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Words / Images: Oliver Dixon
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With the price of fuel rocketing, how can the haulage industry hope to succeed? Something needs to be done... and quickly
On the 6 January, Richard Arens scored two notable achievements. As a NYMEXbased oil trader, he will go down in history as being the first person to offer $100 for a barrel of oil.
He may be less keen to boast of his second claim to fame, though. This was to lose $600 on the deal. Arens bought 1,000 barrels — the smallest trade possible — and then immediately punted it back into the market at $99.40. Had he waited a couple of hours, he could have turned a profit on the trade, but, as it is, Arens will go down in the record books as being the first person to spend $100 on a barrel of oil, and, in all likelihood, probably the last person to lose money trading the stuff.
It's now April, and oil has remained above $100 per barrel for more than a month. The reasons for this are numerous. First, people like the stuff. Much of what we do today is based on the notion that there is a ready supply of oil. Not just for cars and trucks, but also for plastics. pharmaceuticals, fertiliser for food. Indeed, much of what surrounds you as you sit perusing this copy of CM has its roots in oil.
A falling dollar
But there's another reason for the seemingly unstoppable rise in the price of oil. It is a commodity that is traded with some gusto on a number of different exchanges worldwide, so when the global stock markets entered meltdown last year, investors moved away from the unpalatable risks of paper stocks, and surged headlong into the commodity markets. Hardly a shock.
After all, when one of the world's biggest investment banks goes from being a Wall Street star to the largest recipient of US social security in the space of a weekend, the savvy investor doesn't need telling twice.
Were it only for the fact that oil represents a relatively safe haven to investors, we could formulate an argument that would see it reducing in cost over time. Sooner or later, some semblance of sanity will be restored to the global markets, and, were everything else to remain equal, oil would lose some of its lustre. Of course, demand from the emerging markets — China, India and the like — means that some upwards pressure is likely to remain, but the most current hike in oil prices has very little to do with the actual demand for the stuff.
And there's more going on in the background. Try the US economy — or what's left of it. The huge US deficit has placed downward pressure on the value of the dollar.
As the dollar drops against just about every other currency on earth, then so oil —priced in those very same dollars — becomes more expensive as producing countries try to maintain some sort of revenue parity.
Just for good measure, as the dollar falls, then so oil becomes a fair hedge against the inflationary pressure that a falling currency creates, which, in turn, creates further demand for the stuff.
Increased oil prices lead to an increase in inflation, and so we enter a rather vicious macro-economic spiral.
But, in this country, we don't use dollars, and pounds sterling has been rather robust against the dollar for a while time now. While the impact of a falling greenback has seen a 'dollarised' oil price increase in excess of 55% between 2001 and 2007, in terms of the Euro, the increase is nearer to 12%. So it's reasonable to assume then that a similar disparity exists when one compares the real increase in oil prices in our own currency. So why we are getting poked in the eye every time we go anywhere near a fuel pump in the UK?
The simple answer is taxation. The UK levies 55% on every litre of oil sold therein, and it isn't alone.
Fuel saving
According to the Organisation of Petroleum Exporting Countries (OPEC) — not always the most reliable source, admittedly — the G7 countries turned $2.31 trillion in tax revenues on oil products between 2001 and 2006, while, during that same period. OPEC only made $2.05 trillion actually flogging the stuff.
And, to paraphrase OPEC, while it (OPEC) had to pay to get the stuff out of the ground, the G7 countries only had to take the money out of our pockets.
With a growing budget deficit in the UK, it's unlikely we'll see anything approaching a tax cut. If anything, we'll see the opposite. And, despite the well-meaning words of some, and the verbose posturings of others, the likelihood of a cut in the pump price of either petrol or diesel in the UK is remote. Until the government can find something else to levy a tax upon, oil will do very nicely. thank you.
But there comes a point at which it doesn't. Last year was the one in which US hauliers joined their British — and, increasingly, many of their Western European counterparts — in discovering their biggest single cost was the price of diesel. Up until 2007, it had been drivers' wages that made the biggest dent on their balance sheet, but today, for many hauliers, and not just in the UK, fuel is the biggest single cost of operation. That's noteworthy, but where it starts to become problematic is over the issue of controlling this cost. That transport operators attempt to squeeze as much as possible from a gallon of fuel goes without saying. Miles per gallon is the first thing a sane truck buyer is going to look at. It is an integral part of the 'total cost of ownership' of a vehicle, and if the right numbers don't add up, that vehicle isn't going to get sold.
