The price of oil, and the corresponding price of fuel and transportation, is a function of the global economy and production fundamentals. The combination has driven oil prices down more than 60% over the past two years—but that decline will reverse. The questions are when, and then how rapidly? And what will it mean for trucking?

“All everybody can say right now is oil prices are low,” said FTR economist Noël Perry during a session on fuel pricing and transportation, part of the recent FTR Virtual Conference. “But oil fundamentals—the things that drive this market in the long term, or even in the medium term—have a very substantial upside case.”

Perry attributed the price decline to an abundant supply, including additional production from a recovering oil industry in Iraq and, most immediately, to the 500,000 barrels per day coming into the market as the sanctions against Iran are lifted.

The “caveat” in looking ahead, Perry explained, is that oil traders have a very pessimistic view of the world economy, compared to the consensus view of economists who anticipate some stability. But, if the traders are correct, falling demand will lead to falling prices comparable to 2009.

“So if the economy drops and we get recession, then oil prices will be low until the end of that recession,” Perry said. “But, assuming that doesn’t happen—which is what most economists are saying right now—then it falls back to fundamentals.”

A key fundamental for trucking, in Perry’s analysis, is the relationship between the price of oil and the price of diesel: For every dollar of diesel, 50 cents is oil. And that makes for a “fairly easy” calculation: If oil drops 50%, diesel should drop 25%.

But as oil prices began to fall in mid1-2014, diesel pricing lagged, which Perry attributed to likely supply chain issues. However, by the end of the year diesel was falling rapidly and had caught up by the first quarter of 2015.

Since then, the price of diesel has been below the basic cost relative to crude.

“So when, finally, the price of oil bottoms and starts moving up again—and this is the fundamental we’re worried about—the price of diesel will move up more rapidly,” Perry said, and again he noted such an increase is not a near-term concern. “But when it turns, people are going to be surprised because diesel will turn more.”

As to the market fundamentals, the basic crude oil supply from the Middle East “comes out of the ground” at a cost of around $20/barrel, and that supply is stable, Perry explained.

The cost to tap the crude supply in the U.S. runs between $40 and $70, the Canadian tar sands about $75, deep offshore wells about $80, and  the cost to extract crude from the Arctic runs at $90. Those supplies only come on line when profitable. And, since the development of fracking technology, drilling in the U.S. has become “very responsive to price,” Perry continued.

Once oil pricing rebounds, Perry anticipates a surge to around $80 per barrel—bringing U.S. wells back on line—after which the price will settle at around $60.

So how does this impact the transportation market? For trucking and intermodal, the price of fuel is a major force: The higher the price, the greater the difference in the cost of fuel per mile and in rates, with the advantage going to rail. With the fall in fuel price, the gap has narrowed substantially.

“It’s not enough to kill intermodal, but it’s enough to take the bloom off,” Perry said. “Intermodal growth is not nearly what it was, and part of the issue is fuel.”

Indeed, falling fuel surcharges (FSC) have had a “dramatic” effect on rail intermodal pricing, added Larry Gross, FTR’s intermodal and rail expert.

“Overall growth in the base rate has slowed to a crawl somewhere in the 2% range because of the pressure we’re seeing from the over-the-road side,” Gross said. “Growth in intermodal is still going to occur, but they’re going to gain it the old-fashioned way by earning it, as opposed to just answering the phone and having market forces drive volume to the rails.”