Brent Wm. Primus, a transportation attorney, wrote an article which appeared in the February 2012 issue of Logistics Management magazine. The article is titled “Shippers, take action!”. In the article Brent explains how the implementation of the FMCSA’s Safety Measurement System (SMS) has the unintended consequence of increasing shippers’ exposure to vicarious liability for highway accidents. The article explains how this all started with the case of Schramm v. Foster in 2004. Although there have been many articles written on this topic, he also offers a very simple, one sentence, solution to the shipper liability problem with SMS.
I remain a proponent of removing the scores from public view because many shippers will continue to harm small carriers by denying them freight as long as the scores are public. The agency can continue to use SMS to prioritize carriers for further investigation, but there is no safety benefit in making the scores public. A simple solution to solving the liability issue would be a welcome first step in reducing the economic damage of CSA/SMS.
Not much has happened since last October when the the FMCSA approved the first Mexican trucking company to enter the U.S. According to Transport Topics, Transportes Olympic remains the only motor carrier granted authority under the pilot program. The carrier only has two trucks, one of which is registered for the program. The registered truck has crossed the border 9 times since October. In addition, one owner operator Moises Alvarez Perez, who does business as Distribuidora Marina El Pescador, received authority in December and has one truck but it has yet to cross the border. We should be grateful that the Mexican government cancelled its retaliatory tariffs on U.S. exports when the cross-border program was approved, but it sure does not seem like they got much in return.
Despite the incredibly low participation in cross-border trucking, the program is being challenged in court by the Owner-Operator Independent Drivers Association, the Teamsters union, and Public Citizen. The lawsuits were filed in the Court of Appeals for the District of Columbia Circuit. They remain separate lawsuits, though the court has ordered that they be argued on the same day. It has not yet scheduled the arguments.
The FMCSA denies that the groups are eligible to challenge the program.
It is hard to say whether the lack of participation is due to uncertainty around legal, political, and regulatory issues or if it is driven more by economic concerns. Long-haul Mexican carriers do not want their drivers sitting for hours at the border waiting to cross into the U.S. Most of those moves are handled by local shuttle trucks. Once they are in the U.S. the Mexican carrier is only allowed to haul a load back to Mexico. That makes it unlikely that the carriers will want to go much beyond Dallas, Houston, and San Antonio recognizing that they don’t want to sit and wait for a return load and also can’t afford to come back empty. Longer haul round-trip dedicated runs are also a possibility.
We are continuing to look at Fatigued Driving scores where, remarkably, 32% of the measured carriers are in the worst 20th percentile while only 5% are in the best 20th percentile. One would expect an equal number of carriers to be in each percentile, which is depicted by the red line of our graph. With roughly 50,000 carriers measured we would expect about 10,000 to be in the best 20% and 10,000 to be in the worst 20%. The actual scores from the January 2012 FMCSA dataset are represented by the blue line. Less than 2,300 carriers are in the top 20% while over 16,000 carriers are in the worst 20%. As mentioned in an earlier post, over 55% of all carries measured on the Fatigued Driving BASIC have a golden triangle (score above the intervention threshold.) The intervention threshold for this BASIC is 35% for non-hazardous materials haulers so we would expect about that percentage to have an alert. SMS scores are not suitable for determining which carriers to do business with. Carriers with great safety ratings, great service, and competitive rates are being harmed by the publication of SMS scores because some shippers and 3PLs are using this faulty system to qualify carriers.
For those less familiar with Compliance Safety Accountability (CSA) and Safety Measurement System (SMS), there are seven quantified performance factors called Behavior Analysis and Safety Improvement Categories (BASICs.) Of the seven, five are made public through the FMCSA web site. For each BASIC an arbitrary percentage of carriers are deemed to have a score that warrants further investigation by the FMCSA. Carriers with scores above that percentile are labeled on the FMCSA web site with a golden triangle, which is often also referred to as an alert.
Housing starts increased to 699 thousand in January (seasonally adjusted annual rate), the third straight month at or near 700k. Single unit structures totaled 508 thousand, the second month in a row over 500k. Total starts reached a low mark of 477k in April of 2009, while single unit starts bottomed out at 360k in January of 2009. Housing starts remain far below the average of just over 1.5 million per year over the last 40+ years, and even farther below the 2.2 million peak of the most recent housing boom. Total starts have been under 1 million (SAAR) for 43 straight months, far longer than in previous housing recessions, averaging only 611k during this stretch. Since 1968, the U.S. population has grown from 200 million to over 300 million. Low housing starts not only impact transportation demand for building products but also for appliances, furniture, and other related items. The vertical bars represent recessions.
