It’s that time of year.
We’re expected to know now what fuel will cost in October of 2016 (and every month in 2016!), so that we can provide our management with a realistic freight budget for the full 12 months of 2016.
It’s a daunting task and, some would say, thankless. But it has to be done in order for the company to have an understanding of the freight expenses for the following year. It is a forecast and should be treated as such.
While our budget for 2016 is an estimate and a forecast, there are areas of the industry that we can look at in order to reduce the uncertainty or, at least, be as best educated as possible with our estimates.
First, it’s important to understand the components that go into the freight costs that trucking companies pass onto us in the form of rates.
In the simplest form, any trucking company will have the following cost categories that will then be passed onto you, the shipper, in the form of rates.
The big hitters: driver wages/benefits and fuel.
This should come as no surprise for most of us.
While there have been some recent upward moves in wages and signing bonuses in order to attract more and younger drivers to the trucking industry, this cost category remains fairly stable.
Therefore, we don’t expect a volatility swing in driver wages and benefits to play havoc with our 2016 budget. For all intents and purposes, we’ll assume no change (or very little, meaning 1% – 2%).
Now, let’s take a look at fuel so far in 2015….
Now, it’s time to prepare for 2016.
What will the year look like?
Unrest in the Middle East?
It’s just a matter of how much unrest… and, we can’t predict that. There is also the wildcard of the Chinese economy. If their economy is truly slowing, then there will be far less demand for oil and gas to support their economy; therefore the global demand will be less and oil prices should fall.
So, we need to relax, breathe deep and look into our crystal ball and concentrate on fuel costs for 2016.
I have never heard of a logistics professional bringing a crystal ball to their management to justify costs for the coming year and live to tell about it.
So, we need to get a bit more scientific.
Here are a few reputable starting points.
The EIA is part of the U.S. Department of Energy; by law, its data, analyses, and forecasts are independent of approval by any other officer or employee of the United States Government. So, that should provide some objective numbers.
Their data and analysis help stakeholders understand the rapidly changing energy landscape across all fuels and all sectors.
When you go into their website, you’ll want to download the table as shown below.
Since we are interested in Diesel prices, we go to the tab labeled “2tab” and find the section
“U.S. Liquid Fuels Refiner Prices for Resale” and check the row labeled “Diesel Fuel”.
Based on this row of data, we find that the average cost per gallon in 2015 was $1.70. Looking at a simple average (forecast) for 2016, we calculate $1.75/gallon; therefore, a 3% increase in fuel.
But let’s not stop there.
We should always look at other forecasts or trends to corroborate this 3%. It’s like getting a 2nd opinion!
Another free resource to check the futures indices is…
We have chosen the Yahoo! Finance section, but there are certainly other sources from which to pull this data (Bloomberg, etc.). These prices give us an indication of the direction that the “experts” feel that the cost of crude oil will move in the future.
Here is the chart as based on Nov 13, 2015 data. Of course, these numbers change daily based on the world’s demand and geopolitical events.
Based on these latest numbers, we would expect that crude oil prices will increase by approximately 15% during the course of 2016, so the overall average increase will be less.
Cass Truckload Linehaul Index
This is an historical index, but may provide some insight into rate trends.
As the nation’s largest payer of freight bills, Cass manages more than $26 billion annually in freight spend, enabling Cass to compile meaningful logistics data that serves as an indicator of transportation industry trends. The Cass Truckload Linehaul Index™ is a measure of market fluctuations in per-mile truckload linehaul rates, independent of additional cost components such as fuel and accessorials.
So, while the first 2 data sources provided insight to the price of fuel, this index focuses on the cost-per-mile rates that the industry has experienced since 2012.
Their website contains a statement that reads: “with demand growing softer and capacity becoming more available, we are now forecasting pricing to range from 1% to 3% in 2016,” state analysts with Avondale Partners.
From the chart below, we see that there was only a slight increase in rates from 2012 to 2013. The 2014 to 2014 brought a larger increase. Now, 2014 to 2015 is showing moderate increases.
The question is: will it continue as moderate increases (1% to 3%) for 2016?
Another resource you could reference (for a fee) would be at FTR Transportation Intelligence.
Now, based on the 3 (free!) data points we reviewed:
- The U.S. Energy Information Administration’s Short-Term Energy Outlook: 3% fuel increase
- Crude Oil NY Mercantile Futures: 15% fuel increase during the course of 2016
- Cass Truckload Linehaul Index: 1% – 3% linehaul rate increase in 2016
Considering the 2 data points on fuel, one data point on truckload linehaul rates and our tendency to be conservative for future costs, we are going to plan for a 5% overall increase in total trucking costs in our budget planning for 2016.
Click the following link for a PRINTER FRIENDLY VERSION of this article: LWL031 Preparing Your 2016 Budget for Trucking Expenditures