Diesel Increases to $4.727 a Gallon

This story appears in the July 14 print edition of Transport Topics.

The average retail price of diesel jumped 8.2 cents to $4.727 a gallon last week, more than wiping out the entire 7.8-cent drop in the price of trucking’s main fuel over the previous five weeks, the Department of Energy reported July 7.

The single-week boost in diesel prices broke the previous record average price of $4.723 a gallon set May 26, while gasoline rose 1.9 cents to $4.114, also a new record.

Analysts were united in tying last week’s diesel jump to record high crude oil prices, but differed on whether the price of crude would continue pushing fuel prices up.

“Basically, crude oil hit record highs the previous week . . . and that pushed retail prices to new records this week,” Phil Flynn, senior market analyst at Alaron Trading Corp., Chicago, told Transport Topics.

Neil Gamson, an economist at DOE’s Energy Information Administration, agreed. “Mainly, the increase in retail prices is a pass-through of crude oil prices, in which usually about half the retail increase comes in the first two weeks after crude’s rise.”

“We had some pretty high crude prices over the past couple weeks in the $140-per-barrel range, and they kept going up to reach a record of over $145 on July 3,” Gamson said.

“Diesel and gasoline prices rallied last week in pure sympathy with crude oil, which touched $145.85 a barrel at its zenith, for now,” Tom Kloza, chief oil analyst for the Oil Price Information Service, a markets-tracking company in Wall, N.J., told TT.

“Diesel continues to be the product that inspires the most fear globally, because diesel demand is growing much faster than gasoline demand around the world, and refiners don’t have much leeway in adjusting their runs [between diesel and gasoline],” Kloza said.

U.S. refineries can produce 20 gallons of gasoline from each 42-gallon barrel of crude but only seven gallons of diesel, the EIA says.

“Right now, U.S. refiners are all making as much diesel as they possibly can,” Kloza added. “There is this myth that they can simply swing 5% to 10% of production from gasoline to diesel and vice versa. They can’t.”

The price of crude fell sharply when trading resumed after the July 4 holiday, leading analysts to speculate differently on retail fuel prices.

Kloza said the dip in crude prices may cause fuels to drop for a short time, but “August through October looks to bring a very inhospitable environment for end-users of any fuel.”

“The big money still likes the prospect of $150 to $175 a barrel [by October] for crude oil for a variety of reasons,” Kloza said. “It looks as though diesel will sell for at least $25 a barrel higher than crude . . . and that would translate into retail prices of, say, $4.75 to $5.50 a gallon.”

“It’s possible that all things are in place for a market top for crude, as long as we avoid a hurricane hitting the Gulf, no more banking institutions fall into crises and more confidence builds up about the American economy,” Alarcon’s Flynn said.

The EIA’s Short Term Energy Outlook, published July 8, was also optimistic, predicting diesel prices would average $4.35 per gallon in 2008 and $4.48 per gallon in 2009.

The report warned, however, that “the oil market remains tight . . . [and] world oil consumption continues to grow despite seven consecutive years of rising prices.”

The average retail diesel price was $1.878 a gallon more expensive than a year ago, meaning that a 200-gallon fill-up cost $375.60 more than last July.

American Trucking Associations estimates that U.S. trucking burns 752 million gallons of diesel per week and 285 million gallons of gasoline, which means the industry paid nearly $1.4 billion more for diesel last week and $323 million more for gasoline than a year ago.

“Fuel is too high, and that’s it,” Gene Anderson, fleet maintenance manager for for-hire Wicker Services Inc., Burlington, N.C., told TT. “We try and do all the sensible things like decrease idle time, cut driving without loads. We haven’t had to lay anyone off, but times are hard.”

Wicker has 58 tractors and 315 trailers, both dry van and flatbeds.

Not all trucking firms were suffering from the high cost of diesel, however.

“We’re in a little different position because 97% of our business comes from U.S. postal contracts,” Rick Vassar, vice president of the 60-truck LVL Inc., based in North Little Rock, Ark., told TT. “We have to purchase fuel from their supplies and they set a price weekly and reimburse us 100%.”

The company runs about 10 of its trucks with general freight “but correct surcharges are not hard to get, because these guys are usually happy to help us out,” Vassar said.