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Talking Freight

Energy Issues and the Impacts on Freight Transportation

May 17, 2006 Talking Freight Transcript

Good day, ladies and gentlemen. We thank you for your patience. Welcome to today's webinar: Energy Issues and the Impacts on Freight Transportation. My name is Bill, and I will be your conference coordinator for today. At this time, all participants are in a listen-only mode, however, we will facilitate a question and answer session toward the end of today's conference. If you require assistance, key star 0 and an operator will be happy to assist you. I would now like to turn the conference over to your host for today's presentation, Miss Jennifer Seplow. Please proceed.

Jennifer Seplow:
Good afternoon or good morning, depending on where you are. Welcome to the Talking Freight Seminar Series. My name is Jennifer Seplow and I will moderate today's seminar. Today's topic is Energy Issues and the Impacts on Freight Transportation. Please be advised that today's seminar is being recorded.

Today we'll have four speakers, Mark Rodekohr of the Energy Information Administration, Richard Moskowitz of the American Trucking Associations, Todd Spencer of the Owner Operator Independent Drivers Association, and Jo Frigger of EMO Trans Global Logistics Provider.

Mr. Rodekohr is the Director of Energy Markets and Contingency Information Division, Energy Information Administration, Department of Energy. He directs a staff of 25 economists, operations research analysts, and other professionals in the production of EIA's Short-Term Energy Outlook, Country Analysis Briefs (a series of about 100 profiles of key energy consuming or producing countries) and an annual analysis of key energy industry financial indicators in the Performance Profiles report, focusing on the largest 28 energy firms in the United States. Some of his major accomplishments include: EIA's monthly Short-Term Energy Outlook covering energy price, supply, demand and expenditure issues. Briefings based on this publication are widely used by the EIA Administrator and other Senior Officials to brief Congress and other Senior Policy makers in the Department and White House alerting them to potential near term problems in the nation's energy markets. EIA's Country Analysis Briefs addressing energy issues in over 100 key energy producing and consuming countries, are widely used by both the public and private sector in the analysis of potential investments in the energy industry. Mr. Rodekohr is the Vice President, National Capitol Area Chapter, U.S. Association of Energy Economists.

Mr. Rodekohr received a B.S. in Economics, 1970, from the University of Delaware; an M.A. in Economics, 1972 and a Ph.D. in Economics, 1974, from the University of Colorado. He also has a Ph.D. in Fields of Comprehensive Examinations

Rich Moskowitz is the American Trucking Associations' Assistant General Counsel and Regulatory Affairs Counsel. He has practiced environmental, regulatory and corporate law for more than 16 years and is a frequent lecturer on environmental and hazardous materials regulatory issues. Mr. Moskowitz represents the trucking industry before the Environmental Protection Agency, the Department of Transportation and the Courts on a wide variety of regulatory issues, and presently specializes in hazardous materials and energy issues.

Prior to joining ATA, Mr. Moskowitz, served as General Counsel to Wellesley Group, a solid waste transportation company, and as General Counsel to the National Solid Wastes Management Association. Mr. Moskowitz also worked as an attorney at the law firms of Beveridge & Diamond and McKenna & Cuneo in Washington, D.C.

Mr. Moskowitz graduated from Brandeis University in 1986 with honors in economics, and received his law degree with honors from George Washington University in 1989.

Todd Spencer is the Executive Vice President of the Owner-Operator Independent Drivers Association (OOIDA). Mr. Spencer began his career in trucking as an employee-driver in 1974. In 1976, he purchased a truck and became an owner-operator trucker leased to a motor carrier. In 1978, he was elected to the Association's Board of Directors. In 1981, he sold his two trucks and assumed the role as Editor of the Association's magazine, Land Line, and Communications Director for OOIDA. In 1992, he was elected to his current position as Executive Vice President.

Mr. Spencer has testified before various committees in the U.S. Congress on trucking issues. He has served on various committees of the Commercial Vehicle Safety Alliance (CVSA) as an industry representative, as well as serving as an industry advisor to the Federal Motor Carrier Safety Administration and the National Transportation Safety Board.

Jo Frigger is Chairman and CEO of EMO-TRANS, Inc. USA. EMO TRANS is an international freight forwarder and global logistics service provider, servicing its customers with air freight and ocean freight services for direct, intermodal, and consolidated cargo for import shipments and export shipments. EMO also provides warehousing, distribution, packing, insurance, letters of credit, customs brokerage, and chartering. EMO's project division, PLI, provides turn key solutions for specialized projects.

Mr. Frigger founded the USA division of EMO-TRANS in 1972. Prior to that, he worked for Deugro as a Branch Manager, Regional Manager, and Vice President of the USA division. Mr. Frigger was born in Germany and has dual citizenship in the US and Germany.

I'd now like to go over a few logistical details prior to starting the seminar. Today's seminar will last 90 minutes, with 60 minutes allocated for the speakers, and the final 30 minutes for audience Question and Answer. If during the presentations you think of a question, you can type it into the smaller text box underneath the chat area on the lower right side of your screen. Please make sure you are typing in the thin text box and not the large white area. Presenters will be unable to answer your questions during their presentations, but I will start off the question and answer session with the questions typed into the chat box. Once we get through all of the questions that have been typed in, the Operator will give you instructions on how to ask a question over the phone. If you think of a question after the seminar, you can send it to the presenters directly, or I encourage you to use the Freight Planning LISTSERV. The LISTSERV is an email list and is a great forum for the distribution of information and a place where you can post questions to find out what other subscribers have learned in the area of Freight Planning. If you have not already joined the LISTSERV, the web address at which you can register is provided on the slide on your screen.

Finally, I would like to remind you that this session is being recorded. A file containing the audio and the visual portion of this seminar will be posted to the Talking Freight Web site within the next week. Due to the size of the file, recorded files are available for viewing/listening purposes only and cannot be saved to your own computer. We encourage you to direct others in your office that may have not been able to attend this seminar to access the recorded seminar.

The PowerPoint presentations used during the seminar will also be available within the next week. I will notify all attendees of the availability of the PowerPoints, the recording, and a transcript of this seminar.

Now we are going to start with the first presentation. Again, today's topic, if you just joined us, is Energy Issues and the Impacts on Freight Transportation. Our first presenter will be Dr. Mark Rodekohr of the Energy Information Association-- I'm sorry, Administration. And again, if you think of questions during this presentation or during any of the other preparations, please type them into the chat area on the screen and we will answer them in the last 30 minutes of the seminar. So, with that, I will turn it over to you Mark.

Mark Rodekohr:
Thank you, everybody and good afternoon. We're a statistical agency so my presentation will be heavily laced with numbers and charts and all that kind of stuff and not so much policy recommendations or anything like that. I'd like to start off, we're going to talk about the short-term fuel outlook for freight fuels, in particular. Then the longer term for the freight sector, according to the annual energy outlook. In the short-term fuel price outlook, we do this once a month. It is updated about the 7th of every month and so we're constantly changing our outlook a little bit all the time. I think we're being more right than wrong lately, which is good. Anyway, here is sort of short run forecast, if you heard it, you know, listened to the news on NPR every morning, around 6:00, it will tell you what happened to prices. But essentially our forecast is that prices are not going to relax, crude oil prices will not relax much over the next 18 months. In fact, if you look at the top red line, you will see they will approach record highs in real terms, if it goes up that high. And it's possible. We don't know what will happen with respect to Nigeria, Venezuela, Iran, Iraq and a number of other countries that are very difficult to forecast exactly what's going to go on with their production. For the freight sector, clearly the most important price is diesel fuel prices. You see that here on the projections. We do not think they're going to peek nearly as high as they did in I'd say December '05; well, November '05. But we do think they're going to remain relatively high and that will bring pressure on markets to adjusted out, especially for those of you users who are in the public sector, who have to worry about fuel prices for buses and all of those kinds of fleets. We do not expect those to go down very significantly.

