Fuel Crisis Survival
With diesel spiking to record highs of up to $2.65 a gallon, the industry continues to get by with fuel surcharges. But not everybody's collecting them.
Those who Don't face demise.
Deborah Lockridge
Senior Editor
Oliver B.Patton
Washington Editor
You can probably thank the fuel price spike of 2000 for the fact that fleets are weathering the current record-high diesel prices. Back then, average diesel prices soared from around a dollar to near $1.50, reaching more than $2 per gallon in the Northeast at the peak of winter, while crude oil prices hit new records of more than $30 a barrel.
The prices sparked owner-operator rallies and work stoppages. Trucking companies had a hard time getting shippers to pay fuel surcharges. The crisis was followed by a wave of trucking company bankruptcies: nearly 8,000 between 2000 and 2001, compared to about 1,200 in 1999, when fuel prices hovered near a dollar a gallon.
In fact, figures from A.G. Edwards and Dun & Bradstreet for years showed a correlation between fuel prices and bankruptcies - until now. For the first time, the number of trucking bankruptcies is going down even as diesel prices go up and up.
At press time, average retail diesel prices reported by the Department of Energy were starting to come down a bit after hitting $2.316 the week of April 11. That price was nearly 64 cents more per gallon than the previous year's figure. Prices in some regions were even higher, with California prices reaching $2.625. The Department of Energy is predicting fuel costs to average $2.21 per gallon over the entire year, compared to $1.81 last year.
The trucking industry as a whole paid $10 billion more for diesel fuel last year than it did in 2003, according to Bob Costello, chief economist at the American Trucking Assns. (ATA). In the first quarter of this year, the industry was on pace to spend $16 billion more on top of last year's amount. With fuel prices expected to ease a bit in the next few months, Costello says, that probably won't be the figure at the end of the year, but he wouldn't be surprised if it's another $10 billion, putting the total fuel bill for the trucking industry for 2005 well over $70 billion, compared to $52 billion in 2003.
Yet we haven't seen the uproar and panic that accompanied the last spike in fuel prices.
"It appears that so-called fuel surcharges have become more prevalent over the last year or so," Costello says. This is a switch from the 2000 crisis, when many shippers refused to pay fuel surcharges.
There are two basic ways fuel surcharges are handled. In the less-than-truckload industry, as the price of fuel goes up, it is a percentage of the cost of the rate per mile. Right now, most carriers are charging around 14% surcharges on LTL freight and 28% on truckload. Typically, truckload carriers are increasing their rate per mile by one penny for every five cents a gallon increase in the price of fuel, although that price varies by carrier.
Of course, every contract is negotiated differently, so some larger shippers or those with high-value freight may negotiate lower fuel surcharges.
Steve Graham, vice president of purchasing at Schneider National, says he understands most fleets are covering 70% to 80% of their fuel costs with surcharges.
"In 2004, capacity was pretty tight, and shippers needed the capacity, so I think they were more willing to agree to a surcharge" in their contracts, he says. Ironically, the reason capacity was tight was due in part to the last fuel price crisis, he says.
"I believe what happened is those who could not get fuel surcharges went bankrupt, and that had a lot to do with why capacity got tight. The shipper community almost caused the problem by being unwilling to pay surcharges to some folks and basically put them out of business, taking away the excess capacity that really has plagued the industry since deregulation."
That doesn't mean trucking companies aren't feeling the effects of higher prices. Chattanooga, Tenn.-based U.S. Xpress, for instance, expected to report a first-quarter loss that it blamed partly on high fuel prices.
John Smith, president and CEO of CRST in Cedar Rapids, Iowa, says while his company has not seen any customer resistance to fuel surcharges, loads handled through brokers often don't have the benefit of fuel surcharges, "or at least not enough. Because freight has been less plentiful recently, we've been hauling more of the brokerage business."
Fuel "hedging," once touted as a way for fleets to help manage fuel costs, has all but disappeared in this volatile crude oil market. This tactic involved buying fuel, either real or on paper, at a price you believed was cheaper than possible upcoming price spikes.
