How record diesel prices will impact the U.S. economy

Motorists have been keeping a close eye on prices at the pump since the war with Iran broke out earlier this year. While unleaded gas prices have largely avoided historic highs, the same can’t be said for diesel fuel, which hit an all-time high of $6.31 a gallon on Wednesday.

It was just the latest grim milestone in a steady climb. Economists and supply chain experts say what starts with the transportation sector, where trucking and railroad companies are currently feeling the pain, will ultimately drive up prices for virtually everything in the economy.

David Russell, global head of market strategy at TradeStation Group, said this was not surprising as diesel is the single most universal tangible input to the economy.

Freight carriers will be the first to feel it, but if diesel prices remain at record levels, there will be many other losers, including consumers and businesses.

chief commercial officer of south norfolk The railroad noted at Tuesday’s Morgan Stanley conference that diesel prices are already $8 in California.

Consumers are already experiencing what’s coming next in the form of rising gas prices. Jeff Leonard, vice president of media and strategic communications for the National Association of Convenience Stores, said oil prices aren’t the only thing driving up gas prices right now. Diesel price. The cost of transporting gasoline to gas stations is the driving force behind the steady increase at the pump.

“Rising transportation costs are adding a few cents more to the cost of selling fuel. So are percentage-based swipe fees, which increase as prices rise,” Leonard said. Retailers have to make difficult decisions about whether to absorb these additional increases or pass them on at the pump.

“Right now, they’re absorbing most of the costs, which typically happens when wholesale prices and costs go up dramatically. Right now, retail gross margins have shrunk by about 15 cents a gallon, which is the normal net margin,” Leonard said.

Additionally, the chips, soda, and donuts inside your favorite convenience store must also be transported by diesel vehicle. So the pain of the pump permeates into the store because it costs a lot of money to get the product there.

Costco recently made the decision to limit the amount its motor oil members can purchase, which is affected by crude oil markets and refining capacity.

Kermit Glik, CEO of Ship4wd, a subsidiary of Israeli shipping giant ZIM and an all-in-one digital freight forwarder, said diesel is already at a price point that no one pays attention to until it’s included in something else. “It affects freight, farm equipment, food delivery, home heating, everything that comes into contact with the truck during transportation,” Glik said.

It may take some time for diesel charges to pass through the economy and into your bank account.

“Consumers feel like it’s the last time, but it’s important,” Glik said. “Grocery prices, shipping rates, and anything else that is seasonal that relies on fast trucking transit typically shows up weeks after surcharges creep into the supply chain. This is unlike gasoline, where drivers notice the pain right at the pump,” Glik added.

Truck drivers are the most directly affected, especially since many independent operators are unable to quickly adjust when costs rise. “Small operators may be sidelined, capacity may be eliminated, and transportation costs may rise further. This is not a linear process,” Russell said.

However, if you’re planning a trip this winter, you could be paying more.

“Jet fuel is similar to diesel, so travelers face higher airfares during the holidays,” Russell said.

“Higher diesel prices will spread throughout the economy, and consumers will face higher costs for regular goods delivered by truck and services such as home improvement stores,” he added, noting that previous PPI reports showed pressure on a wide range of items from packaging to circuit boards.

“The longer diesel fuel prices remain high, the list of affected goods and services will only grow,” Russell said.

Kerosene costs may rise this winter

Home heating oil, which is widely used to heat homes in the Northeast, is closely linked to diesel prices because it is made from the same ingredients.

said Mark Wolff, executive director of the National Association of Energy Assistance Directors. household kerosene If prices remain at current levels, customers can expect to pay up to 31% more this winter.

But he said that’s not all. “Families are going to be hit in three ways. One is the heating oil and gasoline prices are going to go up, which is going to hit everyone, and everyday families are going to really struggle because they rely on diesel to deliver everything,” Wolf said.

Wolf’s organization has been lobbying Congress to allocate more money to federal heat assistance programs, but he said that’s unlikely because Congress is in recess until November.

“Unless states intervene, low-income and even middle-class people will face significant hardship. Fuel will become expensive enough that families will no longer be able to afford it without making significant sacrifices,” Wolf said.

One possible relief is this season’s Super El Niño event, with the National Weather Service predicting seasonal temperatures in the Northeast to be much warmer than normal.

