NEW YORK — While retailers fret over the effects of higher fuel prices on consumer spending habits, industry analysts and those in the shipping industry believe the impact on transportation costs may already be showing.
Recently, fuel prices have pulled back from record highs, owing to OPEC’s decision to increase crude oil output two weeks ago. Despite this, average prices for both regular and diesel fuel have remained significantly higher than year-ago levels.
For the trucking industry, which handles the majority of shipping responsibilities, the rise in diesel prices has a more immediate impact on the bottom line.
According to the Energy Information Administration, an arm of the U.S. Department of Energy that handles statistical information, the average on-highway diesel price for the U.S. was $1.73 a gallon, as of June 7. Despite being two cents lower than the previous two weeks, it was still 31.2 percent higher than the average price from the same period a year ago.
“Fuel is typically the second-highest expense for the average motor carrier,” said Tavio Headley, a staff economist with the American Trucking Associations, a lobbying group for the trucking industry. Only labor expenses, said Headley, cost more.
West Coast states have taken the biggest hit, with diesel prices, as of June 7, coming in at $2.06 a gallon, a 59 percent increase from the previous year. California, which has higher taxes and whose refining requirements exceed those of the federal government, leads the pricing race in both regular and diesel fuel grades. According to the EIA, average diesel prices in California came in at $2.12 a gallon on June 7, up 60.4 percent over the previous year.
In regard to regular gasoline, analysts have estimated that the economy loses $1 billion on an annual basis in consumer expenditures for every penny increase at the gas pump. A rise in the price of diesel has a similar impact on the trucking industry.
“As an industry, we use 30 billion gallons of diesel fuel a year,” said Headley. “So, a one-penny increase annualized for the entire year would cost our industry an additional $300 million a year.” Since the beginning of the year, diesel prices have risen more than 20 cents.The impact, said Headley, has already begun to show up in the results of many trucking and shipping companies. “Fuel is typically 10 to 20 percent of total operating expenses. So far this year, we’ve seen it with some companies as high as 25 percent.”
Mark Bienstock, executive vice president of DCD Capital, said he believes manufacturers and importers will absorb the higher costs. “With oil prices and the pending interest rate movement, this is a cost that the supply chain is going to have to deal with,” said Bienstock. Higher fuel prices also make being efficient and having goods delivered on time a priority. “Suppliers are now going to see further chargebacks if they’re late because they have additional cost to air things in,” said Bienstock.
Harold Dundish, executive vice president and western regional manager of Capital Factors, agrees that manufacturers will take the initial hit. “It’s getting more difficult to pass on prices to a retailer,” said Dundish. Still, Dundish contends that if fuel prices remain high, consumers will eventually face higher prices in the stores as well as at the pump. “Ultimately I think the consumer is going to wind up bearing the brunt of it.”
Richard Hastings, a credit economist at Bernard Sands, believes the level of efficiency in the global apparel industry has improved to such an extent that the impact of fuel prices has been significantly lessened.
“In some instances the higher freight costs due to fuel price inflation has been offset by greater efficiency and global collaboration, things that continue to reduce costs and price,” said Hastings. “It’s very lucky,” he said, referring to the current environment. “It’s not like in the Seventies, when industry was very inefficient and a little bit of inflation went a long way.” If anything, said Hastings, rising energy costs pressure manufacturers to become more efficient and improve production.
Unfortunately, fuel prices are poised to remain high heading into the summer season and, for diesel in particular, will likely remain so. According to Headley, diesel prices typically experience a spike in the fall or winter. “That’s when heating oil production also starts,” said Headley. “That takes away from diesel because they’re similarly refined products.”For the summer months, said Headley, anxiety should keep the price of crude oil high. “What’s really driving prices would be the fear factor, the possibility of supply disruption in the Middle East.” According to Headley, analysts believe the “fear factor” has added $5 to $10 to the price of a barrel of crude oil. “Until that situation is cleared up, prices will remain at present levels.”
Carl Steidtmann, chief economist and director of Deloitte Research, Consumer Business, observed, “I think you’ve seen the peak in oil prices, barring some kind of supply disruption. It is rare that you see oil inventories and prices rise at the same time.”
Steidtmann doesn’t anticipate much impact on consumer spending, explaining that, if one adjusts the prices for inflation, they are similar to those of the early Eighties. “Prices essentially are the same as it was back then in dollar terms,” said Steidtmann. “Very few things selling today are at the same price that they were 20 years ago. The thing to remember, too, is that the importance of oil and gasoline has declined over the years.”
Steidtmann believes that there could be a slight impact on the retail end in terms of shipping costs. “Energy costs are very important to the transportation sector in general. There will be some inflationary pressure, but for many retailers, the cost of shipping as a percentage of doing business is still a pretty small amount.”
As a result, retailers in the moderate and discount markets continue to focus their concern on the impact of fuel prices on discretionary spending.
“Remember, whenever any major economic problems arise, apparel is generally one of the areas that goes to the bottom of people’s concerns of buying immediately,” said Bienstock. “It becomes a secondary concern of theirs.”
Bienstock said his primary concern is a reduction in the flow of traffic to malls and stores as people cut back on unnecessary trips.
Dundish sees men’s wear taking the first hit. “When things like this happen, and disposable income starts to disappear as a result of it going to gasoline instead of apparel, men’s wear will hurt first,” said Dundish. “Fathers will sit back and make sure the wife and the kids are taken care of. He’ll take [care of] himself last.”With high margins on luxury goods and the well- heeled continuing to be willing to spend freely, high-end retailers should continue to see strong sales. “The affluent consumer is not affected, he’s going to do what he wants, he’s still going to buy the big car and still fill it up with gas because he can afford it,” said Dundish.
Alberta Ferretti's "Rainbow Week" sweaters are back. The designer closed her #MFW show with a few day-of-the-week sweaters, which first debuted on the catwalk last January as part of the pre-fall 2017 collection. #wwdfashion (📷: @delphineachard)