Oil prices rise, freight rates may follow

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Oil prices rise, freight rates may follow Source: Journal of Commerce Publication date: 2000-04-28

Call it the ghost of oil price gains past. A barrel of crude oil might cost $9 less than it did at its peak of $34 last month, but the effects of that surge are still being felt in ways that keep the risk of broader U.S. inflation alive.

Just look at the trucking industry, which is especially vulnerable to surging fuel costs.

Rising oil prices are likely to hurt truckers in the months ahead. That points to higher freight charges, which would squeeze companies' profit margins across the country and put pressure on them to raise prices.

The risks to the cargo recipients are high. So far, trucking companies have been able to pass oil-cost increases to their customers.

Bob Costello, an economist at the American Trucking Associations in Alexandria, Va., notes that "many of these companies added fuel surcharges some time ago -- some beginning in January."

But the surcharges have covered just part of the increased price of diesel and have been limited to the larger trucking companies. There may be more hefty increases to come.

Trucking companies, particularly the larger ones, don't buy their fuel at the pump, but rather follow complex purchase programs. According to Costello, they often sign contracts to buy fuel at a fixed price, sometimes up to a year in advance.

Such contracts will come up for renewal. And when they do, fuel suppliers will be eager to capture the sharp rise in diesel prices.

Truckers who were essentially buying in the spot market have already had a bumpy ride this year.

Just like an ordinary car driver, they have seen prices go from $1.10 a gallon in January to peak around $1.50 in March and then slide back to $1.40.

But companies that contracted for supplies up to a year ago may now be confronting the higher prices for the first time.

The sticker shock these truckers experience will raise pressures for another round of higher freight charges.

Freight costs account for no more than 10 percent of costs for most products, Costello said. Yet there are signs that delivery costs have already shown up in consumer prices -- witness the unexpectedly strong 0.4 percent gain in March's consumer price index when the food and energy components were stripped out.

If fuel surcharges increase freight costs, then higher oil prices may continue to seep into the CPI.

Higher diesel costs have had a far more damaging impact on smaller freight companies. Costello noted that "many of these companies are in real distress and some have already gone out of business."This has macroeconomic implications, because when smaller companies go out of business it makes already tight capacity in the trucking industry even tighter. This adds to the large, surviving companies' market power and allows them more freedom to raise prices to cover their increased costs.

http://cnniw.yellowbrix.com/pages/cnniw/Story.nsp?story_id=10231151&ID=cnniw&scategory=Energy%3AOil

-- Martin Thompson (mthom1927@aol.com), April 29, 2000


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