Effects of recent and expected fuel price increase on transport and logistics
EVIES IPELEGENG JOINA | Monday May 30, 2022 14:53
Rising fuel costs is one bump that is felt by businesses of all structures and sizes. As fuel prices continue to rise, companies are faced with the options of operating at a loss, charging their clients a higher rate, or exploring out-of-the-box ways to save on costs.
Increases in fuel prices affect a number of activities in Transport and Logistics with a resultant effect of a rise in commodity prices.
The Council for Supply Chain Management Professionals defines logistics as “the process of planning, implementing, and controlling procedures for the efficient and effective transportation and storage of goods from the point of origin to the point of consumption.”
This definition emphasises the crucial role of transportation and lifting machinery, e.g. trucks, trains, ships, cargo planes, forklifts, cranes etc, in the logistics process. The common feature of all these assets is that they are all dependent on fuel to operate. It is therefore, a given that any increase in fuel prices increases the cost of logistics.
Historically, prices of crude oil fluctuate and are susceptible to world crises e.g. war, natural disaster etc. Also, a cartel of crude oil-selling countries called the Organisation of Petroleum Export Countries (OPEC), which accounts for 60% of global fuel supplies, generally tends to fix prices to achieve their geopolitical aims. Henceforth, transporters are compelled to adopt and adapt these price fluctuation risks in their businesses.
Consequently fuel price increases results in the various negative impacts in businesses which include:
High operating costs
In competitive markets, transporters are forced to absorb price increases in order to retain customers which lowers their profit margins and hampers growth.
When transportation costs increase, distributors tend to buy in bulk to minimise trips which results in increased warehousing costs.
As it is a common understanding that transport is the backbone of the economy, it goes without saying that the increase of transport costs results in increased commodity prices. In order for the transport and logistics companies to sustain their businesses they transfer the increases to consumers. This transfer has a knock-on effect on the demand for goods and services which is then reduced due to unaffordability. However these decisions still bite back on the companies due to reduced customer base and/or cancelled contracts.
When prices increase, consumers look for cheaper alternatives which tend to be goods sourced locally because they do not attract additional import costs resulting in less international trade. This in turn affects the entire supply chain i.e. shipping, warehousing, trucking, rail, cargo planes etc.
Logistics companies are also consumers of goods of other sectors, e.g. machine parts, tyres, paper, computers etc, and price increases raise their business expenditure on supplies.
Increases in fuel prices also leads to unstable economies and increases in prices of goods (including fuel) and services in an economy result in market volatility, rise in inflation leading to poor investor sentiments, reduced market activities and capital flight. Ultimately, job opportunities are reduced leading to low business activities, retrenchments, cancelled contracts and rise in poverty.
Loss of tax
When businesses and people suffer financial and job loss, tax revenues dry up leaving government without funds for development, maintenance of public infrastructure and curtailing many public services such as road, Internet, railways etc. Poor public infrastructure hampers efficient logistics. Consequently, government revenue shortfall results in tax increases which raise business overheads.
Political instability
When the cost of goods and services become unaffordable to the populace at large, this causes discontent which may lead to riots and strikes against the government. Instability causes loss of business, disruptions and sometimes damage to business assets e.g. rioters burning trucks, warehouses, stealing inventory etc.
The “domino effect” of increases in fuel prices continue to have a further knock-on effect on the rise in development costs. Rising material prices make it less likely that a development will move forward and it increases the cost of delivering government-financed infrastructure, raises costs for homeowners, renters and office tenants, and exacerbates overall inflationary pressures, which serve to push nominal borrowing costs higher. With developers questioning whether to initiate new projects or to move forward with a job that is already in progress, contractors are at risk as fewer jobs may become available with a decline in developments.
Budget overruns
The increase in commodity prices also affects projects’ estimated budgets, which leads to the revision of contract prices which end up with cost overruns. This effect is also attributed to the annual revision of the prices of building materials, labour wages and machinery hire rates, which is causing serious distress among business owners.
High costs of sourcing
Ordering costs automatically become higher because of the increased transport rates. Generally, total cost of stock will be escalated from the ripple effect. All the stages in the procurement cycle become more expensive since in one way or the other they have an attachment to distribution and transportation. Warehouses costs become higher because organisations then find it cheaper to buy in bulk and store commodities to reduce transportation trips. This puts a push up on demand for warehouses for storage. Consequently when demand is higher than supply, prices rise.
Loss of customers
If transport demand is elastic, chances are that any increase in fuel prices and corresponding increase in transport rates will turn away customers resulting in decreased customer base. This may also affect the reputation of the given organisations.
Mitigation strategies include:
National Petroleum Fund
Government collects levies to a fund established to cushion the economy from price fluctuations or short to medium term price increases. When fuel prices increases the government may subsidise the increase thereby protecting businesses from shocks allowing them to adjust.
Fuel price fluctuation insurance
Many logistics companies could band together and collectively insure part of the risk with insurers. Collective schemes tend to lower premium prices due to a large participating group, making such arrangements affordable.
Processes review
Logistics companies can regularly review their processes to make them more efficient, effective and economical by reducing wastage, minimising fuel loss through pilferage, cutting down unnecessary trips, improving information flow systems, reducing extensive warehousing, etc.
In conclusion, increases in fuel cost impact negatively on Transport and Logistics. This results in financial losses, loss of business, price increases on supplies, low business opportunities, unfavourable business environment, and ultimately an increase in poverty.
*Joina is a Transport Management and Logistics Lecturer, Faculty of Commerce, BA ISAGO University