Fuel Costs Stagger Business
Aug. 9–It’s hard to complain when business is good. But Mike Hurley, a veteran of 30 years in the trucking business, is willing to make the case.
Hurley owns a 16-truck operation in Spring Valley that haul rocks, dirt and other raw materials for the region’s booming construction industry. But he says what should be strong profits for Kelly & Associates are getting erased by $12,000 to $15,000 more each month in diesel costs.
“We can’t pass on the fuel costs fast enough to recoup the increases,” said Hurley, who noted that diesel costs have risen about 50 cents in two weeks.
“We’re not making what we should be making in a booming business.”
There’s little relief in sight.
Crude prices for September delivery closed yesterday on the New York Mercantile Exchange at $63.94 a barrel, up $1.63, or 2.6 percent, after climbing as high as $64 shortly before the end of the regular session. Oil prices have risen 47 percent this year.
The latest high came on the day that President Bush signed an energy bill more than four years in the making. The legislation provides some incentives for domestic oil and gas producers but does little to curb consumption.
A boom in worldwide consumption, led by rising demand in the United States as well as in developing nations, has been a major reason for the surge in prices. But tight refinery capacity is also a factor, and yesterday reports of refinery outages sent gasoline prices to record highs as well.
On the Nymex, gasoline futures closed at $1.86 a gallon, up 1.5 percent, the contract’s highest-ever close.
With refineries running near maximum capacity during the summer months, a time when demand for gasoline is at its highest, U.S. motorists are paying an average $2.37 a gallon, about 49 cents a gallon more than at the same time last year, according to national estimates compiled by the Energy Information Administration.
Of course, those prices would be a bargain in San Diego, where the most recent surveys pegged the average unleaded price at $2.65 per gallon.
After a week of record-breaking sessions, the latest surge in prices came as U.S. diplomatic missions in Saudi Arabia, including the embassy in Riyadh and consulates in Dhahran and Jeddah, were closed for two days amid reports of planned attacks.
Oil markets are sensitive to any threat to the stability of Saudi Arabia, the world’s largest oil exporter. Last week, Crown Prince Abdullah became the new king after the death of his half-brother, Fahd.
Adding to the political anxiety, Iran, the second-largest oil producer within the Organization of Petroleum Exporting Countries, began work at a uranium reprocessing plant in Isfahan, a move that is certain to test relations with the West.
For most of the past two years, oil markets have been volatile, a reflection of the lack of spare production capacity worldwide, inadequate refineries, strong consumer demand in the United States and China, and supply disruptions from major producers like Iraq and Venezuela. That has led to a doubling of oil prices since 2003.
The strain on refineries is beginning to show in the United States as they operate at full capacity to meet summer gasoline demand. In recent weeks, several unplanned shutdowns, incidents or accidents have sparked concerns that supplies would be unable to meet demand through the end of the year.
“Refiners are exhausted, like runners in mid-marathon,” said Deborah White, a senior commodities economist with Societe Generale in Paris. “They’ve been pushing very hard since last year. As a practical matter, these things have limits. If you push too hard, capacity drops.”
The latest incident was a fire Saturday that shut a refinery in Philadelphia that produced 200,000 barrels a day. There was no word from its operator, Sunoco, on when the refinery would restart. That follows a long list of shutdowns at major refineries owned by BP, Exxon Mobil and Valero.
“Other than the weather, and hurricanes, and refineries going down, and Saudi Arabia and Iran, and strong economic statistics, there really is no reason why crude oil prices should be so high,” White said. “It must be speculation, don’t you think?”
Energy-dependent businesses across the region are feeling the pinch.
Ed Munoz, who oversees a three-truck operation at Unlimited Distribution.net in San Diego, said he’s losing business to bigger companies that can buy diesel on contract, avoiding some of the current price hike.
“The fuel increases are affecting us big time,” Munoz said.
But large companies like San Diego Gas & Electric, which has a fleet of 1,900 vehicles, are also seeing an impact. SDG&E says fuel costs have risen 13 percent already this year.
Tony Morales of LAX Freight Services on Otay Mesa said that even with rising prices to customers, it’s impossible to pass along all of the recent diesel fuel cost hikes.
“Our business is very competitive,” Morales said.
OPEC, meanwhile, has increased its supplies to 30.4 million barrels a day, raising output by 300,000 barrels a day in the past two weeks, in a bid to cool prices, according to the organization’s president, Sheik Ahmad Fahad al-Ahmad al-Sabah.
But analysts dismiss OPEC’s power to influence markets. With little production left untapped outside of Saudi Arabia, there is nothing the cartel can do to rein in prices.
“OPEC? They are irrelevant,” said Lawrence J. Goldstein, the president of the PIRA Energy Group, an oil consultancy in New York. “It’s only when you hold off supplies that you become influential.”
He added, “Today, all the events are leaning in the same direction: up.”
The New York Times News Service contributed to this report.
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