Now, why is this happening? Well, this chart, which is a little confusing, admittedly, shows you the difference between demand, which is the red bar, non-OPEC supply, which is the blue bar and, of course, the change in the WTI oil price. What you can see is in starting in roughly 2005 quarter 1, demand was far exceeding non-OPEC supply. We don't expect that to really catch up a lot. And as a result, the market is very imbalanced, likely to have more price spikes and not likely to go down in prices over the next 18 months. Key to this projection is world oil surplus capacity. You can see here it this chart, in 2002, we had almost 6 million barrels a day of excess capacity. We're now down in the range of $1 million to 1.2 million barrels a day. On a market of 84 million barrels a day, this is extremely tight and you will find this in any industry, copper, steel, cars, anything else, once you get to that point of supply and capacity, it limits production. Prices tend to go up and be erratic. We've seen that throughout the commodities markets, not just oil. This chart shows you a little bit of the events; it's a chart in nominal dollars per barrel, but as you can see, the oil embargo of '74, which I was around for, when I started to work, the Iran/Iraq War, the Saudis abandoned the swing producer role, which left prices dropping like a rock. And then operation Desert Storm pumped them up, the OPEC cutbacks and now the Hurricane Katrina, strong demand, especially from China and Venezuela and brought prices back up quite a bit. Not a record in terms of real prices, but a record in terms of nominal prices. We've reassessed our long-term oil price projection. Most oil-producing countries are facing investment consistent with higher oil prices. But not entirely. Investment impediment still exists. 65% of the oil in the world is controlled by governments and not by private sector companies. In doing business, the increasing price of rigs have doubled. So, a lot of other factors are going on here. Most oil companies are not betting on 60 to $70-barrel oil. They're betting on roughly 75 to $35 barrels is what they're doing. Our friends at Exxon are giving money back to their shareholders like crazy. We do not believe peak oil, Matt Simmons' argument that we are running out of oil. I heard that in '74. I didn't believe it then, I don't believe it now. There are a lot of molecules of oil in the ground. The question is how much it costs to get it out and how quickly you can do it. And what the government policies are. But, that being said, our world oil price projection is much higher than it was last year. We're now looking at prices in real terms in the 50 to $60 range, compared to last year, we were looking at more like in the 25 to $30-barrel range. So, we've definitely upped our projections in that regard. And we think that's more consistent with market behavior at the moment. And this is a market that's very cyclical and there are good arguments to have peaks and valleys so, when it crashes, it can crash hard. We just don't know. Petroleum consumption by sector, this is a simple chart, but it says a big story. The story is everything is in the transportation sector. That's freight trucks, light-duty vehicles, et cetera. None of the petroleum demand growth is going to be in much of the other sectors. They're going to be heavily influenced by natural gas and other fuels, but not by petroleum. This has been a trend that's been going on. We expect it to continue to go on.

By load, of course, the big thing is light duty vehicles. That's going to be the biggest growth and, again, we always assume that there's no change in policy. Should you have a big change in policy with respect to MPG standards, et cetera, that could make a difference. Freight trucks are also expected to grow. A lot of this is due to factors that I will go into in a minute. The heavy-duty vehicle consumption, you can take the numbers and divide them by two, these are in quadrillion BTUs. We expect that to continue fairly rapidly. Partly because of the growth in the economy, partly because of just in time inventories. The freight trucks are very ideal method of getting product to market quickly. The travel, again, like I showed you before, is expected to keep on the trends. We're up a little bit less than we expected last year to do the higher prices, but nevertheless, continue to grow in the sort of 3% range or 2.5% range over the next 30 years. We don't keep track of how well we've done on the projections for travel, but our projections for prices are usually pretty bad but the projections for consumption, except for other variables, are much better. Vehicle efficiency is also expected to grow a bit higher than we had last year, again, because of higher prices. So, we think that that's going to help the vehicle efficiency growth. As you can see in this chart, it's going to be growing after 2010. We had a discussion the other day about this subject. About some of the regulatory reasons for why this growth was maybe put off.

Heavy duty vehicle sales are as you can see this chart, they were always sort of lumpy, which is very consistent with the sort of stock turnover factor that you have in any of these kinds of sales. If you buy a lot one year you don't need as many next year. We expect that to remain kind of lumpy but nevertheless continue to grow on sort of a trend. But not reach the level they were in 2000 by the end of the forecast period. The technologies in this, I'm just going to comment this, I'm kind of dumb about this stuff. Not an engineer. But anyway, my experts tell me that internal friction reduction, advanced reduction and advanced fuel production will have a big impact after the year 2010, but not until that point in time.

Now, if you look at two technology cases, we have 2005 technology case with respect to transportation, fuel is the red bar. But we have a high technology case, which is the blue bar, as you can see for freight trucks, the high technology case could make a small difference, but not a big difference. Whereas with aircraft it could make a huge difference and with light duty trucks, not as much with freight trucks. Let's look at the world transportation and energies by region. What you see here is the mature market economies, the U.S. and Europe, et cetera, are the biggest users and growing steadily but they're not growing nearly as much as the emerging economies, which would be east Asia and other places like that. What we call transitional economies, which is the former Soviet Union, et cetera, were sort of basket cases, we don't expect them to really grow too much. Now, this is my trivia question. I shouldn't have shown the chart so quickly, but what is the second country in the world with regards to world oil reserves? Nobody knows this. It's Canada. Because of all the tar sands that they have. Right after Saudi Arabia. And you have Iran, Iraq, Kuwait, Venezuela and it goes on down the list. I thought that was a nice little trivia question to pose to people who have students. So, anyway, I'm done at this point and I'd like to thank you and be happy to answer any questions later on.

J. Seplow:
Thank you. And I know a few people did post questions and we will get to those in the last half hour. We're going to now move on to our next presenter, Richard Moskowitz of the American Trucking Associations. Rich, if you'd give me a minute, I will get this turned over to you. Okay, Rich, you can begin.

Richard Moskowitz:
Thanks, Jennifer and thanks, everybody, for participating this afternoon. For those of you who are not familiar with the American Trucking Associations, we are the nation's largest trade association that represents the trucking industry. We represent about 37,000 motor carriers in all segments of the trucking industry. I would be remiss in my responsibilities and instantly fired if I didn't remind everybody on the call, that the phones at your ears, the computers you're working off of, the lunch you ate today was brought to you by a truck.

The purpose of today's presentation is to demonstrate to you how important fuel is to the trucking industry and then to talk about perhaps one of the biggest issues facing the industry today and that is the imminent conversion or transition to ultra low sulfur diesel fuel.

The slide in front of you shows a pie chart of the diesel fuel that is consumed in the country by transportation mode. As you can see, trucking consumes the lion's share of that, 65%, or 36.4 billion gallons of diesel fuel every year. For most trucking companies, diesel fuel is their second largest expense after labor, about 20 to 25% as a frame of reference. The industry is tremendously sensitive to the price of diesel fuel and obviously over the past year has experienced some dramatic changes in that area. Based on EIA's most recent estimate in May, we are expected to spend close to $100 billion on diesel fuel this year. That's more than $10 billion than we spent last year and more than double what we spent just four years ago.

This next slide demonstrates how important the price of diesel fuel is to the trucking industry. The orange line, going across the bottom, over a period of time, shows the price of diesel fuel per gallon and the white bar lines underneath that orange line show the number of companies that have filed for bankruptcy in the industry over that period of time. As you can see, there's a pretty tight correlation between the two. When diesel fuel prices spike upwards, trucking companies tend to fail.

