What’s up with diesel prices?

I’ve been posting about diesel fuel prices in the United States for several months now, as it’s becoming an increasingly important operating cost for the trucking industry. In fact, at today’s prices, diesel fuel is the biggest financial burden faced by truckers, whether fleet or owner-operated.

In the graph below of the national average retail price of diesel in the United States for the period of January 1, 2021 to May 2, 2022, the price is shown in blue on the left vertical axis with the gray dotted line indicating the price period average of $3.60 per gallon. The associated fuel surcharge (pump price per gallon – $1.25 per gallon base price6 miles per gallon) is shown in green on the right vertical axis.

Following my posts, several commentators have unnecessarily politicized the teaching of economics by assigning blame to the current occupant of the White House. The graph, however, leads to a different factual conclusion.

First of all, I pointed out that there was a staggered feature around February 24, 2022, when Putin’s Russian army invaded Ukraine, when the national average diesel price rose from $4.06 /gallon to $5.25/gallon in three weeks. To be clear, this three-week jump of $1.19/gallon is unrelated to the President’s long-term energy agenda. Rather, it reflects short-term volatility that rests squarely on Putin’s blatant action.

Second, the long-term trend is and has been rising. Unfortunately, the COVID pandemic had a devastating effect on the global market from March 2020. Consumer demand and manufacturing output came to a virtual halt. The resulting drop in US GDP suppressed demand for diesel, which effectively limited diesel prices. With the change in the new administration in the COVID response, the economy has started to rebound, which has increased demand and supported diesel prices. However, Putin’s rhetoric, where Russia’s military strengthened in early 2022, stoked fear in the global crude market, accelerating price increases until the invasion.

It is also important to look at the current price of diesel over a broader time frame. Looking back over 40 years, from January 1980 to today, when you compare the actual monthly price of diesel to the same price, adjusted for inflation, as shown below in blue and orange, respectively, we We’re not at an all-time high, which happened in 2008 – and we all remember the economic recession and the trucking bloodbath that happened at that time. But, we are close! So a word of warning, my fellow truckers: fuel efficiency is your competitive advantage.

1 Screenshot 2022 05 05 at 12 47 24 H

A bit of an irony: when diesel prices were low, people laughed at fuel efficiency because “fuel is cheap”. Conversely, when fuel is expensive, as it is today, the same people cannot afford to add fuel-efficient technologies because trucks are expensive and operating margins are tight, there is no So there’s no extra money to spend on fuel-efficient aerodynamic devices.

For example, a truck averaging 7.0 miles per gallon fuel efficiency today for a 10,000 mile month will spend $7,871 on fuel (an annual cost of $94,457). At just 8.0 miles per gallon, this truck will spend $1,000 less on fuel, each month.

Further consider Volvo’s state-of-the-art D13 with Turbo Compounding and I-Torque technology which typically delivers double digit fuel economy and above, the fuel cost of this truck is $5,500 per month. Together, this aerodynamic, fuel-efficient platform will burn 30% less fuel, adding almost $2,361 per month – at a minimum, to the bottom line.

According to a 2019 survey of 160,884 owner-operators of 160,884 owner-operators, owner-operators earn an average gross income of $220,591. But many owner-operators’ pre-tax net income — the all-important take-home pay — is between $45,000 and $80,000 a year. Taking the midpoint of that range, $62,500 is about 28% of gross revenue.

To realize that same monthly fuel savings of $2,361, an owner-operator needs to generate $8,468 in additional monthly revenue (over $101,600 annual rate) – that means they need to increase their revenue by 46%, that is almost half. That means the owner-operator has to work another 9 full days each month – that’s 5.5 full months in a year – just to make up for the fuel savings they lose. That, my friends, is not smart business.

The competitive advantage of small fleets and owner-operators is operational efficiency, while fleets leverage scale of operations to their advantage. We all know trucking is cyclical. The only certainty we can count on is that nothing stays stable for long. Freight rates increase over the year with seasonality and from year to year as supply and demand balances shift across the spectrum. But how long will small carriers and ill-prepared owner-operators be able to withstand a bloody market like we’ve seen before? Real businessmen understand the economic benefits of becoming the low-cost producer of freight capacity, that aerodynamics pay dividends, that fuel-efficient tractors will survive a downturn, and that these operators will reap the benefits of a capacity reduction.

When an owner-operator cedes fuel economy, they are effectively committing economic business suicide because fleets have much lower asset costs, buy fuel in bulk, and can hedge their fuel cost risk and have a lower driver pay scale – which I have written about extensively in relation to the Motor Carrier Exemption from the Fair Labor Standards Act – which combine to overwhelm owner-operators, particularly prescient in a scenario of lower freight rates. It is all the more important that owner-operators preserve, protect and exploit this competitive advantage or risk a forced exit from the business.