Shippers facing record fuel surcharges as carriers cope with sky-high diesel costs

Shippers coping with record-high fuel surcharges are advised by diesel supply experts to simply bear with it until more (and cheaper) crude oil is available, perhaps later this year but probably not until 2023.

Diesel prices will probably remain high longer than gasoline prices because diesel inventories have fallen to multiyear lows. That’s according to Patrick De Haan, head of petroleum analysis for Gas Buddy, an online fuel forum.

The Energy Department’s most recent data showed inventories of distillates, a category that includes diesel, are 22% below the five-year average for this time of year. That type of distillate is also used for home heating oil. So if a cold winter is forecast, diesel is likely to stay high, experts said.

“The fluctuation in the price of fuel has a big impact on the shipping and shipping logistics industries,” Ross Harris, CEO at A3 Freight Payment, a third-party freight bill payment company, said recently. “As costs continue to rise, carriers are having to take losses or raise their shipping prices.”

This means that not only has the price of fuel affected the shipper, but the customer, as well. Because shippers have to pay more to send out the product, they must raise the cost of shipping, and the consumer also ends up paying more.

“Simply stated, higher fuel costs cause product inflation and affect every aspect of production transportation along the way,” Harris concluded.

For diesel, crude oil accounts for about 49% of total cost at the pump, compared with about 60% for gasoline. The difference is in refining costs. They account for 28% of the cost of diesel, compared with 17% for gasoline. Taxes and marketing account for 23% of the cost of both diesel and gasoline, according to the U.S. Energy Information Administration.

Historically, diesel prices have been slightly higher than gasoline, but only about 30 cents a gallon as recently as one year ago.

Now, the spread between diesel and gasoline is nearly $1 a gallon—$5.53 per gallon for diesel with gasoline at $4.62 nationwide as of Memorial Day, according to the Department of Energy’s on-highway weekly fuel survey.

Diesel has risen more than $2.30 a gallon from a year ago. Oil prices were around $80 a barrel as recently as January. Today they are about $115 a barrel.  

The Russian-Ukraine war and the Organization of Petroleum Exporting Countries (OPEC) refusal to pump more oil to make up for Russian supply shortages mean little hope for a quick fix to high oil prices.

“People should be very concerned,” the economist Philip K. Verleger Jr. told the Los Angeles Times. “This will ripple through the economy.”

It already has. Prices of everything from new homes to groceries to just about anything hauled by truck are affected by diesel costs. Recently, retail giants Wal-Mart, Target and Costco cited higher truck shipping costs for reduced quarterly earnings.

But there could be structural changes in the market, many of them related to government mandates, that have affected the diesel market more than gasoline.

Recently, analyst Verleger issued a report explaining six basic facts about why diesel is costing more than gasoline. First, refining diesel costs more and produces slightly less output than gasoline.

But Verleger also cites lesser-known factors. They are: increased demand for low sulfur-diesel; declines in Nigerian oil production, which is reducing supply of a key low-sulfur crude; limited desulfurization capacity, which affects West Coast supplies; increased use of gasoil, a diesel-like product in Europe, to generate electricity because natural gas is so expensive; and sanctions against Russia by Western governments that are halting a significant supply of diesel.

Another lesser-known factor is the International Maritime Organization’s (IMO) enactment of IMO 2020 that went into effect the first day of that year. It mandated fuel for ships with much tighter sulfur specifications, further crimping supply.

To compensate for the higher fuel prices, most large carriers enact a fuel surcharge. For a large less-than-truckload carrier such as Old Dominion Freight Line (ODFL), that fuel surcharge in early June was 45.8% of the shipment rate. A year ago, that surcharge was 25.3%. For container freight, the surcharge was 85.8% of the freight bill, compared with 37.3% a year ago for full ODFL container shipments.

Private fleets are not exempt, either. Retail giant Walmart, which owns a fleet of 7,400 diesel-powered trucks, is one example. Its fuel bill ran more than $160 million higher than the company had forecast, CEO Doug McMillon recently told analysts.

Farwest Steel, a West Coast-based steel and metals manufacturer, recently was posting a fuel surcharge of $1.24 per hundredweight, based on the current price of diesel at $6.13 a gallon in the Western States.