Why are Fuel Costs High and How it Affects the Shipping Industry?
The Philippines is currently seeing high fuel prices, and the public transportation sector is currently reeling from the effects as drivers are forced to pay for expensive gas. Although rollbacks could happen in the future, it won’t change the fact that fuel costs are still high worldwide.
From regular commuters to international freight forwarding companies, many people are heavily affected by rising fuel costs that effectively increase gas prices, transportation rates, and shipping costs.
Why is Gas Expensive?
Increased Demand After Strict Lockdowns
The price for crude oil initially went up when the demand for oil and gas returned as the global economy emerged from strict COVID lockdowns. Both oil and gas prices went up as major economies reopened. Because the Philippines is a net oil importer, gas prices in the country will naturally go up when international oil prices spike.
According to the U.S. Energy Information Administration, the top five oil producers in the world in 2021 are the following:
- United States – 18.88 million barrels per day or 20% of the world’s total
- Saudi Arabia – 10.84 million barrels per day or 11% of the world’s total
- Russia – 10.78 million barrels per day or 11% of the world’s total
- Canada – 5.54 million barrels per day or 6% of the world’s total
- China – 4.99 million barrels per day or 5% of the world’s total
These five countries contribute 53% of the total world oil production, and anything that can affect both the production and sale of these countries’ oil will affect the cost of oil. Since oil becomes fuel when refined, expensive oil will then become expensive gas.
While the initial oil and fuel price hike were because of the increased demand, the situation worsened thanks to the Ukraine war.
Russia’s Invasion of Ukraine Cut Down Oil Supply
Because Russia invaded Ukraine on February 24, 2022, the world responded with multiple sanctions to penalize Russia. Due to the sanctions imposed by the European Union, the United States, and other economies, Russia has been selling less oil in the market, resulting in lower supply and higher prices.
Europe started ditching Russian oil by reducing the amount of oil they buy from Russia while shopping around for alternative sources. Some countries still buy some Russian oil because they have become too dependent on it, making it hard to look for alternatives. Because there aren’t enough oil alternatives in the market due to oil producers winding down production, oil prices will remain high until Russian oil returns to the market.
As the war sees no sign of ending anytime soon, it’s unlikely that the global oil supply and prices will return to normal anytime soon.
Effects on the Freight Forwarding and Shipping Industry
Even before the Ukraine War, shipping operators in the Philippines had already imposed bunker fuel surcharges to recover from high fuel costs. Fuel accounts for a freight forwarder and shipping company’s operating costs, so they’re recovering the losses through surcharges. In fact, the Philippine Civil Aeronautics Board has already upgraded the passenger fuel surcharge to Level 4, which equates to P108 to P411 per passenger for one-way domestic flights and P543 to P5,026 per passenger for one-way international flights.
The current surcharge is Level 11, which equates to P355 to P1,038 per passenger for one-way domestic flights and P1,172.07 to P8,714.84 per passenger for one-way international flights. Cargo fuel surcharge is also Level 11, which equates to increases of P1.82 to P5.34 per kg for domestic flights and P6.03 to P44.80 per kg for international flights.
Adding the war in Ukraine to the equation, fuel prices will naturally go up. Philippine Multimodal Transport and Logistics Association, or PMTLAI, president Marilyn Alberto noted that trucking costs would continue to spiral as fuel costs continue to increase. International air freight forwarders in the European Union and the United Kingdom were barred from flying in Russian airspace, creating difficulties in going to East Asia, effectively increasing fuel consumption which then increases fuel cost and transit times.
Alberto said that even if the Philippines does not make any significant trade with Russia and Ukraine, the country will still feel the ripple effect of the following:
- Higher fuel costs
- Long transit times
- Suspension of services
- Delays due to inspections of cargo bound to Russia to comply with sanctions
The ripple effect increases air and ocean freight rates due to longer container routes, high fuel prices, and possible high surcharges.
Conclusion
The reopening of multiple economies increased the demand for fuel and oil, resulting in higher fuel costs. Both the Ukraine War and the ripple effect of lower oil supply and longer transit times also added to the already high fuel costs. The cost of international freight forwarding will remain high, and it will take time for it to go down. Even so, freight forwarders and logistics companies will continue to operate, and it’s more important than ever to rely on a reputable company.
Excelsior Worldwide Freight Logistics conducts free orientation for those willing to learn. It is our advocacy to share our knowledge & experience worth more than a decade in the business. Visit our website today at excelsior.ph to learn more about our service.