I told you I'd spend most of the time on the No. 1 issue in the energy world facing the trucking industry and that is the transition to ultra low sulfur diesel. Beginning in just two weeks, the country is about to change the fuel specification for diesel fuel. We currently use onroad diesel fuel with a sulfur content up to 500 parts per million. Beginning in two weeks, on June 1st, 80% of the fuel we consume that is 80% of the fuel refined or imported into the United States, will have to meet a 15-part-per-million sulfur standard. And the pictures on that slide give a graphic representation of just how small that is. Imagine that shot glass filled with sulfur and then imagine dumping it into an Olympic-size swimming pool. That's approximately 15 parts per million.

The whole reason that we're transitioning to ultra low sulfur diesel is to do away with the image of the black smoke coming out of a truck. It's not so much that the fuel itself is going to create significant emissions reductions, it's the technology that it enables. Much the same way that we took lead out of gasoline to enable the catalytic converters in our cars we are removing sulfur from diesel fuel to enable the next generation of emissions control technology, which for trucks are particulate matter traps and exhaust gas recirculation. These devices tend not to function in high sulfur environments. So, we're transitioning to an ultra low sulfur fuel this year with the expectation that in order to meet those new engine standards, engine manufacturers and truck manufacturers will use emissions control technology that can't function in a high sulfur environment.

The message here is that we all want clean air, but clean air is not free. The 2007 trucks are expected to cost between $7,500 and $10,000 more than the trucks we're purchasing today. In addition, there's an expectation that they will be less fuel efficient as a result of these new-emission control technologies. The new trucks will probably have higher maintenance costs, the particulate matter traps need to be cleaned out and maintained and there's a real question as to the durability of the new engines, whether they will last as long as the engines running today. We just don't have enough of them tested and don't have enough miles on the new engines to answer that question yet.

As far as the transition to ultra low sulfur diesel, one of the biggest issues is it going to be available in sufficient qualities? EPA, as part of this rule, went out and did surveys each year since 2001 of the refiners that refine fuel for the U.S. market. And what they determined is that although the rule says that 80% of the fuel refined or imported must be ultra low sulfur diesel compliant, actually closer to 90% of that fuel will meet the new standard. So, clearly ultra low sulfur diesel will be the dominant fuel in the country beginning next month.

Our biggest concern, though, is will it be available everywhere? Because ultra low sulfur diesel is transported from refinery to the point of sale by a common pipeline system, a pipeline system that carries many petroleum products: Gasoline at 80 parts per million.; Jet fuel at up to 3,000 parts per million.; and home heating oil, which can exceed 5000 parts per million, all move through the same pipelines. There are high sulfur sediments and products moving through the same pipelines and the same tanks that ultra low sulfur diesel will move through. That creates a chance of contamination. I've listened to presentations from the pipeline and the terminal industries that suggest that every time a fuel is handed off from the refinery to a terminal, to the pipeline to another terminal to a breakout tank, each one of those hand-offs can increase the sulfur count content by up to 1 part per million. So, there are real questions as you move further and further away from the refinery gate, whether the ultra low sulfur diesel will remain as ultra low sulfur diesel or whether there may be upset conditions causing the fuel become contaminated and having to be downgraded to low sulfur diesel. If you're running a 2006 or earlier model year truck, that is not an issue. ULSD is backward compatible and older trucks can run on both fuels. But if you do purchase a 2007 or later model year truck, it will have to be run on ultra low sulfur diesel, both for legal compliance reasons as well as the potential to damage the technology. If there are localized shortages in parts of the country, that may adversely affect the transportation of freight using the new 2007 technologies.

Probably the most common question I get is how much is the new fuel going to cost? EPA estimated that fuel would cost an additional $0.05 to refine and distribute. We know since then that the pipelines and the terminals, have had to make capital investments beyond what EPA had forecasted. So, distribution costs are likely to be a little higher than what EPA estimated. We also don't know yet whether fuel customers will demand the use of dedicated tank trucks. Right now, tank trucks carry multiple products. They carry gasoline on one load and diesel fuel in the next load. If there is a chance for contaminating the diesel fuel, the fuel customers may insist that the tank truck segment of the industry use dedicated tank trucks and haul only ultra low sulfur diesel. If that's true, there is likely to be a significant cost added to the distribution of ultra low sulfur diesel.

There is a huge difference between cost and price. Ultra low sulfur diesel, like today's diesel, is a commodity subject to the laws of supply and demand. If ultra low sulfur diesel is plentiful, we expect that the price would be very close to the increased costs associated with its refining and distribution. If there are shortages of ultra low diesel, all bets are off and we could see significant price spikes.

Lastly, an issue related to cost concerns the fuel itself and its energy content. We believe that ultra low sulfur diesel will have about a 1% lower energy content than the low sulfur diesel we're currently using. As a result, trucks would have to burn, on average, an extra 1% of fuel to do the same amount of work. That will impact the bottom line.

The next most significant question I get is how will ultra low sulfur diesel affect performance of the fleet? You will have to burn a little bit more of it to do the same amount of work. We also are aware of a problem with the fuel's lubrication. When you remove sulfur from diesel fuel, you change the composition of the diesel fuel itself and reduce its lubricity. Lubricity is important to ensure you don't have engine failures. Since the problem was identified, most of the states have enacted standards from the American Society of Testing Materials that will ensure that the fuel sold in those states have a minimum lubricity value. That should be adequate to protect the new equipment. Most of the lubricity will be restored using additives injected at the terminals since they cannot be transported in the pipeline for fear of contaminating jet fuel. This is probably a very good point to go off on a little bit of a tangent here, biodiesel has a role to play in this area. A 2% biodiesel blend will restore the lost lubricity from converting from low sulfur diesel to ultra low sulfur diesel.

One of the issues associated with ULSD is that it acts to clean out a fuel system. So, if you're running an older truck, over time that truck's fuel system will accumulate sediment. And when you run ultra low sulfur diesel in that truck, or for that matter tanks holding fuel, the diesel will clean out the sediment in those systems. That will result in fuel filters becoming clogged unexpectedly. This is not an insurmountable problem, but something to be aware of. And as briefly touched on earlier, there will be two grades of fuel in the marketplace between 2006 and 2010. The fuel we will use today and then the new dominant fuel, ultra low sulfur diesel. With respect to the new trucks, you must put ultra low sulfur diesel in them. If you don't, No. 1, are breaking the law and No. 2, you may damage that new equipment. Particulate matter traps costs several thousand dollars. If you damage that trap as a result of misfueling, most engine manufacturers will probably not honor the warranty claim. So, there is a real risk here with misfueling 2007 and later model-year trucks with higher sulfur fuel.

Now, we don't fully understand the consequences of this misfueling. If you misfuel a truck with fuel that is slightly contaminated, 20, 21 parts per million, it may not have a significant impact on the emissions control technology. If, however, you're dumping fuel into the truck at 300, 400 parts per million, that may have a different impact on both the longevity of the equipment, as well as its proper functioning. So, that's an issue that, unfortunately, we don't have answers to yet, but we need to keep an eye on.

I also want to address some concerns that are unique to the tank truck industry. Ultra low sulfur diesel has such a low sulfur content that it's rather difficult to measure. Even the fuel labs around the country have been unable to replicate sulfur testing to the point where EPA has had to grant a 3 part per million tolerance to the sulfur test. If they pull a batch and it comes out at 18 parts per million, they will deem that to be in compliance because of the 3 part per million testing variance. Pipelines, terminals and refiners that handle a tremendous volume of fuel will be able to purchase equipment, which costs roughly $50,000 and may need to be run by trained technicians, to test the fuel. For the tank trucks that pick it up in less than 8,000-gallon batches and bring it from the terminal to the point of sale, they're really the first people in the supply chain that will not find it economically feasible to test the fuel they're hauling. So, if there is product contamination at a truck stop, it will be the tank truck and the truck stop as the only two entities that will not be able to point to a sulfur test of the fuel and show that they were not the cause of contamination. That is a potential problem for those that operate in that segment of the industry.

