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Fuel costs are only going to get worse, so businesses need to reassess their budgets

Fuel costs are only going to get worse, so businesses need to reassess their budgets

It was just two short years ago that the average diesel price was just $1.12 per litre, fuel was in plentiful supply, and oil was hovering around the US$40 ($57.60) a barrel mark.

Today it’s a different story. Stockpiles of petroleum products have fallen to critically low levels through a combination of factors, including the resumption of air travel and sanctions against Russia.

In Australia, the average price of diesel has been driven as high as $2 in May, pushing some freight transport companies to breaking point and raising costs for businesses in every sector.

The transport sector has sounded an alarm about the impact of reduced fuel tax credits, even as the window for cheaper fuel rapidly closes.

At the same time, there are global warnings of looming diesel shortages which could compound the cost of things like international freight — already facing pressures on a number of fronts.

It’s a perfect storm that points to an urgent need for business to reassess their budgets and think about what sustained high transport costs will mean for their operations.

How we got here, and where to next

To understand how we got here, it is important to recall that we have had nearly two decades of almost no inflation. The average pump price for diesel in 2021 was actually cheaper than in 2007, while unleaded petrol in 2021 was the same price as it was back in 2013.

Thus, when fuel prices spiked earlier this year, the federal government moved to reduce the impact of price shock by temporarily halving the fuel excise to 22.1c/L.

For ordinary motorists that has been a boon but for the transport sector, the approach taken to ‘fix’ the problem has — in some cases — made the situation worse.

One consequence of the fuel excise cuts is a flow on impact to the fuel tax credits that can be claimed by transport companies.

Prior to the federal budget, fuel tax credits for the trucking industry were calculated using a formula that started with the fuel excise (44.2 cents per litre) and subtracted a road user charge (26.4 cents/L).

Most transport operators would then receive the difference: a monthly credit of 17.8 cents/L.

Since the temporary reduction in fuel excise in March, the fuel excise was halved to 22.1 cents/L, but the road user charge has remained the same at 26.4 cents/L. Practically, as the difference has not been charged to transport operators, the cost of the road user charge has effectively been temporarily reduced to 22.1 cents/L.

Accordingly, if you assume that the 22.1 cents/L reduction in fuel excise is fully passed on in the form of a 22.1 cents/L reduction in fuel prices, in net terms transport operators are actually 4.3 cents/L better off at present.

However, this is still significantly less than the 22.1 cents/L cost reduction currently being enjoyed by the general public and is in the context of the significant increase in fuel prices experienced by all motorists over the past two years.

From a cashflow perspective, transport operators have been used to lowering their liabilities when lodging a monthly or quarterly business activity statement and claiming the fuel tax credit.

However, the temporary fuel excise reduction means that there is now no fuel tax credit to claim. If fuel prices continue to increase and the net benefit to transport operators is around 4 cents/L, it is understandable that this will put pressure on the industry.

Some in the trucking industry have argued that the situation will force them to push increased costs back to customers, pushing up the price of things like food and making delivery services more expensive.

That would be yet another impost for businesses that are already seeing margins squeezed as input costs rise and that must also weigh up what they can absorb and what they can pass on.

For some, there is a real risk that end-consumers, who are showing signs of being more price sensitive across the board, will reduce or cease spending if transport costs push up the price of goods already impacted by other inflationary forces.

The message for business, then, is twofold.

For freight and transport companies, there is an urgent need to address the cashflow and balance sheet impact of the change in fuel tax credits. The situation is going to change again in September when the excise cut ends, leading to higher fuel prices and the availability once again of fuel tax credits. Ironically, the current net benefit of about 4 cents/L will be lost.

For businesses where transport is a critical factor — it is time to reassess budgets, strategy and pricing models, preparing for what will likely be one of the hardest years for freight and transport in recent memory.

This article was first published by SmartCompany on 16 May 2022. Licensed by the Copyright Agency. You must not copy this work without permission.
This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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