There are many reasons (accusations?) being thrown around to explain the recent increase in gas and diesel prices. The usual suspects – speculators and greedy oil companies – are an easy mark for those who prefer sound bites over substantive analysis and explanation. Many experts are pointing to uncertainty abroad, such as Iran threatening to close the Straits of Hormuz, where 1 of every 5 barrels of oil pass through a narrow corridor, and Israel potentially striking Iran’s nuclear installations. There is a significant potential threat of disruption of oil production and transportation in the region. Domestic uncertainties include regulatory, tax, and environmental attacks on U.S. production, transportation, and refining. What is not getting as much press in the U.S. is the shutdown of two refineries in the Northeast that produced 20% of the gasoline consumed in the region. Sunoco’s refinery in Marcus Hook, PA (Feb) and ConocoPhillips refinery in Trainer, PA (Jan) were shut down due to financial losses and are both on the market. So much for excess profits at these refineries. Nobody is arguing that demand is outstripping supply and driving up prices. In fact supply has been growing and demand has been shrinking or flat through the recession and “recovery”. So why are prices rising?
Forbes produced an excellent article back in 2008 stating that most of the run-up in oil prices in that environment were a result of debasement in the value of the dollar, not measured by other currencies, but measured by its worth in gold. We have used this chart in our industry update presentations since it was produced by Forbes. The chart shows the close correlation between the price of gold and the price of oil between 1956 and 2008. This week, in another excellent article Louis Woodhill of Forbes states that “gasoline prices are not rising, the dollar is falling”. The author states that gasoline would have to rise another 65 to 70 cents per gallon for the ounces of gold per barrel of of oil to return to the long run average (0.0732 ounces of gold per barrel of oil) . Ouch! So far the vast increase in money supply created by quantitative easing (which sounds much better than printing money but has the same effect on money supply) has not led to unreasonable inflation. The concluding paragraph of the article is ominous. “During the 1970s, the toxic combination of a weak dollar, high tax rates, and onerous regulations introduced a new word into America’s economic vocabulary: stagflation. Reaganomics banished this word to the history books. Now, President Obama and Fed Chairman Bernanke are teaming up to give stagflation another try. It is not likely that Americans will like it any more this time around than they did 40 years ago.”
Lately, even the right is bashing the oil companies for causing high prices in the U.S. by exporting more refined petroleum products rather than selling them in the U.S. at a lower price. I came across an excellent explanation and rebuttal in the Consumer Energy Report. The article is titled “What’s So Bad About Exporting Gasoline?” The author, Robert Rapier, points out that fuel exports were our top value export in 2011 at $88 billion dollars. Don’t confuse that with energy independence. We import over 9 million barrels per day of crude oil and export about 3.1 million barrels of refined products per day. But this finished product has a much higher value per barrel than the raw product, so we are importing a raw product, putting people to work in well-paying refinery jobs, and exporting a higher-value product. What’s not to like? The alternative is not to keep the finished product here and sell it for less, since we already have enough finished product to meet current demand. High prices and heavily subsidized and mandated ethanol are dampening our demand for gasoline. The alternative is to shut down the refineries and lay off the workers. Sixty percent of our gasoline exports go to Mexico, the source of 10% of our imported crude. Oil companies are not shipping this stuff to China to drive up our own pump prices.
So will we see $5 diesel? The only thing we know for sure about forecasts is that they will be wrong. In January, The Federal Energy Information Agency said there is only a 6% chance that oil will rise above $125 a barrel and only a 25% chance of gasoline rising above $4. If it happens, EIS believes it would be during the summer driving season. Others predict much higher prices but skeptics point to a prediction by Goldman analysts in May 2008 that oil could hit $200 within six months, only to see it fall to $40 by the end of the year.
Political uncertainty won’t result in $5 diesel but real turmoil in the Mideast could lead to that level of prices. The fear of returning inflation also won’t lead to $5 diesel. The actual return of 1970’s style inflation would certainly lead to much higher fuel prices. Absent a real event, the current supply and demand environment does not support $5 diesel.
Finally, what are you going to do about it anyway? Whether diesel hits $5 or stays near $4 it makes sense to shift truck freight to intermodal where possible. It also makes sense to explore options for natural gas powered class 8 trucks in regional and dedicated operations. You should make sure your fleet and your carriers’ fleets are aggressively testing and implementing fuel-saving strategies. You need to look at supply chain network design to locate facilities in a way that promotes greater use of intermodal. Hedging? Smart hedging is not a gambling strategy of deciding to hedge only when you think prices are going up. Fuel hedging is a useful tool in improving forward visibility of fuel prices and smoothing out spikes. If you are hedging other commodities, a fuel hedging program may make sense but don’t rush into it trying to beat rising diesel prices.
Annualized U.S. assemblies of autos and light trucks surged to 9.9 million in January (seasonally adjusted) from 9.1 million in December. The last time assemblies exceeded 9 million annualized units for two months in a row was in early 2008. Prior to December, assemblies had been relatively flat for the previous 19 months ranging between 7.5 and 8.9 million units annualized (seasonally adjusted). Our graph is a 3-month moving average of the seasonally adjusted annualized assemblies. Year-over-year percentage growth using the three-month moving average is very strong at 22.2%, reflecting weak 2011 assemblies. Average monthly seasonally adjusted assemblies were 11.4 million from January of 2001 through December of 2007 indicating that auto assemblies are still well short of pre-recession levels.