We talked a little bit about contamination from hauling multiple products and dedicated tank trucks. There is an issue with what we call switchloading, that is loading gasoline and then in the next batch loading diesel fuel. In addition to the potential contamination issue, there is a bigger issue with what we call the low conductivity of ultra low sulfur diesel. The conductivity of ULSD is close to zero. As a result, there may be an increased chance for static to develop when you load ultra low sulfur diesel into a tank truck at high pressure. If that tank truck was hauling gasoline before and there is flammable vapor present in the tank truck and there is a spark that results as a result of the loading of the diesel, the picture on the slide here tells 1,000 words. It's something we're very concerned with. We are asking the petroleum industry and the terminals to make sure that ultra low sulfur diesel is properly additized to contain a static dissipater so that this is not a problem. We understand most of the industry is preparing to additize the fuel, but there is no fuel specification that is enforceable under the law, so there may be terminals out there that do not choose to use the additive. That would be a potential safety problem for us.

Lastly, I want to leave you with the one of our biggest fears, which is potential supply disruptions. We need to have an adequate supply of diesel fuel to ensure that freight is delivered. More than 80% of the communities in this country get their goods exclusively from trucking. Last year after the hurricanes, we experienced a problem when several refineries shut down. There was no low sulfur diesel or there was not an adequate supply in parts of the country. What EPA did was issue a waiver and allow off-road diesel fuel, which exceeded the 500 part per million legal standard for on-road diesel fuel, to be used in on-road trucks. This is a solution that worked last year. But once the 2007 trucks, which are sulfur sensitive, are on the road, that may not be a tool that EPA can use to address supply disruptions. We hope this doesn't happen, but we also didn't expect what happened last year with Hurricane Katrina, to have the kind of impact it had on the distribution of fuel. And hopefully we won't have to revisit that situation this year or in future years, when EPA can't simply waive the sulfur standard without damaging the equipment that we're using. And that basically wraps up this presentation. I will look forward to responding to any questions during the Q&A session.

J. Seplow:
Thank you, Rich. Our next presentation will be given by Todd Spencer of the Owner Operator Independent Drivers Association. Todd, if you give me just a moment, I will get you set up. And again, thank you to everybody who's posted questions. Please continue to do so. We will address those in the last half hour of the seminar. Todd, you can go ahead when you're ready.

Todd Spencer:
Thank you very much. Glad to participate today. Basically I guess I'm here to kind of represent the people that are on the front line of the energy issues, people that have to deal with it every day and at every truck stop that they choose to do business with.

OOIDA is a trade association that represents small business truckers. Trucking is an industry that's predominantly an entity of small businesses. Our organization was formed back in 1973. Ironically, as a result of the very first Arab oil embargo, that sent energy prices, fuel prices at the time we thought through the ceiling, but basically it shut down most of trucking and it created havoc. Our organization was formed to address the issues that truckers had, specifically fuel, at the time, but also others and we've stayed with it since then, expanded, grown our membership. Currently there are over 141,000 members, primarily in the U.S and a few in Canada. Our headquarters is in Grain Valley, Missouri, which is kind of in the heartland of the country. We have a satellite office just a few blocks from the capital. We publish a magazine called Landline with a circulation of over a quarter of a million truckers. It's the largest trucking publication in the country. We also have a radio show that airs daily on the XM radio network and we're pretty much on the front lines with truckers on the issues they deal with, whether it be fuel or anything else.

Our members are typically small business truckers, one-truck operators, the kind that are generally referred to as mom and pop people. They're veteran truck drivers, across the board average about 20 years of experience and they will drive over 100,000 miles a year delivering basically everything that we consume as a country. And this is a segment of trucking that's growing more than any other, the small operators. And I think recent figures from the U.S. Department of Transportation show currently the number of small carriers, motor carriers, at 573,000, over 90% of those are in fleets of 10 units or less. And, again, this segment of the industry continues to grow rapidly. There were over 50,000 new carriers registered last year. Among our members, specifically, historically, owner/operators have typically leased their trucks and equipment on long-term contractual basis with the larger motor carriers. That was the historic way that owner/operators fit into the transportation industry, but with deregulation, with changes in the industry, little by little, they're moving away from traditional motor carrier relationships where they would haul, under contract, through that particular carrier to become carriers themselves.

As Rich mentioned, historically fuel prices track closely with business failures. In the typical truckload operation 20 to 35% of revenues can go just for fuel. If you can make out the numbers on the charts, you can see that in late '98 and early '99, fuel prices were near and sometimes below a dollar per gallon. I believe per barrel oil prices were below $10 at that time. This prompted OPEC to action and significant increases in fuel prices in 2000 that truckers weren't able to offset with increased rates or with fuel surcharges. When did that recession start? We know exactly, at the spring of 2000 when truck drivers began canceling orders for equipment and lots of truckers were hard-pressed to find decent-paying loads. Truckmakers laid off workers, so did many of their suppliers. Soon after the economy slowed significantly, we called it the perfect storm among other things. Between 2000 and 2002, roughly a quarter of a million trucks were repossessed and margins stayed pretty tight for those that survived. To kind of give you a perspective on what a quarter of a million trucks is, that's about 10% of all of them that are out there. This didn't change much until the economy and demand for trucking service started to rebound. EPA regulations, ironically, played a somewhat unusual role in reviving trucking back then. New regs, scheduled to begin in 2004, and subsequently moved up a few months helped revive the industry as fleets with aging equipment replaced units ahead of those rules. And most of the repossessed trucks found new homes with owners that could price the service appropriately, with willing shippers that needed the service again. Available trucks matched up pretty well with available loads in 2004 and 2005, despite higher fuel prices, because the demand for service stayed strong. Many big fleets recently reported significant profits, due in large part to the fuel surcharges they were able to assess and collect. I've talked to a number of smaller operators, too, that said 2004 and 2005 were their best years in a long time. I'm not hearing that now as fuel prices move higher again and demand for freight services is softer. It's pretty tight for small operators and owner/operators right now.

Going back to the makeup of our membership and owner/operators overall, those doing the best are those with their own operating authority and dealing with shippers. Usually smaller shippers that depend on the service they provide. But few are the carriers today that deal exclusively with shippers. When trucking was deregulated it didn't create more trucks or make more freight, it opened the door to middlemen, like freight brokers, that specialize in arranging transportation. They can be a needed extension of a sales staff for small carriers. They can also greatly take advantage of their key position between shippers and motor carriers, especially when demand for trucking service is soft as it is now and in times of overcapacity, in the industry, which is most of the time, due to the virtually non-existent barriers for carriers, brokers and for drivers. Most of the big brokerages are publicly-traded companies. Not only we, but the financial markets, too, have noticed that the companies can be very profitable, even very profitable while actual transportation providers fail in mass. They are highly recommended as an investment, but not so with many actual transportation providers. The other thing that deregulation did was empower large shippers with the negotiating ability to simply name their price for transportation charges, playing carriers against each other to lower their transportation costs. When they don't do it directly themselves, they use brokers or freight intermediaries to do the same.

When I mentioned previously that many trucking companies did well in 2004 and 2005, that's a misleading statement. As far as the truckload sector goes, freight revenues haven't been adequate to sustain a healthy industry for a long time. While the news media mentions the need for more drivers in the industry now and going forward, it usually misses the issue. The supposed shortage is really a retention issue. The driver turnover rate among larger motor carriers is between 100 and 200% annually. They go through drivers like oats go through a horse. The only thing that will change that significantly is increases in pay and benefits. Something we don't see happening without some sort of outside influence. The industry is just too competitive, whether you are a one-truck operator or you operate several thousand. The message is still the same, if you don't haul it for this rate, Joe Blow down the street will. This isn't a good long-term trend. The most important person in trucking isn't the CEO, it's the driver from reliability to safety to public image, everything. Not many truck drivers today encourage their children to follow their career paths. Historically, trucking has attracted mature workers from other industries and occupations that believe they could do better financially as drivers. That doesn't happen so much anymore because they can't do better financially. The work is a lot harder, more physically and emotionally demanding and the sacrifices in the family life are extreme. I mention all of this to illustrate how close and how vulnerable this industry always is to rapidly-changing economic conditions. Fuel is certainly a wildcard for the immediate future. Unexpected price jolts or even expected price jolts have a tremendous impact on trucking company failures. We hear from small operators regularly, now wanting the industry to shut down for a week to draw attention to fuel prices. Now, that's not likely to happen. But it does indicate some of the natives are getting pretty restless.

