Diesel Approaches Another Milestone

Global demand pushes price past $5 mark in California, Chicago and other markets

Samantha Oller, Senior Editor/Fuels, CSP

CHICAGO -- Even as the Energy Information Administration was reporting a small dip in diesel prices across most of the country for the week ending June 2, 2008, reports of diesel breaking $5 a gallon in markets such as Boston and Chicago emerged over the weekend. Meanwhile, in California, the average selling price for diesel breached the $5 mark last week, hitting an average of 502.7 cents per gallon, nearly $3 per gallon higher than the year prior. The national average rose 22.6 cents to reach 472.3 cents per gallon.

It's a milestone made possible by international supply-demand dynamics.[image-nocss]

"The key reason for higher diesel prices in the United States has been global demand," Brian Milne, refined fuels editor for DTN, Omaha, Neb., told CSP Daily News. He cited particularly strong demand from Europe, China and South America as choking the supply base; all of these regions have also been afflicted with high diesel prices. The past weeks have witnessed protests from truckers in England, France, Spain, Italy and Portugal, with diesel prices there reaching as high as $9 per gallon.

"Part of the reason Europe got caught up in the high-price action is they've been phasing in environmental regulations to lower the sulfur content, and refiners had a tough time adapting to that," said Milne. This followed an especially cold winter, which lowered distillate supply levels. "A few refinery issues, tighter environmental specs, and the price went higher, so they went looking to the United States for supply."

South America is currently in its winter season, and so is drawing in more diesel, Milne noted. Meanwhile, China, which also uses diesel to generate power, is relying even more so on the fuel for energy purposes because of lower coal supplies, the analyst said. The upcoming Olympics is reportedly also putting pressure on China to meet expectations from an energy and pollution perspective, making it rely more on cleaner-burning diesel for its needs.

For U.S. retailers who make the bulk of their fuel sales from diesel, all of this international intrigue means simply a tightening of the noose.

"Their expenses are going up, and also they are being pushed to the limit they have on their credit lines with their suppliers, so it's been difficult for them," said Mindy Long, vice president of communications for NATSO, Alexandria, Va., a trade association representing more than1,000 travel plazas and truck stops in the United States.

"A load of fuel that last year cost $10,000 now is more than $30,000," she told CSP Daily News. "The fuel-card and credit-card fees are percentage-based, so when the price of fuel goes up, not only is the expense to the location for that product going up, but so are the fees to run their business and process those transactions. So it's all coming together at the same time, and it 's hurting operators."

Smaller, independent operators are among the most vulnerable, said Steve Allen, president of Brentwood, Tenn.-based AMBEST, a co-op association of 140 independent truckstop operators. His members have been afflicted in multiple ways by high diesel prices, and "none of them positive."

"Cash flow. Strains on supplier relationships. Increased transaction fees," he said, ticking off the pain points via e-mail. "Certainly volume has sufferedas more and more fleets go out of business each week."

"The No. 1 factor is the percentage-based transaction fees charged by third-party billing companies," continued Allen. "The chains are all on a flat fee.Independents today are paying as much as five to eight times per transaction as the chains. This is a double-edged sword: If independents remain competitive with the chains, they lose money because of the transaction fee. If they charge enough to cover the transaction fee, they are not competitive."

Allen said one of his members has gone out of business in 2008 thus far from the financial strain. Meanwhile, the industry 's main customer base isn't doing much better. The Owner-Operator Independent Drivers Association recently announced that high crude-oil and diesel prices have pushed many independent truckers and small trucking companies into bankruptcy this year.

Is there relief in sight? DTN 's Milne said U.S. diesel demand is down from last year, crediting this partly to lower demand from the agricultural sector, which faced a later planting season because of negative weather conditions, and the greater conversion to electricity versus diesel for powering irrigation equipment.

"High prices have forced people to conserve a bit," he said. “As we look into summer, we still expect to see strong demand sustaining diesel prices.… But I think it's too soon to say if we have hit a peak."

As part of making his own predictions, Milne will be focused on crude oil prices, which hit a record high a week and a half ago but have since fallen off. "It seems like we are going to go through a correction short-term, meaning prices should move lower for a bit," he said, acknowledging that this "has been a very tricky market to forecast" because of its volatility.

"That should pull prices back a little bit over the next couple of weeks to a month," he said. "But I think you will see a resurgence before the summer is out." He cited increased summer demand for diesel in the Middle East for electricity generation that typically restricts imports from that region. At the earliest, he expects an eventual downturn in diesel to hit around the fourth quarter.

Until then, NATSO is suggesting its members continue to focus on increasing traffic in other areas of the truck stop—driving customers into the restaurants and c-store—but Long conceded that truckers simply have less money to spend overall.

For AMBEST members, Allen suggested a focus on the basics. "My father and mother operated asingle-unittruckstop until retirement," Allen said. "Dad always said that when times are tough, we have to be tougher in all aspects of the way weoperate our business.Take care of the 'three Cs': cleanliness,customers and cash.The folks who do this will survive and will be much stronger."

[Editor's Note: Escalating diesel prices are just one of a number of economic factors affecting petroleum-retail and c-store operators. For more on how the economy is affecting the industry, watch for the June issue of CSP magazine.]