US diesel at $5.599/gal, up 49.9% YoY; rail and barge costs climb in FIR monitor

The Analysis

US on-highway diesel printed at 5.599 dollars a gallon on 3 September. Down five cents on the week. Up 1.865 dollars, or 49.9%, on the year. In the same monitor, rail secondary premiums averaged 638 dollars a car for shuttle service, and the Illinois barge cost index rose 4.8% in two weeks to 221.70.

Three modes, three numbers, one fortnight, all pointing the same way. That combination is the interesting part, and it is not a rate story.

When the road, the rail and the river all get more expensive at once, mode choice stops being a lever. What is left is pounds per trailer and miles per stop.

Diesel does not stop trucks. At 5.599 a gallon a truck still runs and a load still moves. What a number like that does is remove the marginal truck. The owner-operator on a thin lane, the one whose cost per mile was borderline back in the spring, parks first, and the broker's cheapest quote is the first thing to disappear out of your inbox. The miles do not vanish evenly across the map. They vanish exactly on the thin lanes, and thin lanes are where the small shipper lives.

That mechanism is the one people skip past when they read a fuel headline. Averages move slowly, lanes move fast. National diesel is one number; your drayage lane is one truck, one driver and one chassis, and when the number goes up 49.9% in a year, that driver does the arithmetic at his own kitchen table rather than against an index.

Now the rail line, which reads like a cost and behaves like an auction. A 638 dollar secondary premium per car for shuttle service is not what it costs to move a car. It is what it costs to jump the queue. Rail is where everyone runs when diesel spikes, and the secondary market prices that flight within days, so the escape valve gets expensive at precisely the moment you want to use it. Assume a car carries the equivalent of about three truckloads, which is my assumption and not something in the monitor, and that premium works out to roughly 213 dollars per truckload of capacity. That is a scarcity price, not a fuel price, and it will not come back down next week when diesel ticks lower.

The river is the floor under everything. The Illinois index at 221.70 is up 4.8% in two weeks, about ten index points, and two weeks is a violent move for a mode that measures trips in days and cargo in thousands of tonnes. Barge is the cheapest way to move heavy, low-value freight, and it sets the floor beneath every alternative. When the floor rises, the buyer of the substitute does not get a bargain, because the substitute was always priced against that floor.

Put the three together and the conclusion is uncomfortable for anyone treating this as a mode-selection problem. Road up, rail up, river up, in the same fortnight, means the arbitrage between the three is gone. The lever that still works is density: pounds per trailer, drops per trip, miles between stops. Fuel cost per stop does not fall when you drive further, so at 5.599 a gallon a delivery pattern that made sense at 3.734 stops making sense. The carrier will eventually price that back to you as a minimum charge or a stop fee. You will experience it as a November re-quote, but the cause is a September diesel number.

Who gets hit first. An LTL shipper with light, bulky freight, because LTL is priced per pound and re-rated on density, so a light load pays dimensional weight while the trailer burns the same diesel. A shipper on contract truckload with a fuel table gets hit with a couple of weeks of lag, and only on the volume where the table's index basis is current. A bulk shipper on the river is already paying, because that index moved 4.8% in fourteen days and it does not wait for a quarterly review.

Size splits it again, and the middle is the worst place to stand. Big shippers buy density by consolidating and by controlling their own drops. Small shippers buy it by waiting for a consolidator to fill a trailer. The shipper in between has enough volume to run its own pickups and not enough to fill a trailer, which is the most expensive place in the market to be at this diesel price.

Direction is easy to get backwards. Inbound drayage off a port or a rail ramp is the shortest haul and the worst fuel economics per stop, because fuel per mile does not fall with distance and the drop-and-hook waiting does not either. Short-haul drayage is where a diesel number converts into a re-quote fastest. Long-haul contract lanes move last, because they are index-linked and renegotiated on a calendar rather than on a spike.

When you feel it. Diesel is published weekly. Carrier fuel tables follow in one to two weeks. Rail secondary premiums move in days. Barge fixtures move on the next fixture. So the order of arrival is the river this month, the road next month, the contract in the first quarter. If your budget review is annual, you will meet all three at once and conclude it was one event. It was three events travelling at three speeds.

Here is what the monitor does not say. A 49.9% year-on-year fuel increase is not a signal you can answer by switching modes, because the switching crowd is what makes the alternative expensive. Everyone who reacted to diesel by booking rail is the reason the shuttle premium is 638 dollars a car. The shippers who got the cheap car booked it before the spike, on a plan, not on a reaction. Reacting to a published number puts you at the back of a queue you can watch forming.

The second unspoken point is what a fuel number does to service territory. At 3.734 a gallon, a stop eight miles from the next one paid for itself. At 5.599 it may not. That does not arrive as a rate increase. It arrives as your carrier quietly redrawing the edge of the area it will serve next-day, and as a minimum charge appearing on accounts that were perfectly profitable last year.

An account, with assumptions flagged. Assume inbound drayage of 120 round trips a month at 120 miles each, on a truck doing 6 miles to the gallon. That is 20 gallons a trip. At 5.599, 111.98 dollars of diesel per trip. A year ago the same trip, at 3.734 a gallon, cost 74.68 dollars. The gap is 37.30 dollars a trip, roughly 4,476 dollars a month, on fuel alone.

Now the density fix. Assume you can consolidate 30% of those trips, moving from 120 a month to 84. Thirty-six trips at 111.98 is 4,031 dollars saved, which is very close to the entire year-on-year fuel increase, recovered without touching a single rate. The 6 miles to the gallon, the 120 trips and the 120 miles are all mine. The diesel prices are the monitor's.

Doing nothing looks harmless for about six weeks, because a fuel table absorbs the shock and the invoice barely moves. Then the stop fees arrive, then the re-quote, then the carrier decides your postcode sits outside the next-day footprint. By then the only lever left is price, and price is the one you control least. The version where you moved first is boring: you cut trips, you filled trailers, and the conversation never happened.

So the thing to do today is not to call about the fuel surcharge percentage. It is to count drops per trip on your ten thinnest lanes, because that number, not the diesel price, is the one you can still move before the peak.

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— By Ömer Kaya