Political instability driving up fuel costs

Political risk is seeping across into transport costs as frictions between Iran and the US are driving up the price of oil and bunker fuel.

In an augur for both the shipping and much of the rest of the global transport market, Maersk Line has announced the introduction of an ‘Emergency Bunker Fuel Surcharge’ due to fuel price increases being “significantly higher than what had been expected.” The shipping company says that it is now paying US$440 USD/ton in Europe, the highest price since 2014. In a statement to its customers, Maersk commented that “the increase is more than 20% compared to the beginning of 2018 and this unexpected development means that it is no longer possible for us to recover bunker costs through the standard bunker adjustment factors.”

In other sectors, fuel costs have been creeping up as well. For example, UPS’ fuel surcharge for ground services is up by 0.25% per consignment cost over the past month whilst the ‘International Air Import’ surcharge is up by 2.75% per consignment cost. These tariffs are set by a direct relationship to market rates for various types of fuel and are changed weekly. As for trucking, whilst the price of diesel has continued to rise across the developed world, the most vivid illustration of the impact of higher fuel costs on road freight has been in Brazil where a truck driver strike over the price of diesel has almost brought the country to a halt.

Yet the imbalance of supply and demand in the oil market is not so severe. The US is pumping more oil than ever and there are mutterings about Saudi Arabia and Russia increasing output. West Texas Intermediate is US$67.88 per barrel, whilst Brent is US$76.44. While there is gossip that these prices could hit US$100 a barrel, the present momentum looks to be very slightly downward.

The concern behind the oil price spike is due to political issues in Venezuela and Iran. Venezuelan oil volumes have been hit, producing half of what it did two years ago. Output falls in Iran have not been as severe but it still struggles to market its oil. It is trying to expand sales to China.

Fundamentally, it is political instability that is driving up the price of oil, and in turn, transport costs. If this instability eases it would seem logical to suggest that the price of oil will fall. That said, a collapse in Venezuela or war in Iran would obviously have dramatic effects in the opposite direction. The good news is that despite continuing global growth, supply appears able to accommodate higher demand, something that may be a good sign for the longer-term.

Source: Transport Intelligence, May 29, 2018

Author: Thomas Cullen