Spring arrives with higher diesel prices and costs for shippers

Volatile diesel prices should keep shippers on edge this spring as they wait for motor carriers to pass on fuel-cost increases in the form of surcharges.

Last month, diesel prices hovered around $1.63 per gallon. The all-time high for diesel fuel occurred last year when the national average

Historically, diesel prices fall during the spring and summer as demand for home heating oil subsides. Because refineries produce diesel fuel and heating oil from the same family of petroleum distillates, demand for heating oil affects the supply of diesel, and hence prices.

This year, however, the market has not yet shown signs of following that pattern. Although demand for home heating oil has fallen off as expected with the arrival of warmer weather, diesel prices have risen in step with those for crude oil, which at press time was around $38 a barrel. Prices are high in part due to a squeezed petroleum inventory. In addition, oil output from the Organization of Petroleum Exporting Countries (OPEC) has not kept pace with growing worldwide demand for crude oil, especially in China and other parts of Asia.

But financial speculation in the petroleum market has also driven up the price of crude oil, says industry analyst Tom Kloza. "There's lots of 'froth' in diesel and crude oil prices right now," says Kloza, chief oil analyst at Oil Price Information Service. Reduced refinery output also played a factor in the rise of diesel fuel prices this past winter, he says, noting that supplies of both diesel and home-heating oil were curtailed when "an inordinate number" of refineries shut down in order to upgrade their facilities for the manufacture of new, cleaner-burning blends of gasoline and diesel.

No matter the reason, rising diesel prices have begun pushing freight rates upward. Gregory Burns, an analyst with JP Morgan Securities, says he expects rising fuel costs will push up truckload rates by 3 percent and less-than-truckload rates by 5 to 6 percent.

Because major motor carriers have contractual arrangements with shippers that allow them to pass on higher fuel costs, freight rates automatically fluctuate with any change in the national average for diesel prices. One independent truckers' group, however, said its members are meeting resistance from small and medium-sized shippers on fuel surcharges. "Some of my members are turning down loads," says Todd Spencer, executive vice president of the Owner-Operator Independent Drivers Association. "They're not going to haul if the people don't want to pay a reasonable rate to get their goods shipped." Three-quarters of the group's 100,000 members work for small carriers, while the rest contract for loads directly with shippers or through truckload brokers.

As for the future direction of diesel prices, industry analysts are divided. Industry expert Martin Labbé, president of economics consulting firm Martin Labbé Associates, said he believes the decision at this month's OPEC meeting to reduce petroleum production will boost diesel prices even further. On April 1, OPEC cut its oil production quota by 1 million barrels to 23.5 million barrels a day.

Kloza, for his part, holds the view that although diesel prices could rise during the next month, they'll probably tumble during the second quarter by anywhere between 10 and 20 cents a gallon.

"The numbers across the country for diesel are as high right now as you're going to see for the next six months," the fuel analyst predicts. "You've got diesel prices fetching wider profit margins than are sustainable."