Skyrocketing gasoline prices have hidden spillover

This is my July Article for the San Bernardino County Sun:

Thomas Galvin

Most of the goods consumed here in the Inland Empire were made somewhere else.

The majority of what we do make here will be shipped someplace else.

Materials handling and the supply chain are often overlooked elements of our economy, and rising fuel prices and declining transportation demand are changing the way our nation does business.

While the cost of gasoline affects our everyday lives in very noticeable ways, there is a hidden cost that has not made its way into our pocketbooks - yet.

Inflationary spillover effects of higher crude prices will be felt in higher prices for petroleum products such as lubricants, asphalt, plastics such as PVC and in rising diesel prices, which affect the price of shipping products to consumers.

This last result is particularly troubling for the Inland Empire, the transportation and logistics hub for Southern California and the gateway of Asian imports for the rest of the United States.

Driven by record crude oil prices, transportation and inventory-carrying costs of American businesses topped $1.4trillion, a 9percent rise over last year. This cost equates to roughly 10.1percent of GDP, meaning that for every dollar spent on an item, a dime went to cover the cost of getting that item to you.

Trucking companies are in a particularly tough spot.

Since the start of 2005, the price of a gallon of diesel fuel has risen from an average of $2.06 a gallon to $5.02 a gallon. Fuel is the greatest expense a trucking company faces, accounting for over 25percent of total operating costs, a percentage that has been on the rise.

"The price of diesel, if it is $5 a gallon or if it is $6 a gallon, this is a problem. But it isn't the major problem," says Jon Thys, vice president in Colliers International's Inland Empire office who specializes in supply chain management companies.

"The uncertainty of fuel prices and the inability to plan on a specific fuel price for 6 months to a year is the major problem. It is hard for any company to plan long term and institute an efficient warehouse system for their products when the price of diesel keeps rising.

"The change in fuel prices may dramatically change the logistic system and the size of the warehouses required by companies. Companies could shift from three or four large warehouses at transportation hubs to smaller warehouses located across the country. Most of these companies can't plan and make financial commitments to new warehouses until a fuel price plateau is reached, and nobody seems to know when that will be."

Thomas Galvin is a research associate at Colliers International commercial brokerage firm in Ontario.