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Low Gas Prices and 3PL

Gasoline: Driving Change in the Economy

How will the lower gas prices effect the supply chain? Currently the results are unpredictable. However, low prices will benefit some shipping and transportation companies more than others, and a few companies may experience negative impacts. The truth about fuel surcharges according to a late 2014 report by Stifel Financial Corp., is that logistics companies won’t benefit from lower fuel prices as much as you’d imagine. This is because fuel surcharges, which shippers often charge to make up for fuel costs, are linked to the price of gas. From the report: “as the cost of diesel goes down, for example, a trucker’s revenue and expenses both decrease.” Some shipping companies may benefit from low gas prices if they base their fuel surcharge on the price of fuel from previous quarters (when gas was more expensive). For companies with a shorter lag time, however, falling gas prices will result in falling revenues. Other factors in the supply chain—such as market demand and mode of transportation—are more likely to have a dramatic impact on supply chain managers and the 3PL industry than the cost of fuel.

An early round of winners and losers has emerged. Oil refiners and businesses that sell or rely heavily on gasoline, such as gas-station convenience stores, long-distance trucking firms and car dealers, enjoyed surging profits. Many retailers, including clothing and home furnishing stores, didn’t see the expected boost from lower gasoline prices. And total consumer spending failed to accelerate, with Americans stepping up their savings.

Cheap gas, which is expected to persist due to a global slowdown in demand for energy, saved American households around $65 billion in just the first half of 2015, according to AAA. For the year, savings should exceed $100 billion, or more than $750 per household, according to economists at IHS Global Insight. The U.S. Energy Information Administration forecasts gasoline prices will remain under $3 a gallon at least through the end of 2016, which would be the longest such stretch since prices plunged during the recession.

Meanwhile, the shift has confounded economists who predicted the savings would lead to an uptick in consumer spending and give a clear lift to economic growth. For the year ended in June, gross domestic product advanced 2.7%, little changed from 2.6% over the prior 12-month period, before gasoline prices plummeted.

Overall, consumer spending—which makes up around 70% of U.S. economic output—has increased only modestly, up 3.5% in July from a year earlier. That’s a slower uptick than the prior 12-month period. And much of the increase has flowed to increasingly costly essentials, such as housing and medical care, rather than consumer goods. Americans initially stepped up their savings after gasoline prices fell, dampening any upside impact on the overall economy. The personal-savings rate increased to 5.4% in February, the highest level in more than two years, but that eased to 4.9% in July.

That said, less pain at the pump has freed up Americans to spend more on other items, particularly on travel and eating out. Spending at restaurants and accommodations increased 8.1% in July from a year earlier—more than double the pace of overall consumer spending.

The drop in gas prices has also fueled a boom in auto sales, and a sharp shift in car-buying patterns. U.S. auto dealers, on pace for their best year since 2001, sold nearly 600,000 more sport-utility vehicles and pickup trucks through August, compared to the first eight months of last year, and almost 168,000 fewer cars, according to according to researcher Autodata Corp.

“It takes a while for people to realize what’s happened and change their spending habits,” said Joel Prakken, senior managing director of Macroeconomic Advisors. “You might start to see more evidence of the persistent effect on consumer spending” as Americans grow accustomed to the lower cost of fuel.

No area of U.S. economy has been harder hit by the fall in energy prices than the oil and gas industry. Since reaching a peak in December 2014, mining employment, a category that includes oil and gas extraction, has declined by 90,000. Total U.S. employment increased by 1.7 million during that time.

In North Dakota, one of the biggest beneficiaries of the energy boom, unemployment rose above 3% in March for the first time since May 2013, and has remained at or above 3% ever since, according to the Labor Department. Odessa, Texas, boasted one of the lowest jobless rates in the country in July 2014, just 3.8%. A year later, the rate rose to 4.5%, the largest increase in any metro area outside of West Virginia. Unemployment rates in Tulsa, Okla., Midland, Texas ,and Casper, Wyo., all increased in the past year, even as the national rate fell by nearly a percentage point.

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