"I don't see a lot of people doing it," says Schneider's Graham. "Hedging is not a guaranteed solution to make money. If you fix your price at today's price of fuel, say for the rest of the year, and the price of fuel goes down, you are stuck paying for that higher-priced fuel."
LTL carrier Overnite Transportation dropped its hedging program more than a year ago, says Ira Rosenfeld, director of corporate communications. "The volatility of the market just makes hedging impossible at this time. We're basically on the market every morning. We have three or four regular suppliers, and each morning we look to see where the best prices are in various parts of the nation."
Meanwhile, high fuel prices and the success of fuel surcharges could have long-reaching consequences. Some shippers, reports Traffic World, are starting to look at cheaper rail transport or smaller truckers who may not have solid fuel surcharges in place.
There's also the concern about what higher fuel prices could do to the economy. As fuel surcharges pass part of higher fuel costs on to the shipper, eventually the shipper will likely pass some of that cost on to his customers. And even if the customer doesn't bear the higher cost, it can still affect the economy.
"If any company out there has to deal with higher fuel prices that they can't pass along - be it retailer, trucking company or manufacturer - they're less likely to expand, less likely to hire more people, etc.," Costello says.
Highway Funding Bill Includes Fuel Surcharge Provision
Legislation that would require truckload shippers to pay a surcharge for rising fuel costs is part of the highway funding bill now working its way through Congress.
The provision in the House transportation reauthorization bill triggers a mandatory surcharge when the price of fuel rises five cents higher than a benchmark price, and requires that the surcharge be paid to the carrier, broker or freight forwarder by the shipper. It also requires that the surcharge be itemized on invoices and - a key feature for owner-operators - that the money be passed on to the person who bought the fuel.
This is similar to truckload surcharge programs that have been proposed before, but so far have not made it into law.
The Owner-Operator Independent Drivers Assn. (OOIDA) has long championed the idea.
"We haven't quit talking to lawmakers about the need for this since 2000," said Todd Spencer, OOIDA's executive vice president. And, he added, the need is greater now than it has ever been.
"It makes no sense for our industry to have a constant shortage of people to drive trucks, yet 75% of the industry is poised for bankruptcy over fuel prices," he said, referring to the small-carrier segment of the business.
It is likely that the provision will face the same opposition that has prevailed in the past: shipping interests that don't want to deal with legislated surcharge requirements, and large carriers that already have surcharge programs in place.
Spencer believes that high fuel prices increase the chances for the measure, but political obstacles remain. The measure is neither supported nor opposed by American Trucking Assns., which takes no position because it has members on both sides of the issue, said spokesman Mike Russell.
The Truckload Carriers Assn. (TCA) supports the concept of a legislated fuel surcharge, but does not like this particular proposal, said TCA President Chris Burruss. Among other problems, it leaves open the question of whether the legislation would void existing surcharge agreements, he said.
TCA wants to get its own version of the surcharge into the Senate's highway bill, Burruss said.
The Senate Commerce Committee has cleared a bill that does not contain a surcharge provision, but there are two more opportunities to make amendments: when the bill reaches the Senate floor, and when the House and Senate meet on a final bill.
The surcharge provision is a tiny part of the mammoth transportation spending and policy package that Congress has been working on for two and a half years. It was supposed to have been passed 18 months ago, but has been stalled due to disagreements over how much to spend and how to apportion the funds among the states.
In early March, the House passed its version of the bill - a $284-billion, six-year measure that would increase funding by 42% over current levels. The Senate has begun work on its version, and it has until May 31 to come to terms on a final bill that has the blessing of the Bush Administration. If it can't meet that deadline - the sixth that it has set for itself, the Senate will have to grant itself more time.
The House measure, called the Transportation Equity Act: A Legacy for Users, or TEA-LU, touches a host of vital interests for trucking. Besides funding for highway construction and maintenance, it sets policy on safety, traffic congestion, intermodalism, dedicated truck lanes, truck parking and toll roads.
