Tucker Blog

Wednesday, January 16, 2008

Rising Diesel Prices Smack Businesses - Philadelphia Inquirer

By Henry J. Holcomb
Inquirer Staff Writer

Like many trucking executives, Steve O'Kane faces a tough question these days on diesel fuel: How much of the soaring cost can he or his customers absorb?
"The situation is volatile in an upward direction," said O'Kane, chief executive officer of A. Duie Pyle Inc., the West Chester-based fleet of 700 trucks and 1,600 trailers. "There is a lot of speculation on how high is high and probably as many opinions about that as people you are willing to ask."

Diesel fuel prices are soaring, and some experts say the cost of a gallon will roar past $4 this summer.

This has far-reaching impact on business. Consumers will feel it, too. Diesel propels shipping and construction, and many diesel-powered cars, SUVs and pickup trucks are headed to market.

The price of diesel in the Mid-Atlantic region last week averaged $3.51 a gallon, 95.2 cents higher than a year ago, according to a government report issued Monday. That is down 4.4 cents from the previous week, the usual post-holiday lull.

Rising fuel prices are pushing thousands of trucking companies close to the edge, threatening to diminish transportation resources when long-term forecasts say the amount of goods shipped will double by 2010.

The trucking industry is already beset by driver shortages and talk of new tolls and toll increases, said Jeffrey Tucker, who is chief executive of the Tucker Co., a Cherry Hill logistics firm, and a director of the National Industrial Transportation League.

"If the economy stays iffy much longer, thousands of carriers will go out of business," Tucker said.

He and others report increasing pressure to cap fuel surcharges that pass along price increases to shippers.

Why is this happening? The price of crude, the raw material for gasoline and diesel, shot up last year, from $51 a barrel to the current $90-plus range. And faster-than-usual economic growth overseas is pushing demand. In China, the economy grew more than 11 percent last year, and the Bank of China said last week that similar growth was expected this year.

Meanwhile, U.S. environmental concerns have produced laws requiring cleaner diesel that costs more to produce and gets fewer miles per gallon.

Stephen Schork, editor of the Schork Report, a daily energy newsletter published in Villanova, said the refining capacity had fallen so far behind demand because, until a few years ago, diesel profit was insufficient to attract money for expansion.

"Diesel actually sold for less than the cost of crude as late as 2000. When you can't sell a product for more than crude," Schork said in an interview yesterday, "the economics don't attract investment in adding capacity."

Unless a recession slows demand, Schork said, it will be two to five years before diesel supply catches up with demand.

Things could get worse. The full impact of $90-plus crude has not reached the pump, Schork said. And Canada is using more of the diesel supply it has exported to the United States, which could mean turning to more-expensive sources. "It's one thing to ship a product down a pipeline from Canada. It's another proposition to charter a vessel and ship it across Atlantic," Schork said.

In the meantime, the transition to federally mandated ultra-low sulphur diesel adds costs, Schork said. Having two grades of diesel adds distribution and tankage costs and the risk of spot shortages.

Sunoco Inc., this region's largest refiner, is spending $285 million to convert an unused hydrocracking unit at its Philadelphia refinery to a hydrotreater that reduces sulphur from previously acceptable levels to the required level of less than 15 parts per million.

Charles T. Drevna, president of the National Petrochemical and Refiners Association, insists his members have been working hard to meet demand. But, he said, government requirements for fuel-efficient cars and trucks and for gasoline blended with biofuels are creating "major problems fraught with uncertainties."

Refiners cannot make diesel without making gasoline. "The arithmetic is the challenge. Does it make economic sense to invest in capacity when that capacity could be stranded?" Drevna said.

According to the U.S. Energy Information Administration, a barrel of crude oil (42 gallons) yields 19.4 gallons of gasoline and 14.6 gallons of a group of similar products - diesel, jet fuel, kerosene and heating oil. The sulphur content allowed by law is the difference in these products. (The rest yields gases, chemical components and other products.)

The impact of new environmental laws is significant, several trucking executives said. New trucks with required clean-air equipment are getting one mile less per gallon than 2006 models. That is a 16.6 percent decline, from six to five miles per gallon.

High diesel prices are cranking up interest in fuel-saving technology.

The nation's biggest diesel-fuel users saw the problem coming a half dozen years ago. UPS Inc. now spends a third of its $3 billion annual capital budget on information technology, mostly to conserve fuel. Its route-planning technology reduces left turns, which use more fuel, and cuts miles driven by 28.5 million a year, said spokesman Norman Black.

Norfolk Southern, one of three major railroads serving Philadelphia, is working to reduce the 519 million gallons of diesel it burned last year. Its big Conway complex in Western Pennsylvania is testing a yard locomotive with three truck engines instead of one big railroad powerplant. One, two or all three of the diesel engines come online to generate more electricity and turn traction wheels as the load increases, said Tim Heilig of Atlanta, the railroad's chief mechanical officer.

Norfolk Southern is also developing a system called Locomotive Engineer Assist Display Event Recorder, or LEADER. It analyzes the length and weight of the train, along with the topography and curvature of the track ahead, and recommends fuel-efficient throttle settings. And, using new automated controls, Norfolk Southern is evaluating the fuel savings of putting locomotives at the middle and end of trains, instead of just at the front.

In Europe, more than half the automobiles now have diesel engines, which get more miles per gallon and last longer, and there are signs that the engines could soon gain favor in the United States, Schork said.

"There have been tremendous technology strides since the noisy, smelly, hard-to-start diesel cars that turned off Americans in '70s," Schork said. "Diesels are cleaner and friendlier now."

What is not clear, he and others said, is how friendly the price of diesel will be as the oil industry races to catch up with - but not overtake - demand.