Other jolts, although not as instant as fuel, may come from distorted market forces. Truck manufacturers are building class "8" trucks at a record pace, not because business is so good and demand is that great, but because of new emission regulations that go into effect in 2007. Those regs make trucks more expensive and less fuel efficient. Trucking companies have always preferred investing in equipment as opposed to drivers. They can depreciate equipment as compared to simply wearing out drivers. So, cries of trucks parked up against the fence don't mean much. This likely means the overcapacity in the industry could get worse, especially if the economy slows from the effects of high energy costs and other assorted economic issues from interest rates to the housing bubble that will ripple through the economy, slowing it perhaps way too quickly.

Trouble spots down the road that we see are possible service failures. In recent months, we've heard from farmers in Idaho that couldn't find adequate trucks to haul their potatoes. In Oregon, we hear about nursery growers prevailing on state lawmakers for tax money to set up what would be a transportation brokerage to entice trucks to move their seasonal product at reduced rates. The aftermath of Katrina left some shippers around the country complaining of poor truck service in other parts of the country. Higher fuel prices always mean fewer trucks venture into northeastern states. The same is true for California and much of the west coast. You don't take loads into areas where costs are high and low-paying loads, or none at all, are your only options for a reload. In today's market, smaller shippers are more likely to be receiving less service at higher costs to subsidize larger shippers. This could get considerably worse.

In closing, I should also qualify my comments about chronic overcapacity and a shortage of available service. Both exist. Most truckload drivers spend 33 to 43 hours every week just trying to get trucks loaded or unloaded at shippers or receivers that don't much care about that time. This happens because the driver receives no compensation for his time and neither does the carrier. It's hard to imagine any industry that so routinely squanders their workforce and wastes its own productivity. This is by far the biggest productivity issue in truck transportation and it's also unlikely to be resolved by market forces. Thank you.

J. Seplow:
Thank you, Todd. Our final presentation of the day will be given by Jo Frigger of EMO Trans Global Logistics Provider. Jo, if you give me one minute, I will get you set up.

Jo Frigger:
Okay, hello, everybody. As we've learned, everything needs to be transported. In fact, I always thought that transport is the oldest profession in the world. We've heard a lot about trucking and I think for a lot of this truck cargo, truck is just the beginning or the end of a much longer journey by ship or by airplane. Cargo is moving around the world. Some say that the world has become smaller, but one thing is very clear, the distances between the manufacturers and the end user have grown drastically and fuel has subsequently become a major factor for all carriers, whether by truck or air or sea. Imbalances in the world trade also add to the problem by requiring repositioning of equipment and, of course, empty planes or empty ships or empty trucks need fuel too, to get back to where they can load again.

I'm no expert in energy pricing, but I think just to demonstrate, the imbalance of fuel prices globally, we, as far as I know, the USA is the only country in the world where diesel fuel is more expensive than gasoline. And I really do not know why this is. And maybe we'll get some answers to this later in this conversation or discussion. I do know that farm diesel, off-road diesel, is cheaper than road diesel and, of course, the farmers appreciate that, and it's still too expensive. In jet fuel, you don't have these disparities globally. The disparities are smaller, yet, of course, the anticipated increase of jet fuel pricing of about 44% in 2006 will result in drastic cost increases for all carriers worldwide. They anticipate it to be about $20 billion.

Now the fuel surcharges that come in place for air cargo as well as ocean freight. We've done this chart to demonstrate the drastic increase from the January 2005 to May 2006. It's, you know, 100% increase. And this reflects, in the freight charges for air freight and the next screen or the next slide will show you the cost composition of freight charges for air freight. From New York to Frankfurt, the actual rate is about $0.45 per kilo. In 2005 we are looking at fuel surcharge of $0.40 per kilo and an added security surcharge for $0.15 per kilo total rate of $ 1,00. In May 2006, of course, we are now up 20% on the fuel surcharge. The rate and security surcharge haven't changed, the total cost is up about 20% to $ 1,20. The next slide will show you the increases on the Pacific. From Hong Kong to Los Angeles, the freight rate is pretty steady at $2.50. Fuel surcharge at $0.40 has gone up to $0.60. Now, the increase on the Pacific, total rate, is only 6.5%. However, you have to remember that on the Atlantic, you have mostly high-valued goods, machineries and such, whereas on the Pacific you really have a lot of the department store merchandise that is low-valued, so the impact of $0.20 per kilo, either way, is really, you know, phenomenal for some of this cargo. The same goes, essentially, for ocean freight. Ocean freight rates have traditionally been far more complex than air freight rates and this is more or less a simplification of these rates. The fuel impact, which is called a bunker surcharge, is negotiated essentially on the three-month cycle, where as the rate itself is on the one-year cycle or six-month cycle. So, the increases you see in bunker surcharges are moderate, but you can expect another increase from July to September basically. Here again, the example for the Atlantic as well as now for the Pacific. The increase, again, would also be added from July to September and we can expect an increased bunker surcharge. Who pays for all of this, of course all of us.

The conclusion of this whole thing is, of course, that all cargo transportation, by air, sea or land depends predominantly on oil. This will not change in the foreseeable future. It's also clear that the cost of this fuel will increase because of the depleted reserves and the geopolitical circumstances. I think about conserving oil for transportation and better develop renewable sources for energy production, such as wind, water, solar, for uses other than for transportation, use those renewable resources for heating and cooling, and manufacturing, maybe for local transportation and so forth. Atomic energy, gas and coal, certainly are alternatives and I suspect that a combination of all of the above would have to be a long-term solution. Our climate and geographical diversity in the USA offers significant opportunities for us. We must pursue them far more aggressively than we do. Other countries have done a better job than us for developing the alternative resources for energy and conserving energy with more fuel-efficient vehicles, smaller cars, electrified rail systems, et cetera. I think we may have forgotten the lessons of some 30 years ago, when we had long lines of cars in front of gas stations without gas. Every business needs profits to survive and a good portion of those profits generated by the oil companies should be plowed back into the development of alternative energy as a long-term investment. I believe government can regulate this much better.

To paraphrase an old saying, once you have them by the pocketbook, their hearts and minds will follow. We have become dependent on oil and we buy a lot of it from people who are not really our friends and who we do not want to be friends with. Oil and gas has become a political weapon. We've seen this recently, when this dispute between Russia and Ukraine, led to a shortage of gas in Western Europe. Like a drug addict, who doesn't care who he buys the stuff from and what it costs, we have become oil junkies. The withdrawal symptoms of this oil dependency will be extremely painful and we need to act now, not soon, but now.

Cargo transportation needs oil. Without transportation, there is no trade and without trade, we might as well get ourselves a cabin in the wild and forget about cable TV and collect blueberries instead of Blackberries, raise chickens, get a wood stove and an ax and a handsaw. Our chainsaws won't work anymore. They need oil.

Thank you very much.

J. Seplow:
Thank you, Jo. I think that was a good way to wrap up all of these presentations. I hope everybody enjoy all of these presentations. We're now going to move on to the question and answer session I know we have a few questions typed in, so I will go through those. If we get through all of those, we can open the phone lines for questions. There are also some comments from various people typed in, which I encourage you to take a look at. Let me see, I'm going to go down the question list and see where to start here. Let's see, Rich, we'll start with a question for you. The question is, is ULSD necessary for EGR? I know sulfur kills catalysts and fills particulate traps. I was unaware that sulfur effected EGR.

