Opinion

Operators must act on rising fuel costs

fuel

Transport operators are certainly no strangers to fluctuations in fuel pricing, however the perfect storm of supply chain disruptions as we start to recover from Covid, geopolitical tensions in Eastern Europe, and rising interest rates off the back of inflationary pressures are unprecedented.

As an industry group, our phones are ringing off the hook with members and operators desperate for advice on how to respond.

On the one hand, operators are sensitive to the impacts of raising their prices to recover higher costs and are loathe to disenfranchise customers that are facing similar pressures.

But on the other hand, absorbing higher fuel and other prices is akin to kicking the can down the road, and ultimately will only impact already stressed operators trying to meet payroll, pay their bills, and keep their businesses afloat.

The advice is simple – operators must act on rising fuel costs.

To put this in context, it is important to understand the recent movement in the monthly average diesel price. When Covid struck in early 2020, the price quickly plummeted from just under $1.50 a litre to just under $1.20 a litre – its lowest since October 2016. This was prompted by lower demand for fuel with most of the economy in isolation and under movement restrictions.

Fast forward 12 months to January 2021, and a recovery of sorts on the horizon, which is where prices began to increase, in line with restrictions easing. But for a few blips, the price of diesel has sharply increased to where we are now at just under $1.80 a litre and rising.

This is the highest it has ever been, and it cannot be ignored.

Looking forward, there is little comfort that prices will steady any time soon.

The conflict in Eastern Europe shows no sign of easing, which means pressures on crude oil supplies are set to continue. In fact, they are likely to get worse before they get better, with all the signs pointing to sanctions on imports of Russian oil by most NATO and western nations.

Countries that relied on Russian oil for transport, heating and energy will look to other markets, which will drive up costs.

We conservatively expect transport costs to rise by 20 per cent over the next three months as a result of this perfect storm – perhaps more. A spike in crude oil costs is the immediate effect of Russia’s actions against Ukraine and this is translating into higher prices at the pump as the conflict escalates, with no end in sight.

Transport operators cannot wear higher diesel costs forever and will factor it into their cost models, which will lead to higher consumer prices.

There are few – if any – parts of the economy that will be exempt from higher prices because as operators know, transport is a factor in every commodity and transaction. Timber used in housing, concrete poured into developments, and wheat used in baking, all has to be transported, and when transport becomes more expensive, everything becomes more expensive.

There are two fundamental things operators need to do in response to these higher prices – understand the impact it will have on your business and act; and communicate clearly, effectively and regularly with your customers about how it may impact them.

The VTA maintains a wealth of information on fuel pricing to assist members in understanding how fluctuations might impact their business, including Average Diesel Price, Forecast Diesel Price, Customer Fuel Surcharge Levy, Municipal Fuel Surcharge Levy, and Over Dimensional Fuel Surcharge Levy.

These items can help operators to create cost models that accurately forecast how their businesses will be impacted by price fluctuations, and what must change in their pricing to address it.

They are a VTA ‘members only’ benefit, and I would urge you to contact our secretariat on 03 9646 8590 for information on how to access it.

Communication is equally important – whilst no customer likes price rises, if they are provided ample notice and enough understanding about why increases are necessary, the increase will be more palatable. Talk to your customers regularly about these issues and work with them where you can.

As the VTA has been saying for months, these costs ultimately need to pass through the supply chain to the consumers, who ultimately benefit.

It does no one any good for one part of the supply chain to collapse to the detriment of all of us, just because one link in the chain decides to absorb an increase, exposing themselves to potential ruin.

Peter Anderson is the CEO of the Victorian Transport Association.

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