Diesel’s Wild

Remember Pong? The primeval video game — the first-ever, according to Wikipedia — where two, one-dimensional bars bounced a white ball (a pixilated square dot, actually) back and forth until one missed.

That’s what Roger McKnight likens the fuel market to these days. Watching fuel prices bounce between global events — from the frightening tsunami and potential nuclear meltdown in Japan to unrest, and now war, in North Africa and the Middle East — is a daily neck-torquing exercise. The only difference, says the senior petroleum advisor for Oshawa, Ont.-based En-Pro, is that pong was at least relatively simple to follow back and forth.

"I’m sort of losing my patience with the whole thing," says the fuel market advisor. "There’s a lot of trucking companies asking me what they can forecast for the next couple of months and maybe 2011 and I say ‘well, how about we try for 1:00 p.m. this afternoon,’ because it all depends on what the newswires say about Libya."

McKnight says that based on tangible market conditions there’s no way oil per barrel should be where it is, adding that hour-to-hour speculation based on a series of global incidents is sending prices into orbit.

"Just a few years ago [fuel prices] were about looking at supply; let’s look at demand, and let’s look at refinery runs," he explains. "If you look at those three factors today everything should be wonderful because we have an oversupply, we have anemic demand and refinery runs are at 82 percent, so there’s lots of spare capacity and if there’s a big bump in demand they can take care of that.

"Prices, therefore, are not making any sense right now … other than they’re artificially being skewed by ‘what-if’ speculation."

As this sheet slides off the printer, the Pong dot is indicating that diesel will outpace gasoline heading into the supposedly slower summer period. Japan, for one thing, has lost about 29 percent of its refining capacity as the world’s third-largest oil consumer. Plus, most of its electricity generating power is from nuclear and they’re now importing diesel for generators. 

Remember the Good “ol days?

"So even if this Libya thing gets settled — and I don’t think it is — you could see crude drop but diesel still increase even during a
low-demand time," says McKnight. "Normally gas prices start to drop after May-two-four-weekend and diesel prices drop accordingly before increasing again in October. But everything’s gone ass-backwards."

How high into the stratosphere can fuel prices get over the next year?

In Canada, a combination of ongoing turmoil overseas, gradual increased demand from improved emerging economies and the closing of several refineries in eastern Canada could lead to gas and diesel prices north of two bucks a liter by 2012, says Jeff Rubin, former chief economist of CIBC World Markets. He recently told Toronto media that by the end of the year prices could well exceed the $145 a barrel mark we saw in 2008.

Whether or not that stunts this modest recovery for truck ­carriers will probably depend on how steep the trajectory is over the coming months.

Certainly, the recent sharp run-up in fuel costs is like a speed limiter for many small carriers and owner-ops and, if sustained, puts a great deal of pressure on marginal truckloaders struggling to keep cash flowing. "A major wild card is fuel prices. The time lag between the increase in the cost of diesel and their ability to recover the cash via fuel surcharges will put stress on already-shaky balance sheets," FTR Associates’ Eric Starks recently commented in a memo to industry stakeholders.

Luckily, it comes at a time when capacity is tight once again.

Provided the increases are gradual, those who forge through the headwinds in the short-term and withstand the gaps between price spikes and surcharge recovery could enjoy rate increases later on due to accelerated bankruptcies resulting in further capacity shortages.

The potential cold shower for all of trucking, though, is if fuel price inflation becomes so severe as to undermine the wider economic recovery as consumer spending and manufacturing are curtailed.

Fred Zweep of Abbotsford, B.C.-based bulk hauler, Vedder Transport, says fleets and shippers are certainly stymied with where fuel prices are headed. So far, "top tier" shippers are absorbing the fuel component, he tells us.

Over the last month, though, some of Vedder’s clients have found that 37-percent fuel surcharges attached to the invoice are becoming hard to swallow for corner-office types. So, in an ironic reversal of what made itemized surcharges popular in the first place, some customers now prefer reducing the surcharge in half while renegotiating the base difference of their upfront transportation cost.

"So really, the net impact is zero, but the dynamic of the look is different and allows them to manage that better in the view of what their executives want."

A buck-45 a barrel soon?

Although Vedder and its customers are navigating the turbulence relatively well, Zweep doesn’t doubt that fuel might be the last big pitfall that permanently sinks "unsophisticated" carriers and owner-ops — particularly, he says, those who are dependant on load boards.

"There are shippers who buy on the spot market who expect a flat rate and fuel to be built into that and then there’s the owner-operator who doesn’t understand the complexity of fuel," he says. "They definitely feel it because they have to pay that invoice each month or each week, but they don’t have negotiation skills to get themselves ahead of it again.

"Many guys just book the load and [if fuel goes up], they don’t seem to recognize the impact until they see the invoice. And they have to absorb it."

Owner-ops tethered to carriers with refined surcharge or fuel-bonus programs will be fine rolling forward, predicts Zweep, who says he’s never had an owner-op leave Vedder because of the cost of diesel. "However, it’s the next tier that’s hurting our business and there’s far more of them."

As well, Zweep agrees that carriers with more fluid cash flow are in a better position to take advantage of the fuel efficient technology available today. "Since 2004, we as an industry have had to put fuel economy aside and focus on meeting the [emission] standards imposed. Now we’re in a position to be able to start looking at fuel economy in a serious light again."

Fuel economy is pivotal in low margin businesses like dry van. The engine is only one component, says Zweep, so trucks that aren’t properly spec’d will blow profit out of the exhaust stack when diesel’s a buck-forty like it is today.

"Go to a local dealership and ask the long-term sale people what the average owner-op is looking for. Typically they’ll tell you only [a few] have done their homework and truly understand the specs they need."

If diesel costs exacerbate the driver shortage, then so be it, exclaims Barry O’Halloran, an oil patch owner-op from Alberta. "There’s nothing wrong with having a driver shortage," he says.

The one big problem he has with carrier companies is that far too many keep the surcharge or short-change owner-ops after collecting it from the customer — a common anecdotal compliant among independent truckers. But he has a message for truckers who continue work for such fleets: "You gotta charge for it, and then you got nothing to bitch about.

"I had one guy and told him you’re two-percent of my profit and 40 percent of my headaches. See ya."

He sure makes it sound easy.

But not as simple as Pong.