R. Moskowitz:
One of the reasons we went to it is for NoX control. However, when EPA first got the rules, they envisioned that most of the engine manufacturers would develop devices called NoX absorbers to handle that. Actually, the engine manufacturers have pursued a different path and have used exhaust gas recirculation. What exhaust gas recirculation does is takes some of the exhaust and funnels it back into the engine so there is a lower oxygen environment and as a result, the engine actually runs cooler or less efficiently. But it produces low nitrogen oxide, which is one of the regulated pollutants. Now, that system does not need ultra low sulfur diesel down to 15 parts per million, the way a NoX absorber would, but it does function better in a lower sulfur environment. So, it's a long way of saying, is it necessary? No, but does is it assist in the NoX reduction capabilities? Yes.

J. Seplow:
Thank you. The next question is for you, as well, and the question is what role will biodiesel play with regard to emissions reductions and cost savings to truckers?

R. Moskowitz:
Well, ATA actually did a 180-degree reversal on the policy of biodiesel last year. We previously said no to biodiesel for a whole host of reasons and did a lot of research on it and now adopted a policy that encourages the voluntary use of biodiesel in blends of up to 5%, providing that the biodiesel meets the fuel specifications and also providing that there are no state mandates for its use. That being said, biodiesel has a role to play, to extend the national diesel fuel supply. But it's not going to remove our dependence on foreign sources of oil. There is not enough farmland in the United States to completely replace the amount of petroleum that we use. In fact, I spoke with Joe Joeb yesterday on this subject preparation for tomorrow's hearing in front of the Governor's Task Force on Fuels and asked them when did he think the biodiesel industry would reach a billion gallons? Last year they made 75 million gallons. This year they expect to double to 150 million gallons and the trucking industry alone consumes 36 billion, with a "B," gallons. So, as you can see, biodiesel will only be a very small percentage of the on-road diesel fuel that even the trucking industry alone consumes. He estimated it would be 2015, before the industry generated a billion gallons. Even at a billion gallons, we're talking about only roughly 3% of what the trucking industry consumes and there are other uses for diesel fuel, including farm equipment and heating oil and jet fuel and, so it is one tool in the toolshed to address the energy security issue, but it is not a panacea. The other issue that was raised in the question is a cost issue and one of the primary reasons that the trucking industry had opposed the use of biodiesel is that even at today's prices, biodiesel is significantly more expensive to produce than petroleum-based diesel. Thanks in large part to Congresses efforts and the jobs act of 2004, there is now a $1 per gallon biodiesel federal subsidy. And with that general subsidy, the price of biodiesel is equivalent to the price of petroleum-based diesel. In addition, there are state subsidies out there that make biodiesel less expensive than petroleum diesel at today's prices. We have a genuine question on whether the subsidies can continue indefinitely. When they're producing 75 million gallons, it's a $75 million subsidy. When they get over 1 billion gallons, it gets to a rounding area in the federal budget and something that Congress will probably look at a little closer.

J. Seplow:
Thank you. The next question is actually directed toward both Rich and Todd. I will read the question first. The question is, can you please comment on how interested you constituents are in EPA's SmartWay program in general, and specifically in the various types of technology, systems and operations changes it promotes for reducing idling and increasing fuel efficiency? Which aspects of the partnership's offerings are seen as most and least do-able and effective? Rich, if you want to start first?

R. Moskowitz:
Sure, ATA is actually a charter member of EPA's Smartway program. What it essentially does is encourage both shippers and carriers to reduce their fuel consumption and reduce emissions. One of the most cost-effective ways to do that is to eliminate idling that doesn't have to occur. Some idling has to occur, for drivers that are operating in very cold environments and living in their trucks, that won't be eliminated. But there are idling reduction systems that can be installed to reduce that type of idling. That is an area is that shows a lot of promise. In fact, ATA lobbied very hard for Congress to include a 400-pound weight exemption, to allow idling reduction equipment to be installed on the truck without reducing that truck's freight capacity. Trucks are limited in how much freight they can haul. They can't weigh more than 80,000 pounds. 400 pounds would be the equivalent of the extra weight added by a separate generator that would burn more fuel and nonetheless produce electricity for the truck so that main engine idling could be eliminated. The Federal Highway Administration needs to actually issue rules to implement that and they need to actually make sure that the states honor that federal directive to increase the weight limit by 400 pounds before trucking companies are going to make an investment in that type of equipment. There are other types of equipment and technologies that can be used to increase fuel efficiency and reduce emissions, such as aerodynamic packages, which are expensive to install, but produce significant fuel savings and EPA actually has on their web site, a calculator that will help fleets figure out what types of measures are out there, what types of technologies are out there, that they can use to reduce fuel consumption. The idea being that reduced fuel consumption will ultimately pay for the technology over some period of time. For each company, though, because they don't operate on the same duty cycles and the same areas of the country and the same types of applications, a different mix of technologies would be appropriate.

J. Seplow:
Todd, I will give you a chance to comment, as well.

T. Spencer:
Certainly. You know, the reality for most of the industry is it is made up of truckload drivers and the vast majority of those drivers do actually live in the vehicle that they drive. And being able to keep cool when it's hot or warm when it's cold is essential to them being able to get the sleep that's required for them to comply with hours of service regulations and, of course, it's really just kind of a normal creature comfort that is really essential. Our members have been very interested in auxiliary power units that actually would provide heating and cooling, when the truck isn't idling for a long time. The biggest impediment to that has generally been costs. The current systems that are available will come in the area of 7 to $10,000, that's a hefty price for smaller operators to pay or to justify. Even if you sit here and know you ought to have it, being able to pay for it is going to be one of your Paramount concerns. So, they try to minimize the idling that they must do to the extent that they can. We think it makes sense at least from the standpoint of small business that there be some kind of tax incentives put in place to address that issue. It would encourage greater utilization, at least; I am not even necessarily saying subsidies. The current way that the federal excise tax is computed on the purchase of a new truck is it's 12% of the retail value of that truck. That would mean if you're talking about $10,000 additionally for an auxiliary power unit, the federal excise tax will be assessed on that amount, too. That simply makes no sense whatsoever. It's one of the things lawmakers have heard about and not done anything about because of economic and tax policy reasons as opposed to the worthwhile reasons we think they should act. One of the other things that comes into play for most instances is drivers don't often spend their nights in truck stops. They're usually always full. They're going to be on the road, oftentimes, at a shipper or receiver. And it's while they're there, waiting, and sometimes that can be 10, 12 hours, I mean sometimes overnight, to get loading and unloading. They have to do something. We'd like to see shippers be much more proactive in getting trucks in and out quickly, not only to increase productivity of the industry and the efficiency of the industry, but it also addresses this issue, as well.

J. Seplow:
Okay, thank you. I'm now going to move on to some questions for Dr. Rodekohr. The first question is: Do you have any projections for alternative fuels consumption, such as ethanol and biofuels?

Mark Rodekohr:
Yes, we do. And if you send me an e-mail, I will be happy to send you the exact projections that we have. Off the top of my head, I don't know them. But yes we do. We have a lot of extensive detail on that and the short-term and both in the longer term outlook. And clearly they're expected to go up and, of course, we're always assuming that current laws remain in effect and there are no reporters on here?

I don't believe so.

Good. The ethanol industry is certainly weakening a lot of benefits and probably would not since the keyword is today; also, of course, as you've heard on the news, that President Bush is thinking about dealing with the tariff on ethanol. And that will have an effect on the alternative fuel. Biodiesel, I'm not too sure about. Very, very small right now.

J. Seplow:
Okay. The next question I have for you -- and actually I should mention, the e-mail addresses of the presenters are showing on the screen.

