Date: Friday, May 13th, 2022
Source: Wall Street Journal
Diesel costs are reaching new highs across the U.S., straining the operations of trucking companies and wrecking the transportation budgets of businesses that need to ship goods.
The price of the fuel that powers heavy-duty trucks has increased by more than $1.50 a gallon in roughly two months, according to the U.S. Energy Information Administration. The national average price has climbed to $5.62 a gallon, setting a record for the second week in a row, as prices at the pump surpassed $6 in some markets.
“These fuel costs are the biggest thing we’re facing right now,” said Jake Phipps, chief executive of Phipps & Co., a West Palm Beach, Fla.-based manufacturer of interior finishes and building materials for real-estate developers.
He said the company’s shipping costs within the U.S. have risen 15% to 20% from last year, pushing it to make changes to its distribution operations as some customers reconsider projects because of rising costs.
“It’s causing us to look more closely at where a project is and what it takes to ship there,” Mr. Phipps said. “We’re trying to use rail as much as we can, which saves a little bit. But that isn’t always possible. Otherwise all we can do is pass the cost along to our customers.”
The costs have hit consumers at the pump, with gasoline prices across the U.S. up by about a third since the start of the year to about $4.33 a gallon, according to the EIA. Gas prices have moderated recently, however, while the price for the diesel fuel that is crucial to industrial business has continued going up. That has added to rising costs in supply chains and to inflation pressure on things from housing construction to deliveries of consumer goods.
The costs are hitting smaller trucking fleets that make up the bulk of the highly fragmented U.S. trucking market particularly hard, worsening cash flows for businesses that tend to be lightly capitalized with little cushion to absorb sharp changes in costs.
he national average price of diesel has risen about $2 a gallon since the start of the year and pump prices have surged past $6 a gallon in several regional markets, including New England and Central Atlantic states. In California, where historically fuel costs more than in the rest of the country, the average price was just above $6.46 a gallon last week, by the EIA measure.
“It’s going up faster than we can keep up with,” said Doug Smith, a vice president at Ralph Smith Co., a family-owned trucking company based in Bountiful, Utah. “It’s getting to the point where things are going to grind to a halt” as industrial customers reconsider projects and consumers balk at higher prices for goods.
U.S. commercial vehicles, including big rigs, burn about 36.5 billion gallons of diesel annually, according to the American Trucking Associations, and motor carriers spent about $111.6 billion on diesel fuel in 2019, the last full year for which figures were available.
Trucking companies generally can cover rising diesel prices through fuel surcharges that are built into contracts. But the thousands of smaller fleets and independent owner-operators that make up the bulk of the highly fragmented truck market have a harder time passing along the added expenses. The rising operating costs are hitting those operators just as base shipping prices on trucking’s spot markets are dropping on wavering freight demand.
“It’s coming directly out of my profit,” said Rodney Morine, an independent trucker operating as Morine Trucking & Construction, based in Opelousas, La., who runs his single truck between Louisiana and Georgia. “The customers are trying to get everything back to pre-Covid rates, but fuel is a lot higher now,” Mr. Morine said.
His fuel costs have gone up “easily 25% or 30%,” adding about $150 to the cost of a trip from Louisiana to Georgia, he said.
“But I’ve got to come back home, so if I make two round trips in a week, that’s $600 extra a week for fuel, and that means $2,400 a month,” Mr. Morine said. “That’s a monthly truck payment, so it’s like paying for a whole extra truck.”
Larger truckers that work more with long-term contracts that include fuel surcharges tend to be more insulated from the fluctuations.
Daniel Olivier, chief financial officer at less-than-truckload carrier Yellow Corp. , said in an earnings conference call this week that fuel-surcharge revenue at the carrier even exceeded diesel prices in the first quarter, with prices up roughly 50% and fuel-surcharge revenue up 55% to 60% from a year earlier.
Although rising operating costs are troubling, Mr. Smith of Ralph Smith Co. said the bigger concern for his company and its fleet of 30 trucks and 30 independent contract drivers is the impact that shipping expenses have on freight demand.
“Some of them are balking,” Mr. Smith said. “They want to do the project, but at these costs, it’s out of budget.”