Tag Archives: oil prices

Midstream Transportation Trends: The Future of Oil and Gas Industry

Despite the 2014 oil and gas price drop crisis and the rush around alternative fuel sources, the future of the oil and gas industry remains bright and has a steady pace of growth and increasing demand. More than four billion metric tons of oil and produced every day worldwide, with oilfield companies still generating the biggest revenues. Experts estimate that by 2030, the world population will reach 8.5 billion. This means humanity will need a convenient, reliable and safe source of supplying our everyday life with energy.

What is the future of the oil and gas industry?

Midstream transportation plays a crucial role in oil and gas distribution and storage, and, therefore, in the industry’s future. There are many challenges that the midstream sector needs to resolve. Environmental impact, streamlined transportation, and technology investments are the key concerns for the oil and gas transportation industry. The high demand for oil and gas supplies puts companies under the pressure of staying up-to-date with the latest trends and constantly enhancing their technology. To understand where the entire industry is going, let’s take a look at the key trends in the future of the oil and gas industry:

Automation

Essentially, there’s no progress without innovation, regardless of the industry. Midstream transport is the bridge between oil production and distribution, therefore, the efficiency of fuel transportation defines the supply chain flow. Transparency and speed are crucial for a robust transportation strategy, and that’s why midstream companies need to implement automation. It lets companies increase productivity, gain more visibility into operations, store data efficiently and streamline processes. Investing in reliable and powerful software will become a top-priority for oilfield companies.

More collaboration

Oil and gas sector shifts to being more cross-industrial and collaborative. This means that flexibility will enter employment, business model, and partnerships with other businesses. Companies will drift away from rigid employees’ departments to outsourcing and project hiring. In the nearest future, hiring a niche specialist for a certain project will bring more value than an in-house team handling all the processes. The oil and gas will become more flexible and collaborative in terms of working with other companies, too. Better communication and cross-industry projects are gaining more and more use, and this trend will remain growing.

Embracing the growth of renewable options

Let’s face it… no matter how much talk there is around alternative energy sources, fossil fuel won’t be fully replaced within the next 100 years, if not more. Many oilfield companies see these innovations as a threat, however, a much more efficient and mature way of dealing with it if embracing the fact that the process of switching to renewable energy sources has already started. For now, fuel is not going anywhere. That means oil and gas companies should focus on how to increase their global presence, strengthen safety, reduce environmental output and integrate into the new order.

Oil and Gas Transportation with PLS

PLS is one of the country’s leading industrial-focused 3PL providers. We can handle your oil and gas supply chain with our dedicated team, skilled carriers and committed capacity. Learn more about our Oil and Gas Shipping services!

How Do Low Oil Prices Affect Different Transportation Modes?

Fuel Price: Impact on Logistics

The oil prices, mainly due to increased output from North American fracking, has dropped significantly in the past few months. Oil affects just about every industry in the US economy, especially freight transportation.

oil prices

How the drop in oil prices affects truck, rail, ocean and air transportation?

Truck

Truck companies will benefit from falling oil prices because cheaper fuel reduces fuel surcharges which creates savings for the carrier and its customers. Reduced costs will drive higher freight volumes and more reliable business. According to a survey from the Journal of Commerce, in 2014, shippers started to move freight from intermodal services to trucks, not the other way around, for the first time in five years.

Less expensive oil also means trucking companies can streamline operations around demand as opposed to fuel efficiency. For example, carriers can increase the size of their fleet by putting their older, less fuel-efficient trucks back on the road.

Rail

Even though about 20% of rail operating costs are fuel, the drop in oil prices will mainly hurt business for rail companies. Typically, rail is considerably cheaper than shipping over-the-road (OTR), but when fuel prices drop, the gap between rail and truck pricing shrinks, causing shippers to reevaluate the benefits of each mode. Many shippers choose to switch rail freight to trucks because the only slightly higher price is worth it for the increased speed. oil prices

Oil companies usually ship by rail because it is low-priced, plus large quantities can be shipped at once. But, the lower price of oil may soon disrupt production, which will reduce the amount of oil being shipped over the rail – another way freight volume is taken away from rail transport.

The only bright side for rail transport is that truck capacity may prevent OTR shipping costs from declining too much. In this case, rail transport would still be a profitable and productive choice for shippers.

Ocean

In the short-term, ocean carriers will benefit from cheaper fuel prices because they will see higher margins and lower operating costs.