M. Rodekohr:
Yeah, I will be happy to get back to anybody; I'm a manager, so I don't know anything! (laughter)

J. Seplow:
The next question is please expand on the difference between real and nominal crude oil prices?

M. Rodekohr:
Sure, that's an easy one. In real terms, we account for inflation. In had the chart I showed you today, we did not account for inflation. This is a complicated issue in a sense, but crude oil prices today are around $69 a barrel in today's dollars. The record, this is very complicated, is about somewhere between 70 and $80 a barrel. The trouble is west Texas intermediate, which is the prices quoted today, did not exist in 1982 we had the record price. So, that's why there is confusion about what it is. Nevertheless, in inflation dollars, we are approaching the record set back in the early 1980s, when the Iran/Iraq War; when Iran happened. So that's kind of where we're at. We're close to that on diesel and gasoline prices, as well.

J. Seplow:
Okay. Thank you. I think that answers the question. Looking at the questions here, going back to Rich, what are the likely lubricity additives for ULSD? Have they been tested to avoid concerns like MTBE type concerns?

R. Moskowitz:
Lubricity additives, because of the revisions to the ASTM specs, should have begun to have been used beginning in January of 2005. We have a little more than a year's worth of experience with them. I can't quote to you what the chemical names are and I won't tell you which companies manufacture them, but the problem with MTBE is a groundwater problem. It basically started showing in groundwater in states and that's what prompted them to consider banding it. We don't have enough experience using other lubricity additives to know whether they will present a similar problem to MTBE yet. Of course, the manufacturers of the additives would be concerned about that. One of the big issues last year, when Congress was debating the energy bill is whether there would be a waiver for the oil industry, which hasn't come to pass yet. And as a result, I'm sure the manufacturers of whatever chemicals or additives are being used in fuel would share a similar concern to make sure their products don't do unnecessary harm to the environment for fear of liability in the future.

J. Seplow:
Thank you. Jo, I have a question for you now. The cost of fuel is less in China than in the U.S. and Europe. Surcharges presented may be a factor contributing to the costs. Can you explain the extent to which surcharges contribute to the costs? And what are the other reasons for the dramatic differences in the lower prices China enjoys compared to those experienced by the rest of the world?

J. Frigger:
The short answer is I really do not know how China determines their fuel prices. This may be politically controlled in a way that is not clear to me. I mean there are vast changes in fuel prices around the world. I only picked these four examples, really, I mean you have extreme countries like Venezuela, where the price of fuel is like $0.20 or $0.25 a gallon or so. But what I want to know with the chart is why diesel in the U.S. is more expensive than gasoline and it's really in all other countries, less expensive. And the other part of the question, in terms of surcharges, obviously carriers cannot anticipate the development of fuel pricing, but have added this tool to their actual rate charge, to help them to become flexible because the cost of fuel really presents a very, very large part of total expenses.

M. Rodekohr:
I can add a little bit to that, by the way. China is, like many other countries, there is a highly-regulated price and they are, in fact, subsidizing their price, essentially by making it lower in other countries. That being said, there are worse countries. You mentioned Venezuela. You're right. In Venezuela, gasoline is about $0.20 to $0.25 a gallon. And every time they try to raise it they have a riot. Now they're raising plenty of money and don't care. There are other countries in a similar situation, too, India's got subsidized prices. A lot of places do. And Saudi Arabia just lowered the price of gasoline by, I think, $0.30 a gallon two weeks ago because they're making so much money, as well. So, there is a tremendous amount of subsidy. As far as price of diesel relative to gasoline, that is a very good question. It turns out, simply economics of supply and demand in the United States right now. That's what basically determines that. We have a paper on that subject. I will be happy to send that to you or anybody else who wants it.

J. Seplow:
Thank you. Thank you the both of you. The next question we have is do fuel prices tend to have much effect on load factors? Do higher fuel costs lead to more efficient use of truck capacity? Rich and Todd, that may be directed mostly to you, but anybody can feel free to jump in.

R. Moskowitz:
This is Rich. I will take a swing at that one. The industry would like to operate with as full a load as possible under all circumstances. That's the best way to improve the bottom line. That being said, there is a limit as to how much freight can be hauled. There's a legal limit. A fair number of trucks will actually cube out before they weigh out. That is you will fill the trailer before you approach the legal weight limit of the truck. There is nothing you can do short of increasing the size of the trailer, that will address that concern. Same thing on trucks that weigh out, the only way that you're going to improve productivity is to raise the weight limit on the freight that can be hauled by those trucks. And there are, of course there are reasons to do that, to improve productivity. There are also consequences from that decision. Those are public policy debates that go on everyday inside Washington, D.C. We would continue to push for improved truck productivity and we think that because of the driver shortage, because of problems of congestion and emissions, we believe that there are very strong arguments to allow additional freight capacity per truck, but it is an issue that is going to take quite some time to resolve.

T. Spencer:
I guess my answer can be just a little bit shorter than that, in that yes, it does encourage more efficient operations, simply because when trucks don't go, they don't burn fuel, when the economics of the situation don't dictate it. What we're seeing right now with big percentage of our membership and smaller operators all over the country is they have scaled back their operation where they just simply don't go in those high-cost areas. The market will have to sort those things out on its own and it will, in time. The reality for trucks and it's always been this way, whatever the price of fuel is, whatever the energy costs are, if a truck is going to bring it, then basically a truck operator is going to have to be able to offset the increased cost. And that's going to always be reality and I know Rich mentioned productivity and things like that. Realistically, there is not a whole lot practical that can be done in the area of productivity in terms of trailer size because many facilities truck drivers try to load and unload at today weren't even built with the types of trailers that they have to operate today. It's really, really tough for them to get in and get out. When we talk about public policy considerations, those of us in the industry know how well these types of topics go over in Washington with lawmakers and with the general public and how our highways are designed and that traditionally, anytime that's ever happened in the past, it's came with really, really, really punitive tax policy that actually didn't address the issue, but it's just one of those unbelievable costs that would be born by the entire industry, even though there would be a relative handful of people that would benefit from them.

J. Frigger:
I'd like to add to this, not only truckers, but also every carrier, air or ocean, obviously wants to maximize this load on the airplane or the ship up to the capacity and legal limits. And they've always done that. That's how they make money. Of course, with increased cost of transportation, whether fuel prices or anything else, they try to be even more careful and eliminate as much empty legs as they can. It's not always possible.

J. Seplow:
Thank you, all of you. This next question, I think, I'm going to let each one of the presenters address it and give their opinion. The question is, energy prices are one of many trucking cost areas that have risen over the past 20 years. Equipment, drivers, loaders, warehousing, etc. Yet real energy prices, adjusted for inflation, remain relatively low, having less real impact on trucking costs then other items. How will the industry respond when (and if) fuel prices double or triple in real terms. Why would we expect that shippers and ultimately consumers will not have to pay these costs for freight that remains on trucks. Jo, I will start with you. I know you're not speaking from the truck side, but maybe from the water and air side?

J. Frigger:
Well, I think I mentioned this before, when the cost of transportation goes up, we all pay for it. Naturally the carrier has to pass it on somehow. And there is another interesting element in the question. You know, freight charges and tickets for airplanes and ocean freight haven't really gone up that much over the last 10 or 15 years. They have stabilized. Some rates have even come down. So yeah, if it costs more to carry something it will be passed on through to every one of us. As I said before, anything and everything is transported these days. Open the refrigerator or your closet or garage door and there you have it. We pay all for this. There is no question about it.

T. Spencer:
I think I would generally concur in that area. What we've noticed and actually what the history in trucking, going back to the first Arab oil embargo shows is that while prices go up and go down, the industry will adjust, the market will adjust when we have stability in prices. Whether they're at this level or that level or a higher level, it will adjust. What creates havoc in our industry and makes it difficult to plan for everyone is when we have no real idea on where prices will be six weeks or six months down the road. You know, that always creates the economic havoc. I would concur with Jo, too, that transportation costs don't actually add that much to the cost of virtually any kind of consumer goods, or most consumers goods we purchase today. It's been one of the biggest bargains in America for a couple of decades now.

