Diesel Prices Hit Record Highs—Is the Worst Yet to Come?

Diesel Prices Just Broke Records. Worse Ahead?

Diesel prices have reached about $6.33 per gallon, roughly 50 cents above the previous record, adding another major cost burden for truck drivers, small fleets and the shippers that depend on them.

Tom Kloza, an independent oil analyst and an adviser to Gulf Oil, said the trucking industry may not see relief soon. Speaking on FreightWaves Today, Kloza pointed to a combination of limited diesel supplies, refinery disruptions, seasonal demand and global conflict. He described the next 100 days as a particularly difficult period for fleets, owner-operators and shippers.

Diesel has been rising faster than gasoline because supplies were already relatively tight before the latest energy-market shock. The fuel is part of the broader distillate market, which also includes home heating oil. That connection has become especially important after a cold winter increased heating demand in the Northeast, where heating oil remains a common source of residential heat.

Heating oil and diesel are essentially the same products. When more heating oil is needed, it competes with trucking, agriculture, construction and other industries for available refinery output. With temperatures expected to put additional pressure on heating supplies, Kloza said the distillate market could remain strained.

The supply picture has also been affected by refinery outages and disruptions to international oil infrastructure. The closure of Saudi Arabia’s East-West pipeline has led Saudi Arabia to suspend oil-loading for September deliveries to Europe. Kloza said the shutdown could last significantly longer than the several days initially suggested, potentially affecting supplies for 40 to 50 days.

The pipeline also supplies refineries along the Red Sea that are controlled by Saudi Arabia. Those facilities represent about 1.8 million barrels per day of refining capacity, or roughly 2% of global throughput. Kloza said losses in Russia and the Persian Gulf, combined with other disruptions, have reduced global refining capacity by approximately 7 million barrels per day.

For drivers, the result is showing up at the pump and in the cost of operating equipment. Fuel is one of the largest expenses for most trucking businesses, and rapid price increases can quickly overwhelm operating margins, particularly for small fleets that have limited cash reserves or less ability to negotiate fuel surcharges.

Kareem Miller, who operates the three-truck Chicago-based company Strong Pact Trucking, said he had seen diesel prices fluctuate before but had never seen them rise so quickly.

“It was bad,” Miller told CNN last week.

Higher fuel costs are also affecting transportation rates. Trucking companies and independent drivers may add or adjust fuel surcharges, while container shipping companies and other cargo carriers are taking similar steps. Those increases are intended to recover some of the cost of moving freight, but they do not eliminate the cash-flow pressure created when fuel prices rise faster than rates can be adjusted.

Truck stops are facing pressure as well. Kloza said average truck-stop fuel margins have increased from about 4 cents per gallon to roughly 7 cents. He also noted that retail pump prices generally run about 40 cents above wholesale costs, indicating that additional price adjustments may still work through the market.

That creates a secondary challenge for travel centers. Higher pump prices can discourage drivers from spending money on food, merchandise and other services inside the store. Kloza said only about 2% of fuel purchases at large travel centers are made at the posted retail price, with most transactions handled through discount programs and fuel apps.

Diesel costs extend beyond trucking. Agriculture relies heavily on the fuel, and the timing is significant as the industry approaches the spring planting season. Higher diesel prices can raise the cost of field work, equipment operation and transporting agricultural products, adding pressure throughout the supply chain.

Container ships and other cargo carriers are also exposed to the same market because many use fuels closely related to diesel. Their surcharges can increase the cost of moving imported and exported goods, while trucking companies face higher expenses for the inland legs of those shipments.

One potential source of additional supply is renewable diesel and biodiesel. Soybean oil, a primary feedstock for those fuels, has fallen below the price of conventional diesel for the first time in roughly seven or eight years. Kloza said existing biodiesel and renewable diesel plants are operating at full capacity because of stronger margins, and that additional production could come online in months rather than the years required to permit and build a conventional refinery.

Kloza also identified possible government action involving refined-product exports. He said that even a credible threat of export restrictions could affect futures markets, although most analysts consider actual restrictions harmful to refiners and the broader fuel market.

For now, the operating outlook remains difficult. Kloza said diesel prices could climb further in the near term and that $3-per-gallon diesel is likely behind the industry for at least the next 15 to 16 months. Whether prices continue higher will depend on refinery availability, international disruptions, heating demand and the pace at which alternative fuel production can add supply.