Recession Might Be Only Way Diesel Costs Will Drop
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The high price of diesel creates a problem that starts with industry and ends in your pocketbook.
Diesel fuels everything from trains and ships to heavy machinery used in food production. When industry pays more for its fuel, it passes along the higher cost to customers and the financial pain ripples through the economy, driving inflation and squeezing everyday consumers.
Diego Davalos, owner of Houston Affordable Movers, said he’s had to double his transportation fee to help offset the $800 a day he spends fueling his moving trucks on the way to apartment complexes around Houston. But the increase to $140 from $70 is more than some customers can afford.
“We’re losing repeat customers,” he said, noting that revenue has fallen by about 15% year-over-year, “because we’re charging more than we did last time.”
As the nation endures historically high gasoline prices, the pain drivers feel at the pump is nothing compared to the deeper wounds inflicted by the soaring price of diesel. https://t.co/JroBxAt7o2 — Houston Chronicle (@HoustonChron) May 23, 2022
Diesel prices, which have jumped 56% to $5.60 a gallon from $3.60 a gallon in January, are rising faster as inventories of the fuel stored at commercial tank farms have plummeted. While gasoline stockpiles are around 8% below the seasonal norm, diesel’s are about 22% below normal as demand soars and refineries struggle to produce enough to keep up. (Gas prices, meanwhile, have jumped by about 36%.)
While crude supplies have risen as oil production increases and as the federal government taps the Strategic Petroleum Reserve, there aren’t enough refineries left to turn it into fuel. The world has lost 3 million barrels per day of refining capacity since the start of the pandemic, including 1 million barrels per day in the United States — a result of mounting costs and declining prospects for gasoline as automakers accelerated the transition to electric vehicles.
Prices are rising even faster in the Northeast, where diesel topped $6 a gallon last week as stockpiles fell to levels that are 47% lower than normal for this time of year. The nation’s diminished refining capacity is hitting the Northeast harder because much of its diesel comes from the Gulf Coast, where refineries are already operating at maximum capacity as supplies from Russia slide from the global market.
Russia exports about 700,000 barrels a day of diesel to Europe, according to S&P Global Commodity Insights.
With no signs of peace in Ukraine and little chances of more refining capacity coming online, there is little hope of prices abating any time soon, said Patrick De Haan, head of petroleum analysis for fuel tracking firm GasBuddy.
“I don’t think anyone could cheerlead for an economic downturn to bring down prices,” he said, “but that would do it.”
A recession may be in the cards. Demand for goods is already “cooling” as inflation squeezes family budgets, according to financial services firm Moody’s, which downgraded the national retail outlook to “negative” last week. Retailers will not be able to pass along rising costs while “food and energy costs are eating into consumer wallets,” it predicted.
I don’t think anyone could cheerlead for an economic downturn to bring down prices, but that would do it.
Patrick De Haan of GasBuddy
Average prices for foods such as meat, poultry, fish and eggs are up 14% over last year — the largest 12-month jump since 1979, according to the Consumer Price Index issued earlier this month by the Bureau of Labor Statistics.
“That is further indication that some of these transportation costs are being embedded into non-energy prices,” said Chris Lafakis, an energy economist at Moody’s Analytics.
Transportation companies are passing along rising costs out of necessity, they said. Chris Saporito, owner of Houston-based industrial transport company Mallini Transport, said he’s spending about $55,000 a week on diesel for his company’s trucks, up nearly 60% from the $35,000 a week he was spending in January.
“It’s very burdensome,” Saporito said. To stay afloat, he is cutting costs and passing along price hikes to customers when he can.
Large companies such as tank barge operator Houston-based Kirby Corp. and Omaha-based rail company Union Pacific have contracts that factor in the fluctuating cost of diesel.
Smaller shipping companies in Houston are working to do the same. JH Walker Trucking now charges fuel surcharges across the entirety of its business after recent diesel price hikes, said Houston Walker, the company’s chief financial officer.
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Geovanni Aquirre, who works as a generator repair technician for Waukesha Pearce, said filling his utility truck’s tank with diesel used to cost $70 to $80 twice a week. Now, it costs $144. The company has rolled out fuel surcharges to help cover costs, he said, noting customers have so far been understanding.
“They also see the rise in fuel,” he said, “so it’s not a surprise.”
Michael Dyll, CEO of Texas International Freight, said high diesel costs are just the latest misfortune for his company since the start of the pandemic. What began with COVID-related lockdowns gave way to soaring demand for international freight, a crush of cargo, a lack of ships, clogged ports and delayed deliveries.
When customers are already paying $13,000 for shipping containers that used to cost $3,000, the doubling of diesel costs doesn’t help. He hates to say it, but he’s hoping for a recession.
“What hope is there,” Dyll said, “besides for things to slow down — calm down — so industry catches up with how fast things are moving?”
