Oiling the Cogs

The recent slump in oil price per barrel from a high, or low I guess, of around $140 per barrel to hovering around $56 mark has had a welcome impact on the price of diesel at the pumps.  From January 2014 to today we have seen around a 16% reduction in diesel price.  Quite how the large percentage drop in oil price is not directly translated to % drop in pump price is a matter of much conjecture.  Government inquiries have found no evidence of foul play, however; so this issue should perhaps be consigned to conspiracy theory.
As discussed here with reasonable regularity, industry bodies have presented evidence that a reduction in fuel cost (overall price or duty) has a positive impact on UK GDP.  A comparative reduction in freight transportation cost, aligned with the first signs of an increase in disposable income theoretically should lead to increased production and consequently freight movement.  In 2012-13 there was a 7% reduction in freight moved by road, a return to growth in the UK economy has led to volumes now heading in the right direction.  Is the comparatively low price set to stay though?

Predicting the price of oil has traditionally been viewed as a fools errand but there are factors at play here that suggest there will not be a quick return to the days of $100+ per barrel oil.  Increased production in US shale and post-conflict Libya, coinciding with reduced demand from depressed EU and Chinese economies has pushed the price down over time.  Historically OPEC has stepped in at this point to reduce production and artificially inflate the price.  Countries that produce large volumes of oil tend to rely on a certain price to balance their budgets and this is having a significant impact on a number of nations at the moment. The Saudi Arabian led cartel has, on this occasion, made the strategic decision resist the temptation to reduce production.  They are utilising large cash reserves to mitigate reduced oil revenue and apply pressure to the US shale operators in particular.

Massive investment on the basis of a higher oil price questions any profitability for the US shale sector at $60 a barrel.  For smaller operations such as in the North Sea, there is a reduced business case for extraction at the current price point.  Much to the irritation of the SNP it is predicted that North Sea production will drop by 20%. Analysts believe that OPEC are willing to allow deflated prices for perhaps a decade.

Reduced fuel price, does not, of course make everything bright and shiney in the logistics industry…  We like something to moan about.

Fuel price may well be lower, but when there is a severe shortage of UK HGV drivers to sit in the increased number of licenced HGVs, to move the increased volume of freight; challenges remain.   Disappointingly the effect on overall transportation cost of the reduced fuel price is being cancelled out by other factors.

It is clear that there needs to be a complete rethink on how people are attracted to the industry, trained and developed and then given the opportunities of a successful and fulfilling career.  The FTA and RHA have been lobbying the government strongly to adopt initiatives that would entice a new generation of HGV drivers.  The driver population is aging and cost of training and then limited opportunities for employment and difficulties in gaining the requisite experience to satisfy the insurers makes incorporating fresh blood difficult.  Given positions are relatively well paid and the hours culture reduced by Working Time Directive restrictions the task should not be insurmountable.

Government supporting the industry by attracting young job seekers, providing training to get people licenced, and then schemes so that they can gain the necessary experience would be a huge aid to the UK economy.  Improved vehicle utilisation and environmental efficiency through technology; a relatively low fuel price; and a flow of new, highly trained and safe drivers would complete a virtuous circle allowing the industry to move forward with purpose and positivity.

Links & Sources

Good overview of the oil price dynamic: http://www.bbc.co.uk/news/business-30814122

Detailed historical data on oil energy prices: http://www.bloomberg.com/energy/

Transport and Logistics sector statistics: https://www.gov.uk/government/statistics/road-freight-statistics-2011-to-2013

Leave your reply

Your e-mail address will not be published. Required fields are marked *