Businesses, truckers feel pain of higher diesel prices
WASHINGTON -- Linda Dague is offering free shipping to entice customers to order from her 2-year-old company, which sells clothing and other items for premature babies.
Lately, Dague has started to question her decision.
Shipping costs have risen 20% in the last year and look likely to rise even more. That has put pressure on her margins.
"The way shipping is going, it's a fine line between making money and losing money," says Dague, president of Colorado Springs-based Anna's, which was named after her granddaughter, Aurianna, who was born prematurely and just celebrated her 12th birthday.
Diesel prices have surged in recent weeks to record levels, putting a strain on truck drivers, businesses and, potentially, the economy, at a time when economic activity is already slowing.
The nationwide average price for a gallon of diesel was $3.30 last week, breaking the previous record set following Hurricanes Katrina and Rita, the Energy Department said. That was up nearly 15 cents from the previous week and 80 cents higher than a year ago.
The gains have come as oil prices have jumped to record levels. Crude oil accounts for nearly two-thirds of the retail diesel price. Friday, the price of a barrel of light, sweet crude oil trading for delivery in December rose 86 cents to $96.32. Prices have risen 24% in the past two months and are 57% higher than a year ago.
Independent truck driver Lee Klass, 59, of Portland, Ore., says while he has been able to pass along some of the increased fuel costs to his customers, the prices have gone up so quickly, he can't keep up.
"With that kind of volatility, it's impossible. You get a fuel surcharge, and a week later, it's gone," says Klass, who paid $3.629 a gallon to fill up in Liberty, N.Y., last week.
"I'm barely hanging in there," he says. "Every year, it gets worse and worse. And lately, it feels like every month, it is getting worse and worse."
Consumers spared, for now
Thus far, consumers, the main engine of the U.S. economy, have not seen much of an impact from rising diesel prices, says Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pa.
That's because the higher costs have largely not been passed along to consumers as the economy has slowed, giving businesses less ability to raise prices at the retail level.
"I don't think diesel by itself will undermine the economy, because a lot of the financial burden will be shouldered by the transportation companies and the retailers," Zandi says.
He warns, however, that if prices stay elevated or go higher, firms will have little choice but to raise prices to stay profitable.
American Trucking Associations chief economist Bob Costello says he expects high diesel prices will push some struggling trucking companies out of business. But the problem could have been much worse: Trucking firms are having more luck imposing fuel surcharges than when prices soared a few years ago, he says.
That said, trucking companies don't get the surcharge for travel in between jobs, for example, if a driver drops off a load in Milwaukee, then has to travel to Chicago to pick up the next load. And the surcharges often don't cover the full increase. Trucking companies can only raise the price so much before customers turn to trains, which use far less diesel than trucks, says Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.
Plus, because of changes in environmental regulations in recent years, fuel economy for trucks has been stagnant, and in some cases, gotten worse, Costello says.
The ATA estimates the trucking industry will pay $109 billion for fuel this year, up more than 5% from last year and more than double that paid four years ago. Fuel is the second-largest cost for trucking firms, after labor.
More diesel cars on the way
Representatives from a number of car companies say high diesel prices will not deter them from introducing diesel vehicles in coming years. Diesel engines get 20% to 40% better mileage than similar-size gasoline engines and even at current prices would save the average driver hundreds of dollars in fuel costs. Currently, only Mercedes-Benz sells multiple diesel models in the USA — one sedan and three SUVs, all priced $1,000 more than similar gasoline models.
"Our diesel customer research shows that total cost of ownership, factoring purchase price, fuel economy and cost, maintenance and resale value, has greater influence than diesel fuel cost in isolation," says Keith Price, spokesman at Volkswagen of America, which is reintroducing its diesel models next year, after a one-year hiatus to engineer its diesel engines to meet tougher U.S. pollution standards.
"There is a belief that prices will moderate," says Larry Dominique, vice president in charge of product planning and advance strategy at Nissan North America, which is expected to introduce a V-6-diesel-power Nissan Maxima sedan in the USA in 2010, Nissan's first diesel in the country. "Where they settle is a gamble."
High oil prices aren't the only reason behind the surge in diesel. Prices will likely stay high, and could go even higher, in the near future, even if oil prices fall.
U.S. supplies of distillate fuel, which includes diesel and heating oil, are down more than 5% from this time a year ago, the Energy Department said Wednesday. There have even been reports of diesel shortages for tractors and trucks in North Dakota during harvest time.
Strong global demand for oil
Demand, meanwhile, is strong worldwide, particularly in booming economies such as China. And demand only increases during the holidays as retailers stock store shelves and consumers ship presents.
Plus, demand for heating oil, which is similar in composition to diesel, peaks in the winter, which puts upward pressure on diesel because refiners could choose to pump out more heating oil to meet demand at the expense of diesel.
"If you get a very cold winter and you need to have more heating oil, it could tighten up the diesel market even further," says Kevin Lindemer, head of the energy group at Global Insight in Lexington, Mass. "Cold weather means higher diesel fuel prices."
Tancred Lidderdale, economist at the Energy Information Administration, the Energy Department's analytical arm, says the price of diesel is likely to go higher in the weeks ahead.
"I'm not sure how much, but it'll still be rising," he says.