How Do Diesel Fuel Prices Respond to Change in the Market? A Tale of Two Prices
On a global scale, innumerable factors influence diesel fuel price fluctuations. These fluctuations have significant impacts on the cost to get your product delivered to your customers. Adequately understanding the drivers acting upon diesel prices would be a full-time job, and would have to include:
- Every economic indicator affecting oil producing and consuming countries
- All the geopolitical conflicts occurring at any given time
- Every major economy’s foreign policy decisions
- Weather patterns in key ports and refining regions
- The list goes on…
Understanding and predicting how these events impact price is incredibly complex, and most transportation and supply chain professionals do not have the means to properly manage their fuel spend. When fuel makes up 20 percent of transportation costs on average, it’s important to be aware of how the market moves, even at a macro level.
In the transportation and supply chain industry, all these factors influence two key diesel fuel price points that shippers should care about: the market price of fuel, and the Department of Energy’s National Diesel Fuel Price Index (DOE Index).
Wholesale Drops Like a Rock, Indices Fall Like a Feather
While the nature and drivers of price movements can be convoluted, one simple fact remains true: when acted upon by external factors, market prices drop like a rock, whereas index-based pricing falls like a feather.
WTI crude oil prices declined over the past few weeks, which consequently caused diesel fuel prices to drop significantly. The spread between average diesel retail prices and wholesale climbed to over 65 cents per gallon because market prices shifted much faster than the DOE Index was able to reflect. Consequently, the underlying cost accrued by carriers declined significantly, and shippers using market-based fuel pricing, saw their reimbursements move in direct correlation. Across clients utilizing market-based fuel reimbursements, this resulted in over $40 million in cost avoidance since the beginning of May.
For shippers utilizing accurate and transparent fuel reimbursements, this is exciting news because they know that this drastic change was reflected in their reimbursement calculation in real time. Unfortunately, because the DOE Index pricing lags actual price movements, it takes weeks or even months to respond. For example, from June 3 to June 5 the DOE Index reported a one and a half cents per gallon drop–hardly aligned with the market’s decrease of over 12 cents.
If transportation professionals heed one message, it’s the knowledge that markets move far faster than index-based mechanisms ever could. Some transportation and logistics leaders are not held accountable to manage fuel or deem it as an “uncontrollable” cost of doing business, but that does not need to be the reality for your transportation spend.
What is well within your control, is to satisfy your organization’s desire to reduce costs by aligning to actual market costs of fuel. The volatile fuel price behavior at the end of 2018, that prevailed through parts of 2019 and remains true today, is the best example of why a responsive fuel program is not only industry best practice but has become a necessity in today’s market.