American Trucking Association Predicts a 20% increase in fuel costs

From Logistics Management:

ARLINGTON, Va.—In a letter to President George W. Bush, American Trucking Associations President and CEO Bill Graves called on the White House to release oil from the Strategic Petroleum Reserve (SPR) in an effort to curtail the ongoing, historical run-up in crude oil prices which are hampering various sectors of the U.S. economy and the trucking industry.
This letter comes one week after the ATA projected a record high diesel fuel bill for 2008, stating that the trucking industry is on pace to spend $135 billion on fuel in 2008—based on current fuel price forecasts. The ATA also said this estimate represents a $22 billion increase over the $112.6 billion spent on fuel by the trucking industry in 2007.
And the impact rising fuel prices is having on trucking—and all other modes of freight transportation—is evident based on the Department of Energy saying yesterday that the average price per gallon for diesel fuel is now $3.989 per gallon, an increase of 1.5 cents from last week’s$3.974, and an overall increase of 70.9 cents in the last five weeks.
Along with diesel prices rapidly approaching, crude oil is consistently being priced at more than $100 per barrel, and this run-up has forced motor carriers to make fuel their top operating expense rather than labor, according to the ATA.
“As the price of oil skyrockets, it not only devastates truckers but their customers as well, many of which are mom-and-pop stores, and ultimately the consumer,” Graves said in his letter to the President. “We are very concerned that out-of-control energy prices will greatly magnify our current economic slowdown and delay our economic recovery….Please help not only the trucking industry, but the entire economy by trying to burst the bubble in the crude market by releasing oil from the Strategic Petroleum Reserve.”
Graves added that any policies the White House can implement to slowdown the spike in oil prices are needed. And he added that releasing oil from the SPR can be viewed as a major policy action. Crude oil inventories are not the problem, said Graves. But, he noted, “the oil market is no longer functioning on supply-and-demand fundamentals as many hedge funds drive up the price of crude based on based on speculation. We need something to break that chain, and a SPR release could do it.”
The current situation regarding the escalating oil and gas prices potentially may have a long-lasting and damaging effect on the trucking industry, according to Cliff Lynch, president of C.F. Lynch & Associates, a Memphis-based supply chain and logistics consultancy.
“For a long time we have lived with this [increasing oil and gas prices], but we really have not worried about it too much,” said Lynch in an interview. “It is not like it is just a few more cents per gallon we are talking about anymore. And it is getting to the point now where it is a serious drain on the motor carriers, especially the owner-operators with 200-to-300 gallon tanks to fill for $1,000 or more per truck.”
ATA Spokesman Clayton Boyce said that the current situation has been “very difficult” for many small trucking company owners, which has forced some to park their trucks and others to consider filing for bankruptcy.
“The smaller the company, the bigger the effect is generally what we are seeing,” said Boyce. “The smaller carriers tend to not be as effective is padding along the costs of the fuel to shippers.”
Lynch added that in time this situation may lead to a capacity shortage, because many carriers are not going to be able to afford these prices to remain on the road. And he said that standard fuel surcharge programs were never configured to deal with what carriers and shippers are facing now with the current run-up.
“Everyone thought they would see an increase of a few cents per gallon…now we are seeing a constant run-up with a [fuel surcharge] time lag on it, and it is a nightmare,” said Lynch. “We are past the point where something needs to be done. I am not a big fan of government intervention, but there is a time when somebody has to do something and the government is the only power in position to do it.”

My Take: Fuel costs are rising for a number of reasons: strong global demand, a falling dollar, and speculation. This last one is what I believe has been driving up fuel costs to ridiculous levels and here is an excellent piece explaining the run up in commodity prices due to recent Fed actions.

Some economic principals:
When the Fed lowers the interest rate, also known as an expansionary monetary policy, it is basically creating more money a.k.a. inflation. This is why the dollar is lower when compared with other currencies, there are more dollars in circulation now and it buys less (good for exports, bad for imports). When people are afraid, as the current financial crisis has most people worried, and when inflation is present people will turn to real goods, such as gold and oil (and real estate typically, although this period is definitely an exception).

When large amounts of people start buying gold, oil and other commodities, the price of these commodities is bid up. As people pulled their money out of real estate and the stock market (and treasury bills with low yields) a good number of these people put that money into purchasing gold, oil and other commodities (or promises to buy or sell gold, oil and other commodities).

The Fed in dealing with the housing bubble bursting has inadvertently created another bubble, a commodities bubble, which has led to an instability (wild ups and downs) in prices for commodities.

These prices will be passed onto the consumer in the form of higher prices and if the fuel in the Strategic Fuel Reserve was released to the public at current market prices (700 million barrels @ $100 a barrel), that would disrupt oil speculation and help to mop up some of those excess dollars.