SCDigest editorial staff

As oil and gas prices soar, creating a chaotic pricing environment not only for transportation but a slew of other goods and commodities, it is important to separate the reality from suppliers using the situation opportunistically to gain margin.

“Suppliers often use rising energy prices as a means to push through general price increases above the basis of their true cost impact,” noted Dr. Ed Marien, of the University of Wisconsin.

“For example, it’s important to understand a supplier’s cost basis, fixed versus variable,” Marien told SCDigest. “A 10% rise in variable costs doesn’t mean a 10% rise in that supplier’s total costs. But they may try to push through a 10% general increase.”

He noted in the transportation arena, for example, that while transportation companies have been complaining about skyrocketing fuel costs, profits for the carriers seem to be up substantially. While the supply-demand equation is certainly a critical factor, use of fuel surcharges may also play a role, though some observers say carriers do not recover all of their increase fuel costs through the surcharges. Still, it’s hard to find that in looking at trucking company income statements of late.

Marien also suggested that buyers of both transportation and other commodities should be asking suppliers what their fuel/energy hedging strategies are as part of the selection process.

“You want to go with suppliers that are reducing their own risk of sharply rising energy prices,“ Marien said. “Different procurement and hedging strategies by suppliers can have a significant impact on how much these energy price spikes really hit their own cost basis.”

In theory, this means a carrier with a smart hedging strategy should have lower fuel surcharges today than one that doesn’t hedge.