Of all the variables that affect global commerce, the one that has consistently proven itself to be the most nerve-wracking and difficult to predict is the price of fuel. With fluctuating fuel costs impacting every section of the economy, if a news headline so much as mentions the word ‘oil,’ it strikes fear in the hearts of consumers, manufacturers and businesses alike.
In this article, we’ll explore:
- The impact fuel prices are having on the logistics and transportation industries.
- The implication this has for the wider economy.
- How the transportation industry is attempting to mitigate these risks.
The fuel equation
Recent findings from the Competition and Markets Authority (CMA) highlight the extent of recent fuel price instability. 2022 stood out as the most turbulent year, witnessing a staggering 50p per litre increase from January to July, followed by a notable decline. The disparity between diesel prices and petrol has also widened, with diesel commanding a 22p premium per litre on average.
This volatility has raised concerns regarding price dynamics like “rocket and feather”—a questionable pricing strategy that involves companies setting different prices for two customer segments based simply on their willingness to pay. While the strategy may optimise revenue by exploiting different customer preferences and needs, the diesel market has been hit particularly hard by it, resulting in drastic price shifts and supply insecurities.
That said, “rocket and feather” is part of a much more complex interplay of factors, each adding to the inherent volatility of fuel prices. Taxation policies, notably fuel duty, directly impact the final retail prices. What’s more, the expenses associated with fuel delivery, influenced by logistical challenges and geopolitical tensions, compound the issue.
Exchange rate fluctuations, inflationary pressures, and the unpredictable balance of supply and demand in the global crude oil market further complicate the equation—as do the impact of regional conflicts, which we’re not short of right now. With groups like the Houthi rebels sending shockwaves through the fuel market, the challenges faced by industries reliant on fuel—which is all of them, essentially—are profound.
The ripple effect
Fuel prices heavily influence variable operational costs in manufacturing and transport industries, which constitute a substantial portion of overall expenses. As fuel costs fluctuate, so do the gross profits of these industries. When fuel prices rise, profitability decreases, exerting pressure on margins and overall financial performance.
However, the impact extends beyond immediate financial implications, affecting investment, expansion, and innovation efforts. With diminished profitability, companies may find it harder to allocate resources for growth initiatives, potentially hindering their competitiveness in the market. Consequently, managing volatile fuel prices becomes crucial for sustaining operations and developing long-term resilience.
Supply chain disruptions
Fuel price volatility introduces significant unpredictability to transportation costs, making it increasingly challenging for businesses to plan their logistics and manage inventory effectively. This uncertainty often leads to supply chain disruptions, manifesting in inefficiencies, heightened costs, and delays in delivery schedules.
The recent uptick in the number of third-party logistics providers (3PLs) and hauliers facing insolvency can be partially attributed at least to the strain imposed by fuel price fluctuations, exacerbating the challenges already faced by these industries. Such disruptions ripple through the entire supply chain, affecting the immediate parties involved and downstream customers and suppliers.
Consequently, mitigating the impact of fuel price volatility becomes a central factor in ensuring the smooth functioning of supply chains and preserving the competitive edge of businesses operating in the manufacturing and transport sectors. With companies like X2 (UK) implementing strategies to address these disruptions, optimising routes, diversifying transport modes, and leveraging technology for real-time monitoring to help reduce the adverse effects of fluctuating fuel costs on supply chain operations.
Strategic planning challenges
Amidst fuel price volatility, forecasting expenses, setting budgets, and pricing products competitively become far more complex tasks. The necessity to frequently recalibrate strategies to align with shifting fuel prices consumes valuable time and resources, diverting attention from core business operations. What’s more, the cost implications associated with these adjustments can further strain profitability, hindering long-term planning and investment initiatives.
This perpetual cycle of adjustment not only undermines financial stability but also erodes confidence in strategic decision-making processes. As a result, companies are adopting agile planning frameworks that incorporate comprehensive risk mitigation strategies to manage the uncertainties posed by fuel price volatility. Embracing technology-driven solutions for scenario analysis, implementing flexible pricing models, and cultivating collaborative partnerships across the supply chain are key steps towards enhancing strategic resilience and maintaining competitiveness.
Impact on haulage businesses
Whatever solutions a haulage company decides to implement, they need to act quickly. Recent data from accountancy firm Price Bailey paints a grim picture, revealing a doubling in the number of haulage businesses entering insolvency over just two years, highlighting the urgency of the situation.
In the past year alone, 463 haulage businesses have folded, more than double the figure from two years prior. This data comes from a Freedom of Information (FOI) report that indicates the stark escalation in haulage businesses entering insolvency. In the fiscal year 2020/21, the tally stood at 225. However, this number surged by a staggering 173% to reach 463 insolvencies in 2022/23.
This reflects the immense strain that rising overheads, driven primarily by fuel and wage increases along with interest rate hikes, have exerted on profit margins, pushing many enterprises perilously close to collapse.
Challenges for logistics companies
Fuel price volatility adds another layer of complexity to an industry already facing severe challenges. Rapidly changing business needs, an ageing population, and a diminishing pool of EU workers pose significant problems. Moreover, delays to major infrastructure projects across road and rail networks exacerbate road congestion, costing the UK economy billions annually.
Mitigating risk
In a bid to mitigate the impact of fuel price volatility, companies are exploring various strategies, including investing in fuel-efficient technologies, exploring alternative fuels, and hedging fuel prices through financial instruments.
The recent spikes in oil prices, attributed to turmoil in the Middle East, have prompted airlines, for example, to adopt hedging practices to safeguard against potential price hikes. European airlines like AIR FRANCE-KLM have embraced hedging as a risk management tool. By hedging a substantial portion of their jet fuel consumption, these airlines aim to secure favourable prices and mitigate the impact of market volatility. AIR FRANCE-KLM hedged 70% of its jet fuel consumption for the fourth quarter of 2023 and 64% for the first quarter of 2024, locking in prices at $129.87 and $123.80 per barrel, respectively. Similarly, other airlines have hedged significant portions of their fuel needs, leveraging futures and options to protect against price fluctuations and currency risks.
The 4PL answer
Investing in futures may be one way to stabilise fuel price fluctuations in the shorter term, however, companies looking for a more resilient, long-term stability solution are turning to 4PL companies like X2 (UK).
One of the key advantages of 4PL solutions is their ability to optimise supply chain operations. Through data-driven analysis and predictive modelling, 4PLs can identify inefficiencies in transportation routes and modes, enabling companies to minimise fuel usage. Additionally, 4PLs can leverage their network of carriers and suppliers to negotiate favourable prices and terms, helping companies secure stable fuel supply at competitive rates.
By embracing innovative technologies and strategic partnerships, 4PLs are helping logistics companies enhance their resilience to fuel price fluctuations and ensure the long-term sustainability of their supply chains.
X2 (UK) – defence against fuel price volatility
With fuel price volatility posing a significant threat to manufacturing and transportation companies worldwide, X2 (UK) offers tailored 4PL solutions to help mitigate these risks. By embracing route optimisation, predictive analytics, and an extensive network of partners, we allow businesses to reduce operational costs and minimise susceptibility to fuel price unpredictability.
Through collective action and innovation, X2 (UK) is creating a more stable and resilient future for manufacturing and transport industries across the country. To learn more about our 4PL services and how they can help your business overcome fuel price fluctuation issues, you can contact us here.