As big as it is, TEA-LU is not nearly as big as its sponsors had wanted. Rep. Don Young, R-Alaska, chairman of the Transportation and Infrastructure Committee, which wrote the bill, started out two years ago looking for $375 billion, to be financed by an increase in fuel taxes. Young acceded to White House demands that he scale back his proposal, but still insists that the national infrastructure needs more investment.
Not A Temporary Crisis
And you might as well sit back and get used to higher diesel prices.
The cost of fuel is directly linked to the price of crude oil, which has been smashing records and was hovering around $57 a barrel in March (although it had dropped closer to $50 a barrel by press time). The cost of crude oil accounts for about 50% of what truckers pay at the pump, according to American Trucking Assns. economists.
When it comes to oil prices, the old rules about supply and demand don't seem to apply. Even though worldwide demand is growing, Energy Department statistics show that U.S. crude oil stockpiles were higher at the beginning of this year than they were a year earlier.
"Right now there's so much crude oil in the U.S. that literally, if you have it in the Midwest, you can't find a place to store it," says Tom Kloza, publisher, Oil Price Information Service.
It is speculation, more than market conditions, that is driving the price spike, according to Kloza and others.
"The bottom line is that a new class of investors and a lot of money chasing money has gone into the commodity markets," Kloza says. "We can talk about OPEC, we can talk about U.S. refineries or whatever, but the price of oil and the price of diesel is essentially set in New York every day in the commodities market, and those markets are in a feeding frenzy right now.
"If you look at the stock market, it's basically been moving sideways for the last year or two. Well, commodities are not moving sideways, and certainly oil is not moving sideways. Oil for the last 15 months has had one clear trend - higher - and most of these big money funds and large investors are coming into oil because they're trend-following machines."
Even though crude oil and fuel stockpiles are in good shape, Kloza says, oil prices are being driven by what he calls "petronoia."
"People are looking at the possibility of calamities down the road, whether that be refinery events, whether that be geopolitical incidents in OPEC countries, or whether it be a much higher demand growth for the U.S., China, India and whatever. It's as though everyone's forgotten about traditional economics, which say as prices rise, that will tend to temper demand."
There are, of course, other factors affecting the price of oil. For one thing, because crude is priced in U.S. currency, higher oil prices allow oil-producing countries to maintain their buying power in other countries, where the dollar doesn't go as far as it used to.
There are also issues relating to refinery capacity. Even if there's plenty of oil, it takes time to refine that into diesel, gasoline and other products. There hasn't been a new refinery built in the United States in more than a quarter of a century, forcing the country to import some refined oil products and creating the possibility of spot shortages when there's a fire or other problem at a refinery.
And there is a supply and demand factor, as well. Large developing nations such as China and India are using more and more oil.
"You've got China becoming an economic power," says Steve Graham, vice president of purchasing at Schneider National. "They want air conditioning, which takes energy, they want things made out of plastic, which takes oil, they want to buy cars. So I think the market's overheated right now, but I don't see us returning to the prices we saw four years ago anytime soon."
There are varying predictions on where crude prices are going next. A report by Goldman Sachs raised the possibility of a "super spike," saying oil prices could rise to more than $100 a barrel in the next few years.
At the other end of the spectrum, Tim Evans, a senior analyst at IFR Energy Services in New York, believes oil prices could plummet back to the $30 a barrel range this summer. Most analysts, however, believe the answer lies in between.
Kloza is expecting some relief this summer, when wholesale energy markets typically tend to bottom out.
Federal Reserve Chairman Alan Greenspan said in early April that higher oil prices will prompt enough accumulation of crude inventories to damp the current "price frenzy." At the same time, according to published reports, Greenspan expressed concern that oil production and refining capacity aren't keeping up with the rising demand for energy worldwide.
The United States remains the largest oil consumer, using 21 million barrels a day. The International Energy Agency, however, predicts that China, which used almost 5 million barrels a day last year, may consume as much oil by 2022 as the U.S. does today.