This has been the case for years now, although the days in which there was a marked difference between 'brand A' and 'brand B' are long gone. Add to this increased amounts of driver training — now frequently offered by the supplying manufacturer to be certain fuel efficiency will be maximised, as well as advances in route planning and tracking that ensure a vehicle's route and fuel usage are optimised — and it becomes difficult to see how a truck operator can do much more to reduce fuel costs.
Aerodynamics are in common use, as are high-tech, low-rolling resistance tyres, and the cost of developing all this technology is huge. And yet, when Richard Arens is up and about and doing his thing on the floor of the New York Mercantile Exchange, it all counts for very little.
Unless this upward pressure on oil prices is matched by increased revenue accruing to truck operators, there will be one telling consequence: people will go out of business.
With increasing numbers of transport firms now operating on a shoestring margin, any increase in costs serves only to tip them over the edge, unless such an increase is matched by a hike in revenue, which is why Plimsoll Publishing's analysis suggests close to a third of UK hauliers may not survive 2008.
Profitable relationships
There comes a point at which fuel becomes too expensive. Not just too expensive in terms of resenting the price paid, but too expensive in terms of rendering a business untenable. With an average return of around 3% in the UK road transport sector, that point cannot be too far away. So what happens next? A number of firms will go to the wall. Returning to the Plimsoll analysis, it identifies 394 operations that are now on the edge. But it also points out 537 operations that would make good strategic acquisitions.
This seems to make sense. One problem immediately apparent in the UK trucking business is that there are too many operators chasing too little profitable business. Firms that have established profitable relationships working directly for a consignor are matched by any number of operations that 'scrat' around working at return load rates in both directions. Unfortunately, the nature of a market is that it only takes a few operators to do just this, and the rate for the job is squeezed. Firms that rely solely on second-hand work would seem to have little or no future in the modern transport business.
Say those companies that are failing do fail. There seems to be little doubt of this: it's never pleasant to see someone go out of a business, but, if you can get out ahead, and make some money off the back of the auction, then fair play to you. The savvy operator should know when to call it a day. get the stuff sold and move on.
Too many players
What of those 537 operations that would make a good strategic acquisition? There seems to be logic here, too.
The trend witnessed in terms of the global oil price is unmistakeable. It's going up, and will continue to do so. We have to adopt the view that the biggest single factor in the operation of a successful transport company has now shifted, and a business model that has served pretty well for the past few decades is now becoming obsolete.
Small general hauliers are finding themselves in a situation in which, although they are faced by the same costs as the large operator, they do not benefit from the same scale. This means that their profits will diminish until the point at which they can no longer trade. This sounds brutal, but it is an economic reality. It doesn't matter how competent they are or how well they've done the job up until now; when the rules change, history counts for little Small and medium-sized hauliers would seem to have two choices: group together to become larger operations, or reduce in size and hope the other costs inherent in operating a fleet are reduced, thereby lessening the impact of rising fuel prices.
The fact is that the UK road transport industry has too many players, and some are just working to break even.
Excess capacity will push down the rate for a job, so that excess needs to be removed. At this point, it's easier for the remaining participants to charge at a rate commensurate with the new costs of running a transport business, namely oil at more than $100 a barrel.
This is a cohort shift, and one that not only has an impact on the UK, but other western European countries as well. In the US, an increasing number of small and medium-sized fleets have gone under — a trend already well established in the UK.
The need is still there
Ultimately, people still need trucks, and they still need the things the trucks deliver. This is by no means the end of the road for the transport industry, and is, when viewed in terms of the greater good, a positive move. For those who lose their business or their job, it's hard to see it that way. However, in the long run, a shake-out is what this industry has been demanding for some years. In the short term, though, things look bleak.
The road transport industry has been making its case to the government for years in terms of fuel costs. It has to redouble those efforts now, and make them work this time.
Levying a high tax on fuel is not dissimilar to charging people for the air they breathe. Transport is a basic cornerstone not just of our economy, but of the global one, and pricing transport out of existence will have an impact upon our economic wellbeing.
A situation now exists in which legislation seems unlikely to accommodate the protestations of the road transport business. Maybe, when Whitehall hears its silence, things might change. •