Diesel Hits 14-Month Low

By Rip Watson, Senior Reporter

This story appears in the Nov. 17 print edition of Transport Topics.

The U.S. average retail diesel price dropped 14.4 cents to $2.944 a gallon last week, falling below $3 for the first time in 14 months, and is expected to drop even further next year, the U.S. Department of Energy said.

The decline from $3.088 marked the sixth consecutive weekly decline. Diesel has now plunged 38% from the record $4.764 average in July and was 48.1 cents below the comparable week of 2007.

Gasoline prices declined 17.6 cents a gallon to $2.224 last week, 88.7 cents below the corresponding week last year.

The economy’s sharp drop is driving down fuel demand and prices, according to the DOE’s short-term energy outlook, predicting that 2009 crude oil prices will be $63.50 a barrel, or 43% less than its forecast last month. Diesel could hit $2.666 a gallon in December, a price last seen in March 2007.

Fleets welcomed good news on the cost side.

“My checkbook is a lot healthier today than it was a few months ago,” said Mike Riggan, president of TanTara Transportation Corp., Muscatine, Iowa.

Riggan explained that his company, which runs 75 tractors, was coping with an average time of 46 days to collect receivables at the same time it was paying cash for fuel.

“What it [lower diesel] has done for us from a cash-flow standpoint is phenomenal,” Riggan said. “Let’s keep that price going down.”

Mike Card, president of Combined Transport Inc., Central Point, Ore., said he’s seeing a double benefit: he’s receiving payments based on fuel surcharges that previously were 19 cents higher on average and earning profits that have improved because of the recent diesel price drop.

“Our fuel surcharges are really catching up with our actual costs,” Card said. The lower diesel price “has made a tremendous, positive difference.”

The 2009 DOE diesel forecast of $2.73 is $1.08 a gallon less than the average price this year of $3.81 a gallon. For a fleet that spends $10 million on diesel at 2008 prices, the 2009 forecast, if it proves to be accurate, would represent a savings of $2.8 million annually.

DOE expects gasoline prices will increase from current levels and average $2.37 a gallon.

Analyst Tancred Lidderdale at DOE said the agency’s 2009 forecast represents a move toward a more typical relationship between gas and diesel prices after distortions this year.

The average difference between diesel and gasoline prices was 12 cents last year but will be 52 cents in 2008 and 36 cents next year, he said. The spread this week was 72 cents.

Previous predictions of tight supplies and high prices were scaled back. DOE now expects 1.8% worldwide economic growth, one percentage point below its October forecast. U.S. GDP is expected to decline 1.4% next year, with rising unemployment and lower manufacturing output.

Card said that while general commodities markets have been weaker, demand for heavy-haul services is holding up better, particularly demand for movements of road construction equipment and electric transformers.

Lower diesel costs are especially welcome for Combined Transport, Card said, because the deadhead mile percentage for heavy-haul operations is about 20%, and his fleet isn’t paid for those moves.

Riggan said he’s countered the overall rise in diesel by creating a fuel bonus program for drivers  based on their driving practices, such as time spent cruising in top gear, rather than focusing on miles per gallon, which can vary based on tractor manufacturer, model and year.

He’s also taken steps such as changing fuel buying patterns, installing dozens of auxiliary power units and cutting back on governed speeds to 70 miles an hour.

“The other thing we have done is that we are communicating daily with our drivers on fuel,” he said. “We lived through 2007 thinking it [the rising price] was a spike. We had no idea it was going to last.”

As much as he’s enjoying lower prices now, Card remains concerned.

“When you see fuel prices going up above $4 a gallon because of speculators that have no stake in the business, those of us on the ground get pretty frustrated,” he said. “As you have seen the price of crude oil follow the stock market, it indicates to me that people still look at oil as a commodity investment and prices aren’t based strictly on supply and demand.”