One Of The Biggest Environmental Regulations Ever Is Coming And It Will Wreak Havoc

One of the biggest environmental regulations ever is coming and it will wreak havoc on small trucking companies.

Small carrier profits are about to be pressured by a large government organization and it's not the FMCSA, DOT, or CVSA. This impact isn't coming from a new safety regulation, but rather the biggest environmental regulation to ever impact global transportation. And it's not originating from our Federal Government. This regulation is courtesy of the United Nations (UN) and more specifically the International Maritime Organization (IMO).

IMO is the governing body of global maritime regulations and ocean trade. In 2016, representatives to the IMO agreed to change the limit of sulfur content in marine fuel from 3.5 percent to 0.5 percent. This rule (IMO 2020) is to be implemented on January 1, 2020.  By doing so, IMO is forcing global shipping, one of the largest users of petroleum products and largest producers of emissions, to move to a much cleaner fuel.

Because of the limited supply of low sulfur refining capacity, refiners that currently create ultra low sulfur diesel (ULSD) will end up using the same feedstock and equipment to create compliant marine fuel. ULSD and very low sulfur fuel oil (VLSFO) will end up fighting over the same refinery capacity, of which there is a limited supply.

The global demand for marine fuel is around 3.5 million barrels per day. The current U.S.  consumption of ULSD is around 4.1 million barrels per day. While only a portion of the new marine fuel will come from the U.S., the demand for refined and low sulfur fuel will be roughly equivalent to 80 percent of the consumption of the U.S. market.

Because of IMO 2020, estimates of an increase in wholesale ULSD prices range from $0.22 to $0.50 per gallon. The current average ULSD wholesale price is $1.89 per gallon; the estimated increases translate to a 12 percent to 26 percent increase in the cost of ULSD diesel from the refineries. Once the ULSD makes its way into the hands of the retail market, which currently sits at $3.05 per gallon, it could drive diesel prices north of the highest prices seen in the U.S. market in the past year – over $3.55 per gallon, and in parts of Northern California $4.60 per gallon.

Large carriers likely won't be impacted as badly as the small and independent carriers, for a few reasons.

Large carriers operate mostly in the "contract" market, meaning that most of their freight is committed at a certain price. Typically, these contract rates also have fuel surcharge agreements built into them. As the price of fuel fluctuates, so does the fuel surcharge. When fuel goes up, the fuel surcharge increases. When fuel goes down, the fuel surcharge decreases. Often times, the fleet is able to recover most, if not all, of its diesel cost exposure through such a method.

Small fleets that operate in the spot market don't enjoy such a structure. The fleet will receive the going spot rate and have to eat the cost of fuel. If the load is being hauled at a time when there is a shortage of capacity, the fleet will be able to recover their costs. If it is not (2019 market), then the fleet will have to eat the higher fuel costs.

Carriers that run 2,000 miles per truck per week and lack fuel surcharges would see $1,650 to $4,200 in unrecovered annual fuel costs.

The current miles per gallon (MPG) for the truckload market is around 6.5 MPG. The large carriers tend to have more efficient trucks, with some fleets averaging more than 9 MPG. Speed also plays into the fuel economy of a trucking fleet. Large carriers have speed limiters on their trucks, which prevent the trucks from traveling faster than a specific speed. These limiters are often optimized to maximize fuel economy and safety. Smaller fleets don't have speed limiters, or their drivers disable them. This allows them to run faster than the larger carriers, but they also burn more fuel.

Small carriers also lack technologies like optimizers and peddle coaches that encourage specific behaviors, like finding the cheapest place to stop or developing driving behaviors which are more efficient.

The thing that is uncertain, but will likely play out, is the impact of how retail prices will reflect the cost increases.

Large fleets buy fuel under wholesale agreements. These agreements could be direct from a truckstop retailer or from a wholesale dealer. Either way, the price of diesel is purchased at an index-linked price. Fleets refer to OPIS plus or minus to reference this structure.

The current spread between the retail price paid at the pump and the wholesale price is $1.19 (taxes and transportation are not included in this spread, which range, but tend to add around $.50 per gallon to the wholesale price).

If the retail fuel stops (truckstops) end up passing on the entire cost increase to the pump, then things could get difficult for some of the small carriers. If part of the increase gets taken out of the wholesale to retail spread, or fleets implement fuel cost-savings programs that are linked to wholesale diesel costs, then they will end up better off than those that don't.

Regardless, the American independent trucker now has one more thing to hate – the IMO and its desire for cleaner air and oceans.

Image sourced from Pixabay