Last week, the Organization of the Petroleum Exporting Countries (OPEC) and Russia agreed to cut oil production by 1.2 million barrels per day. Compounded by an increased production in North America, the global oil glut seen in recent years has led to lower fuel prices that have helped drive down surcharges within the transportation and logistics industry.
Lower diesel prices are generally viewed as a win-win situation for both carriers and shippers. OPEC's announcement to reduce output rattled many markets around the country, which gave way to sharp jumps in oil prices.
Whether or not OPEC's latest move will drive up carrier fuel surcharges in the short-term or long-term is still up for speculation. Some analysts have noted that the reduction will only reduce global oil production by approximately 1 percent, which isn't nearly enough to drastically impact prices that have fallen steeply since mid-2014. Nonetheless, the cost per gallon at the pump may nudge upwards before the beginning of 2017.
How Oil Prices Impact Supply Chains
It's a given that higher oil prices will lead to increased shipping costs, especially when it comes to moving freight by trucks. Yet, there's more to the story of oil prices and how supply chains can react than meets the eye.
Lower Prices Won't Solve All of Our Problems
We all love low prices, especially when we are filling up our cars. When it comes to the trucking industry, however, low prices can sometimes cause disruptions. As a result of the continuing truck driver shortage, the law of supply and demand is even more pertinent during times of low fuel prices.
To illustrate this point, consider that more shippers will use trucks when fuel surcharges are at their lowest. It truly sounds like a shipper and carrier paradise. However, the shortage of qualified drivers in North America means that there is less capacity available. The increased demand for capacity can lead to increased costs that would've been offset by low fuel prices during a time when a driver shortage did not exist.
How Supply Chains Can Thrive During Oil Highs and Lows
Just because oil-producing countries are in a continuous tug-of-war that creates a volatile market, doesn't mean that your supply chain has to be caught in the middle. Consider these key practices that can help you avoid supply chain disruptions caused by the ebb and flow of oil prices.
- Work With Your Customers: If you ship to customers on a regular basis, take the time to examine your current practices. Are there ways that you can consolidate freight between multiple customers so that space on a truck is used adequately? Establishing regular delivery dates with regional customers is one way you can consider consolidating deliveries. If you utilize dedicated truckload services, are the ways you can avoid empty backhauls? Remind your customers that both of your supply chains depend on the success of one another.
- Intermodal: In the past, transportation by rail was often seen as the go-to during times of high oil prices. Today, many shippers presume that with rail, they are trading cost for transit speed. However, improved technology, infrastructure, and fuel efficiency has made intermodal transportation very competitive with traditional longhaul road service.
#ShipperProTip: Learn more about knowing when rail is the right choice for your supply chain
- Build Relationships: Work closely with your transportation and logistics service providers. Your supply chain depends on the ability of your service providers to be flexible and proactive to your needs. Before they can adequately serve your business, they have to understand your overall needs that go beyond just picking up at point A and delivering to point B. Just remember, you and your carriers have a vested interest in seeing each other succeed. Take the opportunity to turn your passive relationships into one of mutual understanding and work towards one goal!