And, of course, there is a limited amount of oil in existence. Peaking oil production "will result in dramatically higher oil prices, which will cause protracted economic hardship in the United States and the world," a team of Energy Department consultants warned in a report earlier this year. Some experts believe that peak will come within the next few years.
Adding another wrinkle to the equation is the upcoming implementation of federal rules requiring ultra-low-sulfur diesel in a further effort to reduce emissions. Spring 2006 will see the removal of most sulfur molecules from on-road diesel.
The new ULSD blend will officially be the standard made by most refiners on June 1, 2006, according to OPIS, with distribution systems required to have the new fuel by July 15 and retailers scheduled for a Sept. 1 roll-out.
There are considerable questions about whether there's adequate production capacity, enough bulk storage, and an ability to keep the new ULSD properly segregated from higher sulfur products still allowed for off-road use.
Just how much more ULSD will cost is anyone's guess. Some government regulators suggest the actual cost of producing the fuel will average 4 to 7 cents a gallon more than current diesel blends. But supply dislocations, downgrading of material that gets contaminated with sulfur from other fuels, a lack of foreign imports, and other factors could drive the prices higher.
Some pundits estimate that the 2006 fuel could temporarily debut at prices 30 to 50 cents per gallon above the cost of traditional diesel.
"I think you're going to be dealing with the apocalypse of high prices" in the first quarter of 2006, Kloza predicts.
National Security Experts Push for Oil Independence<
But there's a new voice in the long-running clamor over the United States' energy policy.
"We ask that you (President Bush) launch a major new initiative to curtail U.S. consumption (of oil) through improved efficiency and the rapid development and deployment of advanced biomass, alcohol and other available petroleum fuel alternatives," said the Energy Future Coalition in a recent letter to the president.
The coalition called for a $1-billion federal investment to establish a domestic alternative fuels industry to reduce consumption of foreign oil.
Left-wing doomsayers weighing in with another plea for more government interference in the oil market?
Not quite. This letter was signed by top-gun policy makers with impeccable conservative credentials, including Republican stalwarts such as Robert C. McFarlane, President Reagan's national security adviser; Frank J. Gaffney, Jr., a deputy secretary of defense in the Reagan administration; and C. Boyden Gray, White House counsel for the first President Bush. Also among the signatories are Democrats R. James Woolsey, director of the Central Intelligence Agency under President Clinton; and former Colorado Senator Timothy E. Wirth, as well as a number of military leaders.
The gist of their message is that U.S. dependence on imported fuel creates a risk to national security.
The raising of a bipartisan voice in what is traditionally a highly partisan battle does not necessarily mean that happy days are here for U.S. energy policy. But it does signal a growing sense of urgency among policy makers from both sides of the spectrum that the United States must do something to reduce U.S. dependence on foreign oil.
The U.S. has 2% of the world's oil reserves and consumes 25% of the world's annual supply. That means the U.S. cannot produce enough oil to free itself from the import tether - it must restrain its demand, the coalition said in its letter.
Awareness of the problem is particularly acute now, thanks to escalating fuel prices.
This run-up is due to very strong growth in global demand - an escalation that took the oil industry by surprise, according to the Energy Information Administration, an arm of the Department of Energy.
The demand is from countries that do not have much oil of their own - what the EIA calls the non-oil exporting countries. Chief among these is China, which surprised oil producers in 2004 with its growth demand of 1 million barrels per day. In comparison, the U.S. growth demand was .4 million barrels per day.
China has more than quadrupled its gross domestic product since it started shifting from central planning to market economics in 1978. It is now the world's sixth-largest economy and is third in international trade activity. It is the largest automotive market in the world and the third-largest car producer. It recently passed Japan to become the world's second-largest petroleum consumer, and its oil consumption is expected to triple by 2020. The Chinese are building 5,000 miles of new highways each year, and most of their freight moves by truck. They have yet to levy a national fuel tax, although the government intends to do so.
The surge in demand collided with low inventories but, more important, a declining capacity to produce surplus oil. And that is likely to remain the same for the near future, according to the EIA. The agency forecasts that worldwide demand for oil will significantly exceed capacity for growth among non-OPEC sources. Also, while world refining capacity is not maxed out, demand is growing faster than refinery capacity.