IANA, the Intermodal Association of North America, reported very strong growth in domestic intermodal to start 2012. While down from Q4, shipments in domestic boxes are well above the same period in 2011 and just off from the highest volume months in 2010. Shipments moving in international containers rose slightly in January and are very close to 2011 volumes. There was no significant fall peak shipping season in 2011 but the strength of domestic intermodal is encouraging.
Seasonally adjusted real retail sales increased in December to $176.4 billion. (Note that actual sales are deflated using CPI 1982-84=100.) Year-over-year growth was 2.8%, the tenth month in a row under 5%. From peak (Sep '07) to current, retail sales are off 2.1%, a much smaller percentage decline than what has occurred in the housing and auto markets. December sales were 12.7% higher than the trough (Mar '09) of the recent recession. Real retail sales have only recovered to the levels of 2005, which is not much of a recovery. The vertical bars in the graph represent recessions.
Stephens Inc. released their fourth quarter 2011 update on publicly traded TL carriers reporting that rates per loaded mile excluding fuel surcharge increased 5% for the full year from 2010 to 2011 and for the fourth quarter from ‘10 to ‘11. This marks 7 straight quarters of year-over-year gains. Stephens is expecting 2012 TL rates to increase by 3-4%. The data does not necessarily represent the entire TL industry as the publicly traded carriers tend to be larger and more successful in general so are also likely to be more successful in raising rates. In addition, shorter lengths of haul increase revenue per mile without necessarily being indicative of price increases. Average length of haul dropped from 759 miles in 2006 to 610 in 2011. We are in a period of rising TL rates that is expected to accelerate going into 2012 if there is any economic recovery to accompany the capacity and productivity-damaging regulations such as CSA and changes in hours of service.
Graph reproduced with permission from Stephens Inc. For more information contact: Jack Waldo at firstname.lastname@example.org or Tyler Bozynski at email@example.com
We have continued to analyze SMS data and the results are somewhat surprising and do not inspire any confidence in the methodology. We have downloaded three monthly data sets of SMS scores, September and December of 2011 and January of 2012. The first finding is that at a aggregate level, the data is fairly stable. In each month about the same number of carriers are in the dataset (760k), approximately 12% of the carriers have an SMS score on at least one BASIC, and about 56% of measured carriers have at least one BASIC over the intervention threshold – a golden triangle.
The FMCSA has been publicly claiming to measure 200,000 carriers, but if that is the case it would be nice if the data that they offer to the public would come close to backing up their claim. One expert told me that they are not including zero percentile carriers in the data, but I checked and that is not a true statement. When we examined each of the 5 published BASICs, the data gets a little more sparse with less than 10% of all carriers measured on any one BASIC. Vehicle Maintenance is the most frequently measured BASIC and only 3 of the 5 BASICs have more than 10,000 carriers measured.
Now here is the part where my suspicion is truly aroused. For each BASIC a certain percentage of carriers are deemed to be over the limbo bar – regardless of the carrier’s actual safety record. One would expect that about that percentage of measured carriers would have alerts. While the percentage is close for the Unsafe Driving BASICs the number of alerts are off the charts for Fatigued Driving and suspiciously high for Vehicle Maintenance. Note that Alerts for Driver Fitness and Controlled Substance are, for the most part, not driven by percentile rankings. If 35 to 40 percent of carriers are supposed to be over the limbo bar for Fatigued Driving, why do 57% of measured carriers on that BASIC have a golden triangle? At first I thought perhaps there were a lot of carriers with alerts that were not driven by the percentile rankings. It turns out that 32% of all carriers with a score on the Fatigued Driving BASIC have a percentile ranking of 80-100! That is mathematically impossible – 32% of the carriers are in the worst 20% of the population. Only 4.6% of the 50,000 carriers have percentile rankings of 0-20. Incredible! Not only is the FMCSA grading on a curve, the curve is rigged.
So here is a quick synopsis of SMS. Only 12% of all carriers are measured. Of those that are measured 56% have at least one score over the limbo bar. Never mind that highway accidents are at an all time low with a steady record of improvement. Somehow over half of all carriers require further scrutiny. Furthermore, the SMS scores have no correlation with accidents per million miles according to the fine analysis done by Wells Fargo. The regional data anomalies are too numerous to discuss here. Yet, some shippers and brokers are using this faulty data to decide which carriers to use. That is denying business to perfectly safe carriers and obviously does nothing to improve highway safety. To make matters worse the FMCSA wants to use a system where 5% of the carriers are in the best 20% and 32% of the carriers are in the worst 20% to mathematically calculate a Safety Fitness Determination. We can’t let that happen behind closed doors in DC. Let your congressional representatives know that CSA/SMS is fatally flawed.