October 5, 2004
To:
Salt Institute member company CEOs
From: Dick Hanneman, President, Salt Institute
RE:
Rising Freight and Energy Costs
Transportation and energy costs are levying a
devastating toll on the salt industry. The
hurricanes in Florida are only the latest “hit” spiking both the cost of
trucking and rail freight and the price of natural gas.
The underlying structural causes of higher freight and energy costs demand serious
attention.
Over the past two years, a surge in demand for ocean freighters sent ocean shipping freight rates through the roof. This year, rail and truck freight rates are skyrocketing. The tax-cut-fueled economic recovery caught the trucking industry short-handed. Trucking companies don’t have enough drivers at the very time when roadway freight demand is strong and getting stronger. Adding to that, truckers now have to pay as much as $2 a gallon for diesel fuel. Their liability costs have jumped from $4,500 to $7,000 a year and health insurance costs continue to rise. New EPA regulations on emissions from diesel locomotives cost the railroads more than $2 million for each engine they operate. And the federal highway program expired in October 2003, though it has survived on short-term fixes since then; Congress won’t act on reauthorization until next spring. The uncertainty of reauthorization has a hidden cost: we’re falling behind both building and maintaining our highways and congestion is getting worse. In the U.S., the annual cost of traffic congestion increased $2.2 billion from 2001 to 2002 to $63.2 billion (just 20 years ago, it was only $14.2 billion). U.S. motorists wasted 5.6 billion gallons of fuel in 2002. It looks like a long winter with tight salt shipping and dramatically higher salt shipping rates for the winter of 2004-2005.
On the energy front, even the above-average amount of gas in storage has been unable to cushion the price impacts associated with the high price of oil, the hurricane damage to gas wells in the Gulf of Mexico and the long-term imbalance of supply and demand. And cold weather with its associated higher prices is right around the corner. The problem, like that of transportation costs, is more far-reaching and less seasonal. Forecasts suggest that natural gas prices will track higher than the historical average because of lower production from new gas wells, depletion of older wells, the fact that natural gas is no longer in surplus (thus, the bubble of oversupply depressed prices for 10 years has disappeared), and the gas market now sees the same shortages that have governed the oil market for about 25 years. A more in-depth analysis appeared in last month’s Energy Pulse, online at http://www.energypulse.net/centers/article/article_display.cfm?a_id=828.
As managers, you will need to consider these facts. As citizens, you may want to examine how
candidates for federal office intend to address these public policy challenges.
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