1. The Impact of a Rising Oil Prices on Transport Davide Fiorello - TRT Trasporti e Territorio srl, Milano, Italy Other authors: Angelo Martino - TRT Trasporti e Territorio srl, Milano, Italy

2. The Impact of a Rising Oil Prices on Transport Introduction Energy consumption in the transport sector Correlation between oil price and road fuel price Response of the transport sector to the oil price peak Conclusions Content of the presentation

3. The Impact of a Rising Oil Prices on Transport Economies as a whole have not suffered from the recent oil prices peak, but some specific sectors have experienced significant problems and the transport sector is one of these. Despite the recent oil price decrease the basic lesson to be retained from the top prices reached in 2008 is that oil and other fossil fuels are limited resources and their price will eventually increase. The transport sector (among others) has to confront its vulnerability to energy price This study investigated the relationships between oil prices and the transport sector, and provides an analysis of the impact of high oil prices on transport costs. Introduction

4. The Impact of a Rising Oil Prices on Transport According to EUROSTAT data, the share of transport in total final energy consumption has increased steadily since 1990 to reach 370 million tons of oil equivalent (Mtoe) in 2006, i.e. (i) almost 31% of total final energy consumption, (ii) five percentage points more than its share in 1990 (26%) (iii) three percentage points higher than industry’s share (28%). More than one half of the total increase took place in the final years of twentieth century, while since 2001 energy consumption has grown more slowly (but still faster than in other sectors). Oil is 97% of total energy consumption in the transport sector. Renewable sources are 1.5% Energy demand in the transport sector

5. The Impact of a Rising Oil Prices on Transport Most of the energy demanded by the transport sector is used in road transport, absorbing up 303 million of oil equivalent (74% of the total volume in 2006) Energy demand in the transport sector

6. The Impact of a Rising Oil Prices on Transport Unitary consumption of energy: 1000 toe per unit of traffic Energy demand in the transport sector Efficiency improvements of the road and aviation sector are mainly the result of higher load factors (for road in the freight transport). For rail, the lower efficiency is due to the strong reduction of rail freight transport

7. The Impact of a Rising Oil Prices on Transport Oil price and road fuel price trend It is well known that oil price is only partially transmitted to road fuel prices…

8. The Impact of a Rising Oil Prices on Transport Oil price and road fuel price trend … and actually transport demand seems largely uncorrelated to oil price

9. The Impact of a Rising Oil Prices on Transport The ability for the transport operators to change the tariffs and thus pass on the higher costs of fuel to their customers differs considerably by market segment and mode Fuel surcharges are widely used in both cargo and passenger aviation, whereas it is quite unusual in road transport where many small companies with weak market power operate Responses of the transport sector to the oil price peak

10. The Impact of a Rising Oil Prices on Transport Across Europe, road haulage companies are generally unable to pass on increasing costs to their customers Even when requests for tariff adjustment occur in the normal process of annual review of trade agreements, customers often return on the market to evaluate competing offers. Consequently, the largest part of the manufacturing cost has been absorbed by the compression of profit margins and a lower overall profitability of the sector. Particularly, small and medium-sized firms have been suffering. Responses of the transport sector to the oil price peak

11. The Impact of a Rising Oil Prices on Transport Road haulage Since most of road haulage companies are not able to pass on higher transport costs completely, several initiatives have been undertaken to reduce other costs: - fleet cost management (e.g. choice between “invest” and “lease”), - fuel cost management (e.g. economic driving techniques), - staff cost management (e.g. leasing temporary workforce), - insurance cost management (e.g. fix franchise at an appropriate level). - install own diesel tanks and buy diesel from oil companies or large retailers (savings between six and nine eurocent per litre). - Collaboration between shippers to exploit economies of scale Responses of the transport sector to the oil price peak

12. The Impact of a Rising Oil Prices on Transport Road haulage Despite any cushioning effect, the surge of oil price occurred in last years has damaged many operators The largest part of the higher cost has been absorbed by the compression of profit margins. However, given the very high level of fragmentation of this market in several countries, profit margins are already very low. When oil price should rise again and steadily remain on high values for a long period, the sustainability of road freight companies would be seriously threatened. Responses of the transport sector to the oil price peak

13. The Impact of a Rising Oil Prices on Transport Air sector Jet fuel expenditure for the major network carriers has doubled between 2004 and 2007 Fuel surcharges were largely adopted. During the last oil shock, these charges in some cases even exceeded the net transport fare At the same time carriers have improved cost efficiency acting on tickets, sales and promotional expenditures (-9.2% change in unit costs, 2006 vs. 2005), stations and ground (-1.8%) maintenance (-0.8%) and depreciation (-7.5%). Excluding fuel, EasyJet has registered a cost per seat reduction of 13% over the past three years, whereas Ryanair has declared that its unit costs reduced by 6% Responses of the transport sector to the oil price peak

14. The Impact of a Rising Oil Prices on Transport Air sector As for road haulage, reactions to high oil price cannot avoid consequences on profitability During the peak oil period, a number of airlines announced some structural capacity cuts and imminently grounding their aircrafts on unprofitable or marginally profitable routes. The huge increase of the air passengers in the last years has been almost totally due to additional air demand thanks to low fares. When low air tariffs should became unsustainable because of high energy prices and other measures the risk that a large share of demand and the consequent economic activity and employment generated would disappear is high. Responses of the transport sector to the oil price peak

15. The Impact of a Rising Oil Prices on Transport Maritime sector In sea freight rates, the additional cost due to higher oil prices is levied through the Bunker Adjustment Factor (BAF). Over the last three years, every one dollar rise in world oil prices has fed directly into a 1% rise in transport costs. The shipping sector was only slightly impacted because freight rates are not amongst the main drivers of maritime transport demand Nevertheless strategies to reduce fuel costs have been put into practice: - reduce speed (consumption depends on the cube of the speed) - use larger vessels - vessel sharing agreements Responses of the transport sector to the oil price peak

16. The Impact of a Rising Oil Prices on Transport Summary impacts of oil price in the transport sector

17. The Impact of a Rising Oil Prices on Transport The increase of oil price affects the transport sector much more than the rest of the economy. There is almost no oil substitute in the transport sector, The recent peak oil price period experienced until mid 2008 has demonstrated that the global economy is today less vulnerable to high energy costs than it was a the time of the first oil crises in the 1970’s. But, if the economy as a whole can live through high oil prices much better than in the 1970’s, nonetheless big difficulties could arise if one single sector – road freight transport – should be stopped. For that reason, despite the recent fall of oil price, designing a strategy to limit oil dependency of the transport sector remains a urgent need Conclusions

18. The Impact of a Rising Oil Prices on Transport Thanks for your attention