Diesel Average Rises 2.3¢

By Rip Watson, Senior Reporter

This story appears in the Jan. 19 print edition of Transport Topics.

The average price of U.S. retail diesel fuel rose last week for the first time in more than three months, inching up 2.3 cents a gallon to $2.314, the Department of Energy reported.

The previous increase was 0.1 cent to $3.959 on Sept. 29, soon after hurricanes temporarily disrupted Gulf Coast refineries. Excluding that blip, diesel has declined every week since the record of $4.764 was set on July 14 and now costs less than half that price.

The gasoline average last week rose 10 cents a gallon to $1.784, or more than 57% below the peak price of $4.114 DOE reported.

Analysts had been expecting an increase last week because a surge in crude oil earlier this month brought the price per barrel close to $50. But crude prices have receded since Jan. 6, suggesting that increases last week could be temporary. Stockpiles hit a 16-month high last week, which could further pressure prices downward. Crude oil settled at $35.40 a barrel Jan. 15 on the New York Mercantile Exchange.

Both government and private observers said they expect no long-term upward pressure on diesel until the U.S. economy rebounds.

Two weeks ago, “it looked like we found the bottom” for diesel prices at $2.291, said Phil Flynn, an analyst at Alaron Trading Co. “Unless the financial stimulus package increases demand, prices will stay low. Global demand is weak. The outlook is very bearish.”

“I still think oil could get to the $20s [a barrel],” Flynn said. “We are in a deflationary spiral when it comes to commodity prices. Unless the economy rallies soon, it is going to be hard to get much support for commodity prices, and diesel prices could go lower.”

“The oil price path going forward will be driven mainly by the depth and duration of the global economic downturn, the pace and timing of the recovery, and actual OPEC [Organization of Petroleum Exporting Countries] production,” DOE said on Jan. 12 in its first 2009 energy outlook.

DOE’s latest report forecasts an average diesel price of $2.27 a gallon this year, a 2% drop in gross domestic product and an 11% drop in distillate consumption to 3.87 million barrels a day. In January 2008, DOE expected 2.8% GDP growth and distillate consumption of 4.37 million barrels.

On a year-to-year comparison, diesel fell $1.012 from the $3.326 price in the comparable week of 2008. Gasoline fell even farther, dropping $1.284 from $3.068.

Diesel price declines have helped the average fleet save about $4,000 per truck in fuel costs during the fourth quarter, Avondale Partners analyst Donald Broughton said.

While fleets have enjoyed cash-flow benefits as fuel prices fell, the decline also has some less desirable effects for some carriers.

Truckers’ customers now are exerting pressure to stop fuel surcharges altogether, said Keith Tuttle, president of Motor Carrier Service Inc. of Toledo. Ohio.

“We have customers in the industry who think that fuel prices aren’t a problem,” said Tuttle, whose company runs 80 tractors and offers warehousing as well as brokerage ser-vices. “Customers are in control of pricing.”

When diesel is at $2.30 a gallon, the fuel surcharge typically is about 20 cents, because customers are assessed 1 additional cent for each 6 cents that the DOE price is above a threshold price of about $1.15.

Low fuel prices hurt well-run fleets in another way, Tuttle said.

“The decline in fuel prices has kept some very weak companies in business that shouldn’t be here,” he said. “Others are just staying alive to pay their drivers; it’s very difficult for the rest of us who are in the business to make money.”

Marginal fleets that are surviving because of lower fuel prices have bloated capacity and driven down rates, Tuttle said.

“There is a glut of equipment out there, and it is huge,” Tuttle said. “This is having a drastic effect on pricing right now. Prices that we quoted last week won’t get a load moved this week, and customers are laughing at prices that we quoted three weeks ago.”

The situation has worsened, Tuttle said, as fleets that supplied auto plants now are competing for general freight business because those manufacturing facilities currently are shut.