For most Americans, the cost of fuel is one of the largest expenses in their monthly budget. While demand for gas continues to soar across the nation, the average price per gallon is holding steady at $2.89 and in some cases, declining. Unfortunately, the same cannot be said for the trucking industry. Consumer statistics seem to be a misleading relief for the trucking industry, as fleet fuel prices are not holding steady—they are rising steadily.
The national average price of diesel is 8.4 cents more than it was a year ago, when the price was $2.992. — Department of Energy
That is a considerable jump and the highest level in several months. Fleet fuel is the leading expense in trucking aside from driver salaries, so when fuel prices increase, fleet managers are bracing to tighten other areas of operations. As crude prices continue to increase, fleet fuel has seen a 2.8 cent rise for a third consecutive weekly gain with no sign of slowing. According to the Department of Energy, the average retail price of diesel was $3.076 in March, marking an .11 cent increase since the beginning of the year.
How Does It Happen?
The demand for diesel globally has been through the roof, partially because the economy has been going gangbusters all over the world. — Phil Flynn, senior market analyst of Price Futures Group.
As Phil Flynn points out, it is all about that demand—but there is much more to the story than demand and the cost of crude oil. Business Insider did a study that found essentially 11 factors that contribute to the cost of gasoline and fleet fuel. Let’s take a look at how it breaks them down.
1. Marketing: This includes the cost of operating the service station. It’s not free to sell brand-name snacks.
2. Taxes: The nationwide average tax on gasoline is 49.5 cpg, up .7 cpg from January. The federal tax on gasoline is 18.4 cents per gallon. The average state gasoline excise tax is 20.9, unchanged from January 2012. Fleet fuel tax can exceed these numbers based on the IFTA (International Fuel Tax Agreement).
3. Refining Costs: Different gasoline formulations required in different parts of the country yield different prices, and the refining process itself produces different costs over the course of a year. Diesel fleet fuel requires different refining processes and should be considered accordingly.
4. Geopolitics: The markets continue to hang on any word from the Iranian regime or about U.S. sanctions thereupon. Oil supply disruptions or even the thought of supply disruptions could cause gas prices to go haywire.
5. OPEC Production: According to EIA, OPEC’s surplus production capacity had fallen to 2.6 million barrels per day by the end of 2011 but is expected to increase to 3.6 million barrels per day by this year. Because they are such a huge player in the energy markets, their decisions on capacity can move gas prices.
6. Non-OPEC Production: For the period ended September 2011, the U.S. imported 53 percent of all crude imports from non-OPEC countries, primarily Canada and Mexico. During the same period the year before, it imported 50 percent. In total the U.S. imports a third of all its crude from non-OPEC countries.
7. Emerging Market Demand: According to Roubini Global Economics, emerging market oil demand growth, driven by China, will soak up global supply growth, keeping the supply-demand balance tight and oil prices elevated over the next five years. A China hard landing in 2013-14 poses the biggest downside risk to EM oil demand growth.
8. Your State: Retail gasoline prices tend to be higher the farther the outlet is from the source of supply: ports, refineries, and pipeline and blending terminals. About 62% of the crude oil processed by U.S. refineries in 2010 was imported, with most transported by ocean tankers.
9. Exchange Rates: Countries with strong currencies have seen energy prices rise less in local terms.
10. Weather: The general rule of thumb is mild weather = lower prices, extreme weather = higher prices. For example, during mild winters, crude inventories build up because of lower heat use, which dampens prices into spring. On the flip side, if the summer is hot, air conditioning use will send prices back up.
11. Speculation and Hedging: The most controversial of all factors. According to CFTC Commissioner Bart Chilton, the 2008 barrel-price swing from $147 in June to about $30 in December was almost certainly caused by speculators.
“There was no justification for such a price swing based upon the fundamentals of supply and demand,” Chilton said. “The only good explanation is what many researchers and prominent economists and others have said about the link to excessive speculation.”
However, he added that speculators perform an essential role in the market, as counterparties to hedging producers.
The consensus, according to the AP, seems to be that speculation does indeed cause volatility but has ultimately a minimal effect on average price.
So, while the cost of fleet fuel can be contributed to demand, these factors start to clarify how that demand is generated. For now, the trucking industry can be comfortable knowing that business is booming and there is no slowdown in sight. While the demand for fleet fuel is increasing, demand for trucking is as well, making it possible to address rising costs with rising profit.