As the price of oil continues to plummet, I am confused by the retail gas prices I see posted at my local gas stations. Intuitively it feels that the record lows in oil should be yielding lower prices at my pump. I’ve been contemplating this for the past few months when I decided to finally do some research. You can too at the U.S. Energy Information Administration’s website (EIA.gov). That’s the source of all information found below.

First, I decided to create a line chart of oil (West Texas Intermediate-Oklahoma & Brent-Europe (left axis)) and gas (U.S. regular conventional retail gasoline(right axis)) prices for the past ~16 years. This yielded this beauty:

I was actually surprised to find that all prices looked fairly tightly correlated, but I know looks can be deceiving so I ran decade by decade correlations on the prices (starting at 2010):

What I (kind of) found from doing this comparison is that when WTI and Brent are closely correlated, gasoline prices tend to be more closely correlated to oil. However, this is not exactly an absolute rule, and it certainly doesn’t help to answer my question. Did gasoline go down commensurately with the price of oil? (I still thought the charts were pretty cool though). So the next step was to look at historical instances of oil prices falling within the $30-40/bbl range: When I performed this comparison I found this:

What I take from this chart is that from 2009 to present, oil prices between $30-40/bbl was extremely uncommon (only 3 out of 96 months). However, when this pricing range did occur the retail gas price was roughly the same as it is today. Meanwhile between 2000-2004, $30-40/bbl oil occurred in 19 of the 60 months. During these much more frequent occasions, retail gas was $0.44 to $0.13 per gallon cheaper than it is today! So what I take from this is when anomalously low oil pricing occurs, the gas prices don’t fully adjust to account for it. However, if oil remains depressed for multiple months, then I expect my gas to drop at least $0.13!

The transportation industry is a huge part of the U.S. economy. In 2012, according to SelectUSA.gov, the spend on transportation and logistics was $1.33 trillion. This equates to 8.5% of the GDP. However, it’s my contention that this industry will see massive transformations within the next few years, and it may be completely unrecognizable from its current form in the medium-to-long-term (20-30 years).

1. Driver Shortages – it’s no secret that there is a rapidly increasing shortage in available freight drivers on the road. The American Trucking Association published a research paper that has the 2014 shortage figure at 38,000 drivers. In 2015, at the time of the paper’s publication, the shortage was forecasted at 48,000. What does that mean to us? A LOT of things…a lot of things that may not be obvious at first blush:
   • Rapidly increasing freight costs – Even with the record lows we’re seeing in fuel prices, the impact of the driver shortage will far outweigh any savings felt from the drop in fuel. Simple supply and demand. So expect to see free shipping offers start slowly disappearing, or in order to maintain the facade, prices of the “product” will increase rapidly. Certain industries that require additional certifications may see even greater pricing impacts — for example, hazardous materials and their derivatives (paints, pesticides, fertilizers, degreasers, etc)
   • Increases in accident frequency – Surprisingly, a large part of the driver shortage problem is based on the strictness of hiring at most trucking firms. Hiring drivers with even minor offenses on their record increases the firms insurance rates, and thus repels most firms from making the hire. As the rates to move freight edge ever higher, eventually the economic scales might tip, where hiring the higher risk driver makes sense. Keep your eyes out for a strong correlation in freight movement prices and accidents involving semis.
   • Slower freight lead times, and conversion to alternate modes –  with fewer qualified drivers on the road moving your freight, expect longer transit times, and increased usage of rail and air modes of transportation. Remember, however, that almost all modes of transportation ultimately end up on truck at some point before they reach their destination. This may also result in other creative modes of transportation for these “last mile” situations (ex: an “Uber of Shipping”)
2. Younger generation choosing inflated trucking income (and other service jobs) over college – College tuition has been getting extremely expensive, and starting salaries have not gone up comparably. It will only be a matter of time before the whole equation crumbles and more youngsters bypass college and start getting vocational style jobs (that also have the added benefit that they can’t be performed overseas). The demand for drivers will drive up the price paid to drivers, and therefore will attract new youngsters into role. This will also likely have an impact on accident frequency. as mentioned above.
3. Conversion to self-driving methods – All the talk surrounding self-driving vehicles seems to be around personal cars only. I believe the larger implication of self driving cars will be in the freight movement and public transit vehicles. These will be easier to oversee and track through insurance and government regulation. Huge savings and efficiency will be gained through moving freight non-stop (robots don’t get tired!)
4. Eventual decline in shipping demand with ubiquity of 3D printing – at some point 3D printing will be so commonplace, that the shipping of bulky, unwieldy finished goods will be nonsensical (in much of the finished goods shipping today, large amounts of space in trailers is being wasted — shippers are shipping empty space.) The only thing to ship in the future will be dense, easily stackable raw materials for the printing machines. People and companies will order raw materials, and will print out their products onsite.
5. Massive price increases in rail shipping – With truck freight prices increasing, a large chunk of the U.S.’s freight will move to rail — aka demand is/will steadily increase. However, on the supply side, the rail industry is in a bit of a conundrum, as well. Due to inordinately high scrap rates in boxcars in the economic downturn of 2008, there is a significant shortage of boxcars. On the tank car side of the industry, new regulations are to blame for the shortage. New safety measures, spurred on by the semi-recent tank car explosions, will make some tanks obsolete, while others will require safety modifications. In both cases, the boxcars and tankcars have a long lead time for manufacture — to the tune of ~2 years. You can learn more about both the box car and the tank car shortages respectively here: boxcar shortage; tank car shortage
6. Lower marine freight costs (select moves) – This forecast is based on a multitude of factors. First, China’s economy is slowing and I believe will remain depressed for the foreseeable future (the paper dragon that was the Chinese economy is finally being brought down to its true size — and not being artificially bolstered by state mandated, and unneeded development projects). In addition to the Chinese slowdown, the new Panama Canal update is supposed to come into effect this year. This change will allow far larger ships through the locks, changing port usage rates, and rail freight movements from a number of cities in the U.S. — particularly in the Gulf and East Coasts. This paper: Panama Canal Expansion Study by the DOT Maritime Administration provides a lot of great information. This site provides a lot of cool diagrams of the new vessel sizes that will soon be able to make it through the canal, as well as a % completion of the various phases of the project. In addition to the Panama Canal project, there was some talk during 2015 about a possible Nicaraguan Canal, as well — funded by an unnamed Chinese Tycoon. I’m skeptical that this project will ever take place. There is a lot of environmental resistance, and there is far too much mystery surrounding the project to make it seem plausible.

Transportation is a huge part of our life, whether we see its impact directly or not. With these new trends, it will be far less likely to ignore its impact on all of us. Keep an eye out in the near term for sizeable changes in this industry, and massive shifts long-term.