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Vikram Dua

CEO, LSIWorld

12 Jun, 2019

Oil and the impact of its cost fluctuation on Canadian trucking industry

Canada’s biggest natural wealth – Oil

Canada is among the developed countries that are “net exporters” of crude oil and gas and its oil rent comprises 4% of the GDP. Oil rent is the market value of the oil after deduction of its production cost. The largest reserves of this natural resource lie in Alberta, Northern Territories, British Columbia and Saskatchewan. More than two-thirds of the world’s oil sands are located in the northern parts of Alberta. Drilling and cultivation at these reserves make us the world’s seventh-largest oil producing country in the world. It is estimated that Canadian oil reserves equal 170 billion barrels of which 164 billion barrels can be extracted from the oil sands. The gas reserves equal 1225 trillion cubic feet (Tcf). At the current rate of domestic consumption, the oil and natural gas reserves can last 300 years.
This precious natural resource impacts economy, geo-politics, trade, commerce and the transport sector in many ways. Oil and gas meet two-thirds of the energy needs of our country. The sector creates 550,000 direct and indirect jobs. Since almost all of the oil and gas is transported through pipelines, the system of pipelines also creates a lot of jobs. US imports petroleum from Canada despite being a large oil producer. As long as the US is importing oil, Canada is the best supplier for the US due to proximity and friendly ties. Our relations with US in the petroleum sector are further fortified by the fact that it supplies us with products and services that are used in oil extraction and refining.

Which factors add to the retail rate of oil

The retail price of diesel and gas is dependent upon various factors – the cost of crude oil, refining, transportation and marketing, profit margin and federal and provincial tax regime. Any increase in freight charges leads to price rise in every sphere due to the trickledown effect. Cost of the crude oil has the largest impact on the diesel and gas prices. Refining costs depend on the type of crude oil used and the kind of technologies available at the refinery and adds to the final cost. Large pipelines transport maximum volume of fuel from refineries to the area of consumption. It is then brought to the pumps in tanker trucks. Distribution, marketing, and retail dealer’s costs and profits are also included in the cost of fuel.

Oil price hike and customers’ living cost spikes

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Trucking is highly fuel price sensitive industry. According to non-governmental sources, the operational cost of trucking has gone up by 6% in the previous two years. This is primarily due to rebounding of fuel prices after touching a low in 2016. Such a hike in fuel creates two kinds of damage. One, it makes the truckers to cough out higher amount at the pump. Two, a hike also mean lesser capacity of the customers to buy fast moving consumer goods and consumer durables—the goods truckers ferries. Lesser the number of consignments and lesser is the business for truckers. Ultimately, the customers’ shells out more money for every purchase as the transportation costs are added to the price of products. Thus oil price rise has a cascading effect on every sphere of life. Then there are rising environmental concerns, which are adding to the cost of operations for truckers. For example, Canadian government has begun implementation of the carbon tax on diesel that will increase the fuel cost for all the truckers. The tax would add 5.37 cents per liter of diesel, which shall rise to 13.41 cents by 2022. The tax will also be levied on the US trucks operating in Canada and the industry is still to react to this change.

Offsetting the higher diesel rates

How can we offset the soaring fuel price and check its burning a hole in the customer’s pocket. Road transport, although, being the largest guzzler of energy, yet performs better than other modes of transport. This efficiency is due to the technical innovations on the front of fuel efficiency and compliance to emission norms. Companies can increase investment in the fuel efficient trucks and introduce modifications in the existing fleet to get a better mileage on every journey. Decreasing the rolling resistance also increases the efficiency of the vehicle. Properly balanced and inflated tires also decrease the fuel consumption. The driver should drive only on the sweet spot area where speed and fuel consumption are at the optimized level. Higher speed means increased fuel consumption and reduced profit. The fuel economy changes depending on loads, routes, traffic, geographical area and road surfaces and it is better to calculate the miles per gallon per month or per week. We can improve the aerodynamics of the vehicle like keeping the trailer tight to the tractor, mounting the cleaners under the hood, restricting the gross weight of the vehicle to the optimum, regular maintenance, shifting wisely and cutting out of route miles. Drivers should not idle for long durations. Operators should also focus on streamlining the routes. Innovation in packaging can also decrease shipping cost as it reduces the cubic space occupied on a truck.

Conclusion

Trucking and logistics companies are adding value to the economy every day. A booming trucking industry is a sound indicator of the growing economy. Trucking is also one of the largest employers in Canada. On the other hand, the margins of profit are very thin and the competition is high. In order to stay competitive, a trucking company has to work at various levels. At the home front, the truckers should work to increase the productivity of every truck. The government should keep the tax regime in check lest it drives trucker-owners and drivers out of work. The manufacturers should work on their R&Ds to produce more efficient and environment-friendly vehicles. In the ultimate analysis, the fuel prices need to remain in control for societal well- being and a balanced growth of the country.

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