Diesel costs climbing to record levels

by Becky Gillette

Published: March 24,2008

When one pulls up a car, truck or SUV to the pump for a 60-buck fill-up, the impact is obvious. What is less obvious but still packs a major wallop is the impact that record-high diesel prices are having on the overall economy.

High diesel prices are threatening to take most of the profit out of the best farm commodity prices seen in many years, and any sector of the economy that relies on transportation is also seeing profitability challenges from the increased diesel prices.

“With record high-levels for fuel prices, combined with the slowdown in the economy, we are definitely seeing an impact across the board,” says David Roberts, president of the Mississippi Trucking Association. “Just like most folks, we are doing all we can as an industry to cut costs and look ahead for brighter days.”

As an industry, trucking is still moving — literally. Trucking in Mississippi contributes to the movement of approximately 80% of all consumer goods transported in and out of the state.

“Our industry plays an important role in our economy,” Roberts says. “We are doing what we can to stay the course. Our members are doing those things necessary to keep costs at a minimum. Reducing speed on the trucks will save fuel. Obviously, costs are often passed along through the fuel surcharges. But with the slowdown in the economy, these are tough times. “

Diesel prices for Brown Bottling Company in Jackson were up 35% in January compared to a year ago, and February numbers are expected to show an even higher year-over-year increased cost of diesel. The company runs 50 vehicles.

“Fuel is one of the major factors to our cost structure, so obviously that has increased our costs,” says Jerry Staines, head coach, Brown Bottling Company, Jackson. “We haven’t done anything about that. We haven’t increased our prices based on fuel. We had a price increase late last year, but it was based on other material increases.”

There can be a domino effect from the higher fuel prices. Staines says when someone has to pay $50 to fill up their vehicle, they might not have enough discretionary income left to buy a Pepsi or Mountain Dew.

“It does make it tough,” he says. “I don’t like it at all.”

‘Tremendous hit’

Some companies they receive supplies from have added fuel surcharges. Brown Bottling hasn’t done that yet, and isn’t planning to.

“But it has been a tremendous hit, and we hope it isn’t going to continue,” Staines says. “However, we think that it probably will continue. We had budgeted an increase in fuel costs. We knew it was going to be higher, but it is higher than we thought it was going to be. As an aside, I was playing golf the other day with a guy from Alberta, Canada, who says he was in the market for diesel truck. I asked why, and he says in Canada diesel is a lot less expensive than gasoline.”

Clayton Boyce, vice president of public affairs, American Trucking Associations (ATA), says one reason diesel is higher than gasoline is that the federal tax on diesel is 6¢ higher than gas.

“The other is just the demand for diesel has been increasing since 2004 because of increased manufacturing in China and because of higher demand in Europe and the U.S.,” Boyce says. “More cars are being made that run on diesel. Another factor is that diesel is pretty much the same as number two heating oil, so when you have a cold winter, the supply is stressed.”

The ATA is ramping up a lobbying program to ask Congress, the White House and the Department of Energy to do everything possible to address the problem. That includes shoring up the weak dollar and increasing domestic exploration and production in the Arctic National Wildlife Refuge and other places drilling has been prohibited.

“We are asking the government to do everything it can to build more refineries in the U.S. because there hasn’t been new refinery built in U.S since 1976,” Boyce says. “We also want to make it clear we are doing the best we can to reduce our fuel use with better truck aerodynamics, speed limiting and using governors. Con-Way just recently lowered the speed on its trucks from 65 to 62.”

The high fuel prices are having an impact on the cost of food.

“Basically, everything we do has increased in cost because of the price of fuel,” says Jarrod Gray, chief financial officer for The Merchants Food Service, a wholesale food distributor in Hattiesburg that sells to restaurants, hospitals and other customers in nine states in the Southeast. “Right now, the highest price we have seen for diesel is $3.80 per gallon. It has gone up dramatically. Obviously, we have to pay for fuel because we own our own delivery trucks.”

In addition to delivery prices, it affects the prices of products the company purchases because fuel charges are added to invoices. In addition to that, the company is seeing utility bill increases based on higher energy costs.

Gray says while it hasn’t cut back on sales, the higher fuel prices affect not just Merchants Food Service, but everyone else because of margins.

Tough choices

“You can’t pass on the entire cost of fuel to customers,” Gray says. “So, you have an impact on your own margins and have to make the choice of passing along fuel costs to customers or not. A restaurant has to make a choice to increase menu prices or not. Consumers are seeing their prices on food go up, and that is whether you go to a restaurant or grocery store. Look at the price of cooking oil and milk, compare it to a couple years back, and you will see a dramatic increase. A big part of that would be your fuel increases.”

There is only so much companies can do to limit the impact. Gray says they are keying in on smart routing to limit the number of miles their trucks drive. But obviously a lot of the routing is driven by what customers need, so there are limits to how much can be saved by re-routing trucks.

“But we look at everything even more closely than we did a year ago,” Gray says.

Higher diesel prices are also impacting highway construction and maintenance for the Mississippi Department of Transportation (MDOT).

“Higher prices result in higher construction cost in our construction projects that are let to contract,” says Harry Lee James, MDOT deputy executive director/chief engineer. “As construction projects cost more, then there is less work that can be done for the same amount of money. MDOT consumes a large amount of diesel fuel, as well, in our day-to-day maintenance activities. The higher cost of diesel for these activities forces us to focus on the core activities (sign/signal maintenance, patching, etc.) and cut back on things such as mowing.”

Another problem is the fuel tax revenues are based on a percentage per gallon instead of the cost of the fuel. Increased fuel costs could lead to a decrease in fuel tax revenues due to a decrease in fuel consumption. But James says this is an area that is monitored closely at the state and national level so that adjustments can be made accordingly.

“We are fortunate that we have yet to see a significant impact from this,” he says.

One thing that could help is simple — drive slower. Excessive speed on the highways leads to less fuel efficiency in most vehicles. Speed is also a leading cause in many traffic accidents.

“If the public were to slow down, not only would we have a safer driving environment, we would also make the fuel that we do use go farther,” James says.

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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