It adds up to generally rising prices, albeit with fluctuations depending on regional conditions.
The Bush administration has so far resisted calls to tap the strategic petroleum reserve in order to moderate fuel prices. The reserve, which consists of about 690 million barrels of crude oil stored in enormous underground salt caverns along the Gulf Coast in Louisiana and Texas, was created in 1975 as a first line of defense against an interruption in oil supplies.
The law that governs the reserve sets strict rules for when it can be opened. There must be a "severe energy supply interruption," according to the Energy Policy and Conservation Act. It is left to the president to determine if that condition exists.
There is a precedent for tapping the reserve in response to price increases, rather than a severe interruption - President Clinton did so in 2000. But President Bush has declined to follow suit, arguing that the reserve is intended for emergency situations rather than market conditions.
"That petroleum reserve is in place in case of major disruptions of energy supplies to the United States," Bush said last year in response to calls to open the reserve. "The idea of emptying the Strategic Petroleum Reserve would put America in a dangerous position in the war on terror. We're at war. We face a tough and determined enemy on all fronts, and we must not put ourselves in a worse position in this war, and playing politics with the Strategic Petroleum Reserve would do just that."
There are also calls to pause or slow down the process of filling up the reserve to its maximum capacity of about 700 million barrels. The siphoning of that oil reduces inventories and drives up prices, say proponents, but President Bush is sticking to his policy.
On the federal level, that leaves policy options that are the subject of intense, long-running debate: finding ways to cut consumption, or loosening regulations to promote more domestic production.
In its letter to President Bush, the Energy Future Coalition calls for consumption measures such as investing in research and tax credits to promote alternative fuels, and requiring government fleets to use fuel-saving vehicles such as hybrids. These are significant ideas - and the more so considering the source - but pretty tame stuff compared to taking on the big gorilla: raising fuel taxes.
One liberal newspaper columnist, Thomas Friedman of the New York Times, has called for a tax that keeps gasoline priced at $4 per gallon, with the intent of driving car buyers toward more fuel-efficient vehicles. Like the Energy Future Coalition, Friedman argues national security: "By doing nothing to lower U.S. oil consumption . . . we are financing the . . . jihadists - and the Saudi, Sudanese and Iranian mosques and charities that support them - through our gasoline purchases."
This reasoning resonates with President Bush, who also has said that dependence on foreign oil is a matter of national security.
"To put it bluntly," he said in remarks in 2002, "sometimes we rely upon energy sources from countries that don't particularly like us."
But a fuel tax increase - whether to strengthen national security or to pay for more highways - is not what Bush has in mind. He and Congress have just been through a big fight over fuel taxes, and the winner was the status quo.
One reason it has taken so long for Congress to pass a highway reauthorization bill is because the House Transportation and Infrastructure Committee began with the idea of boosting fuel taxes. The idea was to collect more money to pay for highway improvements, rather than to cut fuel consumption. Even though powerful Republicans in the House supported that idea, the Bush Administration and House leaders were adamantly opposed and they prevailed. The final bill will not contain an increase in the federal fuel tax.
Emphasizing the point, the Republican-led House Energy and Commerce Committee on April 12 passed an energy policy measure that does not include consumption restrictions and higher fuel economy standards sought by Democrats.
So far a major emphasis of the Bush administration has been on the supply side: loosen restrictions on oil and gas production in the U.S. President Bush recently won a Senate vote in favor of opening Alaska's Arctic National Wildlife Refuge to oil drilling. The margin was narrow, 51-49, and it was not the final step in the process but it does mark a significant move toward the administration's goal of exploring for oil in that environmentally sensitive area.
Also, the energy package voted out by the House Energy and Commerce Committee would allow more gas exploration on federal lands.
In that context, it is interesting to see a bipartisan group like the Energy Future Coalition weighing in with recommendations for adjustments to U.S. oil consumption. Sometimes a new voice can be heard more clearly.
