Leave the Market Alone

With diesel fuel costing about a third more than a year ago, some carrier and owner-operator associations are pushing for a mandatory truckload fuel surcharge tied to a $1.10 benchmark as part of the federal highway bill. According to the amendment, which has already passed the U.S. House, carriers, brokers or freight forwarders would be required to pass the surcharge on to owner-operators.

Without such a surcharge, many believe that more carriers and owner-operators will go out of business if the price of diesel keeps rising. But the facts don’t bear that out. In the third quarter of 2000, when diesel prices jumped to $1.50 per gallon, about 1,320 carriers with five or more trucks went out of business. Yet in the fourth quarter of 2004, when diesel hit $2.10 per gallon, only 285 carriers with five or more trucks called it quits.

If carriers and owner-operators were unable to deal with high prices, why haven’t more failed in recent months when fuel prices are at their highest? In fact, the owner-operator population actually increased by about 16,000 last year, according to the 2005 Overdrive Market Behavior Report. And truck repossessions are so low that the supply of low-mileage used trucks is the tightest in years.

One reason the industry is better able to withstand today’s high prices is that tight capacity has given carriers – even independent owner-operators – the bargaining power they’ve needed to encourage shippers to pay fuel surcharges. More than 87 percent of leased owner-operators in a recent Overdrive survey said they received fuel surcharges last year.

Of course, when the economy turns down, capacity won’t be so tight. If fuel prices remain high, it’s a safe bet that without a mandatory fuel surcharge, more carriers and owner-operators will go out of business. That’s not necessarily a bad thing. A mandatory surcharge will only artificially prop up weak carriers and owner-operators – the same ones who, absent a capacity shortage, will help keep freight rates low.

In a truly free market, supply and demand drive prices without government interference. It’s ironic that the trucking industry, which complains mightily about government over-involvement, should look for a government solution when the going gets tough.

Rather than keeping weak players afloat with the government’s help, let the market take its toll. Left alone, the laws of supply and demand will determine how the industry deals with the rising cost of diesel. And trucking will be a healthier industry for it.

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