Diesel price hikes driving change in several industries
Diesel fuel prices have been on a record-setting streak, rising 20% since August and rivaling the cost of premium gasoline at the pump.
Expensive diesel has truckers steamed. And the cost is forcing several industries to raise their prices or make fundamental changes in the way they do business. One downtown Los Angeles company, for instance, is replacing all of its heavy machinery at a cost of millions of dollars.
Diesel reached an inflation-adjusted record in the U.S. in November with an average price for the month of $3.40 a gallon, the Energy Department said. That shattered the old mark set in October 2005 after hurricanes Katrina and Rita devastated Gulf of Mexico natural gas and oil facilities.
Most Americans, fixated on high gasoline prices, probably didn’t notice. But diesel’s stunning rise is noteworthy, experts say, because although gasoline prices affect what consumers have left to pay for goods and services, diesel costs affect the price of lots of the things they buy.
“Almost everything we use gets moved by a truck, a train or a ship, and they all use diesel fuel,” said John Husing, a California economist and expert in cargo movement. “You raise the price of diesel fuel, and you raise the price of everything.”
How heavily that will hit consumers, and how quickly, remains to be seen. Some price increases might not be passed on until 2008, when new shipping contracts are negotiated.
“There is always a lag,” Husing said. “Prices do not move instantaneously.”
But at least one economist is expecting a big short-term jump in the Labor Departments’ November producer price index, a measure of wholesale inflation, which is due out Thursday.
“It will be an eye popper,” said Ken Beauchemin, a director at Global Insight, a Washington-based economic forecasting company.
Diesel is the fuel that drives world commerce. Diesel engines move 94% of all freight in the U.S., 95% of all transit buses and 95% of all heavy construction machinery.
This time of year usually is the high season for diesel, largely because of the rush to bring goods to market for the holiday shopping season. But few anticipated the extent of the recent price increase.
The average U.S. price for a gallon of diesel reached $3.42 last Monday, nearly 80 cents higher than a year earlier, according to the Energy Department’s weekly survey of filling stations. At a Shell station in Santa Ana, diesel was selling for $4.13 a gallon.
Prices have risen so fast that companies haven’t been able to get fuel surcharges in place quickly enough to keep up.
Since September, “our fuel costs have increased more than 8%, or $85 million,” Alan B. Graf Jr., FedEx Corp. chief financial officer, said last month after the company reduced its earnings projections. “While we have dynamic fuel surcharges in place, they cannot keep pace in the short term with rapidly rising fuel prices.”
But the companies that can use fuel surcharges to pass along some of their expenses are the lucky ones. Farmers, for example, can’t charge more for their agricultural products for fear of pricing themselves out of the market.
So, farmers have made dramatic changes in the way they cultivate their fields, among other things.
“Some have adopted a method known as conservation tillage,” California Farm Bureau spokesman Dave Kranz said. “One Fresno County farmer who has adopted the technique used to drive his tractor as many as six times across a field to prepare and plant it, and now uses just one or two trips.”
Diesel price shocks persuaded independent trucker Al Echols to put his 1999 Peterbilt rig up for sale over the summer.
After 37 years of struggling to net $22,000 to $30,000 annually, a traffic accident in June knocked his truck out of service for three weeks. In that brief span of time, Echols said he watched the price of diesel at the service station he used jump 50 cents a gallon to $3.39.
“I don’t understand how people stay in business,” said Echols, 60, who now drives as an employee for a small California company, hauling aluminum from one of its plants to another. The Fresno resident said he took the job because someone else was paying the diesel bill.
Bob Costello, chief economist for the American Trucking Assn., said that this would be the worst year for small trucking company bankruptcies since the last recession in 2001. The trucking industry will spend more than $110 billion on diesel fuel this year, up from $107 billion in 2006 and more than double the amount spent four years ago, Costello said.
“Through the first half of this year, we have seen 1,700 bankruptcies, mostly among companies operating just a handful of trucks,” Costello said. “I would anticipate that rate to go up.”
The fuel squeeze also is being felt by companies that aren’t in the transportation business.
Downtown Diversion collects and recycles materials from building construction and demolition sites, as well as from movie and television location sets. The Los Angeles company has weathered a slowdown because of the faltering economy, the sub-prime real estate market meltdown and the Hollywood writers strike.
But diesel presents a different level of challenge to the company, which uses more than 250,000 gallons of the fuel a year, Chief Executive Mike Hammer said.
“We’re being forced to work a lot harder and more efficiently to make up for the increased costs,” Hammer said.
Downtown Diversion operates a fleet of 40 trucks, seven tractors called front-end loaders, three excavators and one horizontal wood grinder -- all of which run on diesel engines ranging from 300 horsepower to 1,000 horsepower.
Hammer said the goal for the company, which processes about 500,000 tons of material a year, was to use as little diesel as possible. To pull that off, the company will begin replacing all of its equipment with machines that can run on electricity or use cleaner-burning alternative fuels.
“It’s going to cost us millions of dollars,” said Hammer, who has also had to lay off, at least temporarily, some part-time workers. He declined to say how many of his 150 employees had been idled.
Hammer thinks that lofty diesel prices will continue long after the economy has improved, the real estate market has revived and the writers strike is over.
“This problem has come and it’s going to stay,” Hammer said. “The solution for us is to innovate, think of better ways of doing business.”
Many oil experts agree, pointing to higher demand from China, India and smaller industrializing nations.
As prices rise, so will the cost of shipping goods from Asia to the U.S.
The 14 members of the Transpacific Stabilization Agreement, which includes some of the world’s biggest oceangoing freight lines, said recently that they expected to raise the rate for shipping a 40-foot container to the U.S. West Coast from Asia by $400, and by $600 for shipments to all other U.S. destinations. The group also plans to impose a $400 peak-season surcharge next year from June to October.
“Everything is conspiring to drive these prices,” said Phil Flynn, vice president and senior market analyst for Alaron Trading Corp. in Chicago. “There may be slight drops in price here or there, but right now it looks like high diesel is here to stay for a while.”
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