What impact will falling oil prices have on logistics?

The decline in oil prices experienced over the past 12 months has had a major impact on most sectors of the global logistics industry in terms of cost base. In hindsight a fall was perhaps inevitable. Measured in real terms the oil price had hit highs comparable to the 1979 oil price spike. In part this has been driven by a weakening demand in the Chinese economy and a levelling-off of demand in the developed world, not just for cyclical reasons but also because economies have become more energy efficient. In addition alternative sources of supply, such as North American tight oil, have reduced reliance on the Middle East oil producing countries.

This ought to be great news for a sector such as logistics which is so heavily exposed to oil prices. In theory margins should rise as prices fall. However it may not be quite as straight forward as this.

Certainly a fuel intensive sector such as air freight should see better returns for airlines. This assumes however that the capacity picture is not complicated by older, less efficient aircraft re-entering the market.

Container shipping these days is less affected by the bunker fuel price, having more than halved its consumption of fuel per container through the use of bigger ships and slow steaming strategies. Consequently it is likely that lower fuel prices will have an effect, but probably not a transformative one.

In the express sector traditionally the likes of FedEx and UPS have benefitted from falling fuel prices as the fuel surcharge they impose lags behind the price of jet fuel. Impact on contract logistics is likely to be more marginal as in many contracts the price of fuel is passed on directly to the customer.

However the implications for the logistics sector go beyond that of the fuel price change. Regional and global demand is likely to feel the impact as well.

For example, Middle Eastern demand for both air freight and sea freight has been consistently high after it recovered from the initial shock of the economic crash in 2009. Russia has been more volatile but has also seen underlying growth. However that growth has slowed significantly over the past few months, driven as much by political factors as the falling oil price. The IATA numbers already reflecting such a slowdown on the European air freight sector.

In contrast air freight in the Middle East has continued to grow in double digits. The picture is similar in sea freight and demand for non-hydrocarbon related contract logistics. Much of the region’s growth is driven by investment activity by various state actors whose finances could be affected by the fall in oil and gas revenues. However this will probably take several months, possibly years to have an effect.

Yet the wider macro-economic picture is likely to be beneficial to the logistics industry, with the big markets in North America, Europe and Asia-Pacific benefitting from lower input costs. However optimism should be tempered by the fact that any fall in the price of oil could imply that demand in the global economy is moderating. China in particular may be undergoing significant changes, somethingwhich the prices of oil and other commodities are an indicator of rather than a driver.

Certainly supply side issues such the oil price are important in driving economic growth, however it is the demand side of the economy which has been the problem in many parts of the world and this may be getting worse not better.