R. Moskowtiz:
I'd like to echo what Todd just said. The U.S. has the lowest-landed transportation costs in the world and it's one of the few things that is helping us to retain our competitiveness in the global marketplace. We can't produce the goods cheaper than other countries.

M. Rodekohr:
I have a couple of points here. I agree with virtually everything everybody's said. I think it's kind of interesting, in terms of economics, if transportation costs were to change relative to all other costs in production, you will see a shift in where industries were located, that's sort of Econ 101. That would take a long time to happen. I do agree with you that the transmission costs in the U.S. are among the lowest in the world. Some of that is because of my guy, Dwight Eisenhower, who built the interstate highway system. You have to give him credit on this subject. You're laughing. It's true, though. Anyway, the other thing is when you're looking at costs, energy cost relative to others. I have the chart, I don't have it with me, but the chart shows healthcare costs, shows energy costs and today you're sitting at 16% of GDP in the U.S. on healthcare. That's about 8% on energy and 4% on... That might tell you something about where our cost structure has changed over the last 20 years.

J. Seplow:
Thank you. We have one more typed question in. After that, if we have time, I will open up the phone lines for one or two questions. This question is for Rich and Todd. But also, Mark or Jo, if you want to comment, feel free to jump in. The question is, much has been made of saving fuel while trucks are at idle, but, obviously, far more fuel is consumed while trucks are in motion. Why are there few, or no, incentives for the adoption of more progressive technologies to promote improved engine efficiency? At the same time, rather than having government "pick winners", wouldn't it be more effective to legislate "outcomes", i.e. specify progressively higher MPG requirements from new and used trucks, along the lines of the appeal made recently by Wal-Mart?

R. Moskowitz:
This is Rich. That's an excellent question. In this country, traditionally there has been a trade-off between reduced engine emissions and increased engine efficiency. In order to get the emissions benefits, we've suffered continuous hits to the productivity of those engines. That being said, cafe standards, which apply to light-duty vehicles, have not been extended to heavy-duty vehicles. And AT does not yet have a policy on that. But there is one thing that differs with respect to heavy-duty vehicles and that is that we buy trucks based on productivity needs, whereas people buy cars for a whole different set of reasons. You may buy a car because you have the personality that likes to go 0 to 60 in five seconds as opposed to someone looking to save fuel and go 0 to 66 in 9 seconds. When it comes to trucks, if they were one of the handful of engine manufacturers that were capable of increasing fuel economy from six miles per gallon to 6 1/4 miles per gallon, they would corner the market. They have every incentive in the world to promote the most fuel-efficient trucks. It's a significant factor to the customers' bottom lines, not the same in passenger cars.

T. Spencer:
I could follow up that and say that the price itself is and has always been a motivator to push trucks in the area of greater fuel efficiency. What we have in the trucking fleet today is more than twice as fuel efficient as it was two decades ago. To kind of put that into perspective, bear in mind, one of the ways you make cars get better fuel efficiency is to lighten the vehicle. That's not an option for the truck. It's going to be an 80,000-pound vehicle regardless and it's got all the mass that you can do certain things, but it's going to push the mass through the air. So, your ability to increase fuel economy is much more challenging. To kind of underscore what I'm talking about, the economic incentive itself, we're going to have members right now that that will spend $90,000 for fuel just this year, a one-truck operator. And that will quite likely be twice what the driver takes home in net income. I mean maybe three times what he takes home, given the competitiveness of the market. So, we clearly think the appropriate economic incentives are there right now.

On a related note, the current discussion now in many states about building toll roads or converting existing roads to tolls makes no sense at all for energy policy. Neither car drivers nor truck drivers will utilize toll roads if any other reasonable alternative exists even if that means running more miles and using more fuel. The cost of tolls are significantly harder to pass through than costs for fuel.

J. Frigger:
And again, this doesn't only go for trucks, I mean airplane engines as well. Think about the long distance trips we have with the 707, the same distance the 757 will take it with two engines and much fuel savings. I think any technology that helps to reduce fuel consumption by maintaining efficiency speeds and capacity is something carriers will buy and go for. In the long-term, it saves on the operating cost.

J. Seplow:
Thank you. We have a little bit of time. I'm just going to let the operator open the lines to see if anybody had questions they want to ask over the phone. And then if not, we will close out. So, Bill, if we can give instructions for asking a question over the phone?

Thank you, ma'am. If you have a question key star 1 at this time. At this time, we have no questions from the phone lines.

J. Seplow:
Okay, thank you. Then we will go ahead and close out, then. I do want to thank -- actually, we have one more question that came in, which we will address first, what is the impact of fuel costs on mode choice? I'm not sure who would be best to answer that question. If anybody wants to give a thought of that, feel free to jump in.

R. Moskowitz:
I can certainly comment on that. Generally the type of delivery vehicle that's utilized today is almost totally determined by the customer as to what kind of delivery schedule will make sense for them. And so, you know, whether you're talking about a couple three days or a week and a half or something like that. That's what motivates a decision.

J. Frigger:
Obviously that goes even more for the decision between air and ocean freight. It's transportation time versus the need for the goods. And that decision, you know, includes a lot of different items in the decision-making process. In other words, I'm not sure that fuel costs alone would really make a big difference in the decision.

J. Seplow:
Okay. Thank you. Again, I have the e-mail presenters' e-mail addresses on the screen. If you have additional questions, you can ask them...

T. Spencer:
Jennifer, I have one more for Dr. Rodekohr. I think he mentioned in his comments that the oil companies or I guess oil providers are operating, running businesses as if they expect the price of oil to drop significantly into an area of 20 to $30 a barrel again and I'm curious, I'm sort of just stymied by that, I don't quite understand, given the projection for demand worldwide, how that could be a rational projection?

M. Rodekohr:
Well, it's very clear; I would say between 25 to $35 a barrel. These companies have been burned big time in the past by making bets that they thought oil prices would be at the level of the early '80s. And they lost a ton of money back then. And right now, I've talked to most of these manager companies, economists, I don't see them nudging off of that, at tops, $35 a barrel per day projection. You've got to remember, these companies take a tremendous amount of lead time to bring in the kind of projects they bring in. If they start planning on a project today, they're not going to bring it in for three years at best.

T. Spencer:
I clearly understand that long-term supply is a long-term issue. And I think prices for fuel, at least prices for oil in the U.S., seem to be significantly higher than any other area in the country that you happen to list in your presentation.

M. Rodekohr:
Oh, no, no, no, no, no, that's not true at all. Prices for refined products are higher in Europe than they are here. They have been for years, basically due to World War II. You know, crude oil prices are transparent around the world. By and large. It's the same if you want a west Texas meeting in the U.S., it did the same. The crude oil is a very transparent product, by and large, which a lot of caveats now follow the et cetera, et cetera, et cetera, over refining capacity, yeah, so, you know, I don't think prices here are any higher than they are anywhere else. For the input products, the output and refined products, it's a different story, based on tax structures and based on subsidies in many countries like Venezuela, Nigeria, Saudi Arabia, et cetera, et cetera, et cetera. Yeah, we were accused -- I was at the hearing the other day, we were accused of having the lowest product prices in the world. Absolutely not. We're not anywhere near as lover low as some of the other countries. Hope that makes sense.

J. Seplow:
Thank you. I want to thank all four presenters for the work you put into this. And thank you everybody for attending today's seminar. The recorded version will be available within the next week and I will be sending out an e-mail to let everybody know when that and the PowerPoints are available. The next seminar will be held on June 21st, and is titled Operations as a Solution to Freight Congestion. If you haven't done so already, I encourage you to visit the Talking Freight web site and sign up for the seminar. I also encourage you to join the LISTSERV if you haven't already done so. With that, we will close out and everybody enjoy the rest of your day.

Updated: 3/29/2011
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