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The Diesel Dilemma

Posted on: Friday, 4 November 2005, 00:00 CST

By Pittsburgh Post-Gazette

Nov. 4--Independent trucker Mike Zgurich shakes his head in wonder when he fuels up on his daily package delivery route from Leetsdale to Century Three Mall and sees posted diesel fuel prices that are higher than gasoline.

The price of diesel fuel traditionally has been lower than gasoline, but that changed in September when hurricanes Rita and Katrina damaged production and distribution facilities along the Gulf Coast.

A year and a half ago, for example, diesel cost Mr. Zgurich, 48, of Baldwin, 20 cents less than what motorists were paying for a gallon of regular unleaded gasoline. Today, diesel is fetching a premium of 40 cents a gallon or more above unleaded gas.

What gives? It's a simple case of supply and demand.

Demand for regular unleaded gas plunged with the end of travel season, causing prices -- after the big run-up following the hurricanes -- to follow suit. But demand for diesel remains strong overseas and as a substitute for heating oil, both of which work to keep supplies tighter and thus prices higher -- much to the chagrin of truckers, transit systems, tour bus operators and others who must use diesel fuel for their businesses .

"My profits are down 15 to 20 percent over the last couple of months," said Jon Franschini, 37, an independent trucker from Robinson, who drives for Tazmanian Freight Systems Inc., a Cleveland-based company with an office in Coraopolis.

So far, Tazmanian hasn't passed along the increased fuel costs to customers, Mr. Franschini said. "We're both taking some of the hit," he said of his employer. "It's so much that we can't pass it on to the customer."

Many trucking companies, including package delivery services such as United Parcel Service and Moon-based FedEx Ground , have instituted price surcharges that rise along with fuel costs. And some large vehicle fleets have long-term contracts that lock in prices, allowing them to avoid the sting of the price spike.

Still, the domestic trucking industry estimates it will spend about $85 billion on fuel this year, up $23 billion -- or 37 percent -- from last year. Some of that, of course, reflects more trucks on the road as the economy continues to grow. But a lot of the run-up reflects higher prices.

For most truckers, it's a big bite out of their wallet. Fuel expense represents about 25 percent of operating costs for most trucking companies, according to American Trucking Associations spokeswoman Tiffany Wlazlowski.

Ms. Wlazlowski said fuel surcharges that help ease the sting by passing on some of the costs are not widespread. Most trucking companies are small businesses with 20 or fewer trucks, she said, adding that even those who do use surcharges typically do not recoup the full costs.

"It is especially hurting the independent drivers," said Chris Lee, marketing director of ProMiles, a Texas company that tracks diesel prices daily and provides software products and services for the trucking industry.

Diesel and gasoline prices both passed $3 a gallon in the past two months and have dropped somewhat in recent weeks, according to a weekly survey of average prices by the Energy Information Administration, an arm of the U.S. Department of Energy.

But diesel prices have been slower to come down -- they're off some 28 cents from their recent high of $3.16 a gallon, vs. 60 cents for regular unleaded, which hit a high of $3.04 in early September.

Even at truck stops, where diesel prices typically are lower than corner service station because of large volume sales, diesel prices have remained high. They averaged $2.33 a gallon on Aug. 1 and rose steadily during September and October, breaking $3 a gallon on Sept 30 and peaking at $3.20 a gallon on Oct. 20, according to ProMiles, which tracks truck stop prices.

The difference between regular gas and diesel prices has been driven by a number of factors, according to an analysis by the Energy Information Administration, an arm of the U.S. Department of Energy.

In the case of gasoline, a record volume of imports arrived in the last three or four weeks at the same time domestic gasoline production was climbing back to near pre-hurricane levels . The large surge in supply coincided with a seasonal drop in demand as the summer vacation came to an end.

Diesel, on the other hand, is closely tied to the price of heating oil, a similar product described by the government as distillate fuel. Diesel fuel, which differs from home heating oil only in that it has less sulfur content, can be used as a substitute for heating oil so the prices often move in similar directions.

Heating oil prices are generally highest when demand peaks in the winter, starting in September and October as the weather gets colder and fuel is stockpiled for the winter. Diesel prices also often peak as cold weather occurs just as farmers use more diesel fuel in their tractors at harvest time.

As the winter progresses, the Energy Information Administration suspects that demand will continue to grow for heating oil, causing diesel fuel prices also to go up or at least remain high.

It doesn't help that imports of diesel fuel have been held back by strong demand in Europe, where an increasing number of new fleet vehicles are diesel-powered, and in China, where the demand for distillates has been twice that for gasoline.

"After Katrina and Rita, Europe was kind enough to provide us with some of their gasoline reserves that they had on hand, but not diesel. They have a much more abundant use for diesel in passenger vehicles than we have here and they hung onto what they had," said Mr. Lee, of ProMiles.

Truckers aren't the only ones feeling the pinch from the higher diesel prices.

The Port Authority in Allegheny County uses 10 million gallons of diesel fuel a year, and every penny increase in price means an additional $100,000 in costs. The transit agency's last fixed price contract for diesel fuel, which capped prices at $1.44 a gallon excluding taxes since it is a public transit agency, expired on July 31, said spokesman Bob Grove.

Since then, the Port Authority has been paying a floating market price that has averaged around $2 a gallon, with a high of $2.30 in September. The most recent budget for the agency, developed last March for the current fiscal year, estimated prices would rise but go no further than $1.60.

"It definitely impacts our budget," Mr. Grove said.

George DeBolt, of DeBolt Unlimited Travel, a Homestead-based tour bus company, said he's been able to pass along some of the increases to tour passengers and feels fortunate that he can divide the costs among 50 or so ticket holders.

"DeBolt and all the other bus and truck companies have to buy diesel fuel. They've got us. There is nothing we can do," Mr. DeBolt said. "The only mitigating factor is we get to divide the increase in prices of diesel fuel among 40 to 50 people. Motor coaches are still the most efficient form of transportation outside of walking."

By Jim McKay and Elwin Green

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Copyright (c) 2005, Pittsburgh Post-Gazette

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Source: Pittsburgh Post-Gazette

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