What will change significantly is the variety of services and vessels an ocean carrier offers.  Larger, slower boats are more fuel-efficient; these were deployed in high numbers during 2008 when the price of oil spiked. Now, ocean carriers may deploy smaller, faster boats to add service options and value to customers. This will increase the popularity of ocean shipping as its main disadvantage is slow transit time.

Air

Out of all the transportation modes, air transport has the most to gain from declining oil prices. Approximately 40% of an air carrier’s operating costs are spent on fuel. Airlines, just like trucking companies, may take advantage of older, less fuel-efficient equipment to expand the fleet size and provide better service to customers.

But, the price of shipping cargo by air may not drop significantly. In the past few years, many airlines tried to protect themselves from volatile oil prices by locking up long-term hedging contracts at prices of $100/barrel or more. As oil plummets, the hedges result in major loss. On top of this, the price of oil has been rising for almost a decade before the recent fall. This has cut into the profit margin of airlines. Now that the price of oil has dropped, airlines are in desperate need to widen their margins.

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What Are Fuel Surcharge Costing You?

What is a national fuel surcharge?

A fuel surcharge is an extra fee that trucking companies (or third parties) charge to cover the fluctuating cost of fuel. It is calculated as a percentage of the base rate and is usually added to a shipper’s freight bill to cover the cost of operations. The fuel surcharge depends on the average fuel price and can be different for each shipper or industry, depending on fuel cost to revenue ratio. It covers additional fuel costs and keeps carriers profitable, even when the cost of fuel rises.

How is a fuel surcharge calculated?

fuel surcharge

There is no uniform way of calculating fuel taxes; companies use their own formula. Most carriers have information on how they determine the fuel overcharge on their website. For example, UPS uses an index-based surcharge that is adjusted monthly and is based on the National U.S. Average On-Highway Diesel Fuel Price as reported by the U.S. Energy Information Administration (EIA). Currently, the UPS surcharge is 4.50 percent on ground packages with a fuel diesel price of $2.61 per gallon.

National fuel surcharge calculation formula:

  • Threshold fuel price: If fuel costs more than the base price, the surcharge will be applied.
  • Base fuel mileage: Usually 5-7 miles per gallon. The average 18-wheeler gets about 6.00 mpg.
  • Current fuel price fluctuation: The U.S. Department of Energy serves as a source for this information. National and regional average prices are published weekly.
  • The average price, minus the agreed base fuel price, is divided by miles per gallon equates the surcharge rate. For example, suppose the current price of fuel is $2.50 per gallon, fuel mileage is 6 mpg and the base fuel price is $1.20.

$2.50 – $1.20 = $1.30

$1.30/6 = $0.22

To get the total fuel surcharge amount per particular shipment, the rate should be multiplied by miles are driven:

$0.22*600 = $132

This way, a load traveling 600 miles, the shipper can expect to pay $132 fuel tax amount.

Another, less popular method of calculating is based on a percentage from load price. For example, if a surcharge is at 20%, then a $500 load would have a surcharge of $100.

Are there any regulations on a surcharge?

No federal administration regulates a fuel surcharge policy.  Each shipper and carrier individually negotiate and set it in contracts. There is a vast space for fraud – there are no legal requirements to control passing collected fuel taxes from a shipper to a person who actually pays for fuel for shipper’s load. The carrier may have stated a flat surcharge for their drivers, but much higher surcharge prices for shippers – so they could pocket the difference. Shippers should know that surcharge money will actually be passed to drivers.

Tips for Carriers

Obviously, fuel is one of the highest expenses for a carrier, together with drivers’ pay. Using a surcharge supports negotiation on long-term contracts, where base rates remain the same and the fuel surcharge acts as security from short-term fuel price fluctuations. Sometimes, it’s worth using higher fuel mileage than your fleet’s average, choosing 6.25 mpg instead of 6.00 mpg. This gives carriers a competitive advantage in attracting shippers.

Tips for Shippers

Remember, most carriers are ready to negotiate a fuel tax level. If you are able to pay a higher overall rate, it is possible for carriers to decrease or even eliminate the surcharge. It is always good to have options, especially when diesel fuel prices go up and increase surcharge rates. Develop a market fuel surcharge program—third parties, like a 3PL, are excellent sources for this information because they typically deploy many programs. According to a Dallas-based third-party logistics provider, in a survey of 150 large shippers, for a shipper with $100 million in annual truckload spend, a one-cent-per-mile adjustment in the formula for calculating fuel surcharges could cut the company’s annual bill to $32 million from $38.8 million.

What to Read Next: Supply Chain Visibility Infographic

If you want to get expert assistance in dealing with fuel rates, contact PLS Logistics Services.