Reducing the impact of higher diesel fuel prices is possible
Gas and diesel fuel prices have reached record levels in the last few weeks. According to the most recent weekly gasoline and diesel fuel update by the United States Energy Information Administration (EIA), as of March 28, diesel fuel nationwide sold for $5.18 per gallon, up $2.02 over the same period a year ago. In California, diesel prices reached $6.28 per gallon, $2.30 cents more than a year ago. Gasoline meanwhile reached a national average of $4.23 per gallon, and in California $5.26 per gallon.
From a barrel of crude (42 gallons), the average refinery in the US produces about 19-20 gallons of gasoline and 11-12 gallons of ultra-low sulfur diesel. Diesel is a middle-distillate fuel, sharing that category with jet fuel, kerosene, and some lesser products.
Diesel engines and fuel are the lifeblood of the global economy, dominating commercial vehicles, farm and construction equipment, industrial machines, marine vessels, railroad freight locomotives, and power generation equipment, not just in the US, but around the world. So, when the price of diesel fuel rises, the impacts are generally felt throughout various sectors of our economy.
Diesel fuel is a global commodity, so prices and supply in the US also reflect the demand for diesel in Europe, Latin America, and Asia. This current rise in diesel fuel prices in the US is due to several converging factors including the higher costs of crude oil currently at $105 per barrel (up $45 since last year), decreased US production of diesel fuel, and generally low stockpiles or inventories available. The pool of middle-distillate fuels going into February was about 37% lower than the previous 5-year average.
Demands for trucking and air travel are rising fast this spring as the COVID-19 pandemic wanes. The demand for jet fuel impacts highway diesel as well. All of these factors were in place before the Russian invasion of Ukraine added uncertainty and volatility to the global energy markets. Before the invasion, Europe was getting about 50% of its diesel fuel supply from Russia.
Volatility in energy prices is nothing new, cyclical changes and seasonal demands are familiar occurrences. Above-average cold weather conditions can boost demand for home heating oil and compete with the diesel fuel market. Agricultural demand for diesel gets a boost in the spring and fall during planting and harvest times. Trucking is the major fuel consumer, and demand for trucking services is high.
So, what is the impact of these higher diesel fuel prices?
- High diesel fuel prices will be reflected in the cost of producing and moving goods throughout the supply chain and ultimately land on consumers in some form.
- The posted diesel fuel price at the local convenience store or gas station is not necessarily the price truckers pay. Most large national trucking companies have fuel hedging and contract programs that somewhat insulate them from price volatility, so the fuel they use was bought at a locked in, lower, price months ago.
- Most national carriers also have fuel surcharge provisions that are part of their negotiated freight contracts. This gives the carriers the ability to charge more to cover a portion of the higher cost of diesel fuel, some, or all of which ultimately gets passed on to consumers.
Reducing the impact of higher diesel fuel prices is possible. Truckers operating newer equipment – built after 2011 – are in better shape since those advanced diesel engines are 4-6% more fuel efficient than previous generations. Also using more biodiesel fuels can help offset the higher costs of petroleum diesel. Biodiesel fuels (B20) were running about 20 cents less per gallon than petroleum diesel, according to the latest information from the U.S. Department of Energy’s Alternative Fuels Data Center.