The Iran engagement unfolding in the Middle East has created a de facto shutdown of the Strait of Hormuz, a significant gateway for the world’s oil supply. Global fuel prices have been rocked by this, with price increases being seen from crude oil to the unleaded fuel powering most of our vehicles.
Three immediate concerns are being felt right now that will affect the shipping world in the weeks and months to come.
First, diesel pricing in the U.S. is spiking. Diesel is the backbone fuel of the U.S. freight economy. It is one of the largest cost components of almost all domestic trucking and is passed on to shippers in the form of Fuel Surcharges. Sharp increases in diesel costs can also restrict trucking capacity, as the immediate cost increases can burden truck operators to the point of removing some capacity from the road.
U.S. Energy Information Administration (EIA) fuel indexes have shown a 25% increase in diesel costs in just the last week, with further increases likely. This could translate into Fuel Surcharge increases of 10%-20%, depending on the carrier, current FSC starting points, and region of operation.
Second, fuel prices are hitting the ocean freight sector in a similar fashion. Commonly referred to as “BAF” (Bunker Fuel Adjustment), ocean carriers pass on the cost of their fuel to shippers in a similar manner. BAF calculations are carrier-specific but largely based on various bunker fuel price indexes.
However, BAF formulas do not update as frequently as domestic FSCs, often only changing quarterly. Therefore, to address energy spikes like we are seeing now, carriers will often use surcharges such as Emergency Fuel Surcharges to address the gap between current fuel costs and the current BAF calculation.
Ship & Bunker reporting on VLSFO bunker pricing has shown the Global 20 Average spike over 60% since February 27.
Third, fuel surcharges are a key component of air freight pricing. Kerosene-based jet fuel is similarly dependent on crude oil pricing and is also feeling the effects of the fuel increases, as air rates have already increased significantly due to airspace restrictions related to the conflict.
Concerns are not just about the cost of the fuel, but also the supply of jet fuel, which has led air carriers to restrict capacity further.
What we expect to happen in the coming weeks/months:
Domestic Fuel Surcharges will increase, possibly slowly at first, but can continue to escalate. Current FSCs were around 35%-40% and should now easily reach close to 50% and beyond, significantly raising all forms of domestic trucking costs.
Ocean carriers will institute Global Emergency Fuel Surcharges or other potential surcharges to address their increasing costs. These surcharges will apply to all trade lanes, not just limited to Middle East trade lanes, as most of the surcharges thus far have done. Initial announcements of $300-$400 per container may just be the start.
Air freight pricing will increase because of rising fuel costs. Capacity will be cut from the market as fuel supplies start to be strained. Air freight pricing and services could look substantially different in the coming weeks.
For questions about the impact on your direct lanes, please contact your local Mohawk Global representative.
By Chris Lindstrand, Vice President, International Transportation