Steve Breaux, chief supply chain strategist at supply chain software provider Infios, believes there is still room for prices to rise.

“Many factors are influencing prices. Reduced refining capacity in the Gulf, combined with the suspension of much of Russia’s production due to the war in Ukraine, and attacks on Saudi pipelines, create a perfect storm,” Brough said.

He said other unforeseen disruptions, such as a late-season hurricane or another geopolitical event, could push things higher, but many experts are hesitant to make firm predictions for further rate hikes given market and geopolitical volatility.

Saudi Arabia is taking steps to bring more oil to the market. crude oil price It will drop on Thursday.

Why are diesel prices so high and why are they difficult to bring down?

Jack Buffington, an associate professor of supply chain management at the University of Denver, said that while oil prices have been largely subdued, diesel prices are rising because of a lack of global refining capacity, not because supply has been squeezed and oil prices have risen.

“Oil distribution is an issue due to the Persian Gulf and Red Sea shutdowns, but it is not as severe as the loss of refining capacity in Russia and the Middle East, particularly Russia,” Buffington said, noting that nearly 100% of the world’s available refining capacity is currently utilized.

“This doesn’t mean 100% of the world’s capacity is utilized, it means 100% of the undamaged capacity is utilized. So perhaps 20% of the world’s capacity is offline and that is the bottleneck,” Buffington said. But even if conflicts stopped around the world today, prices would not start to fall significantly.

“Some people mistakenly believe that diesel prices will fall once the heavy fighting stops, but that’s not the case given net refining capacity,” Buffington said, adding that it could take more than a year for prices to return to the $4 level.

Right now, the biggest losers are truckload carriers, especially small businesses and owner-operators. “The major airlines tend to protect themselves to some degree with fuel surcharges,” Brough said. Shippers (manufacturers, retailers, distributors) whose contracts do not include fuel coverage also end up paying more when airlines increase freight rates or fuel surcharges.

But big trucking companies are not immune to the pain. Major trucking company JB Hunt Chief Financial Officer Brad Delko said the company is seeing “the most extreme and unusual swings” in fuel prices and record-high diesel prices the company has ever seen, causing at least $10 million in headwinds. The company warned that diesel headwinds would reduce profits.

Brough said farmers would suffer from higher prices because diesel is often used to transport fertilizer and crops and operate tractors and combines. “It may be difficult to pass on those costs,” Breaux said. This is already a major midterm election headwind for Republicans in agricultural states.

Construction, public transportation and food distribution are all at risk of collapse from rising prices. The construction industry is particularly at risk, as all machinery that consumes heavy materials such as cement and gravel is diesel-powered. “There can also be pressure because the work needs to be completed at the contract price,” Russell said.

Brough said that when diesel becomes this expensive, “every mile counts,” so carriers will do everything they can to adapt, including reevaluating routes, carriers, means of transport, inventory and delivery priorities.

“Simply absorbing higher costs is not a successful business strategy,” he said.

Glik said there will be several winners from this diesel surge. One is refiners with high distillate margins, which benefit from widening crack spreads, the difference between the price of crude oil and the wholesale price of petroleum products.

Another is that major airlines that lock in fuel wholesale while charging extra at retail can expect substantial margin increases.

“This is a structural advantage that smaller carriers don’t have, and large shippers can wait out fuel surges in a way that small business owners can’t. They have to decide today whether to eat that cost or pass it on to their customers,” Glik said.

Rail may gain more business because it is cheaper than truck, but it may also lose business if the economy slows on a broader level.

In a press conference after Wednesday’s FOMC meeting, Federal Reserve Chairman Kevin Warsh cited crack spreads as a driver of inflation and the Fed’s decision to raise interest rates as the best way to restore price stability to the U.S. economy on behalf of stressed consumers.

“It’s not just the spot price of energy or the spot price of corn, soybeans, wheat, it’s the difference between those spot prices and what’s called the crack spread,” Warsh said. “What does that mean for the products in stores across the country?”

Diesel prices heading into this winter will largely depend on how long disruptions in the Strait of Hormuz and problems at Russian refineries last. U.S. refinery capacity utilization is already near maximum capacity, leaving limited room to absorb further supply shocks. Russell said that experts who claim to be sure of this at this point are just speculating, and in fact, more people on Wall Street now share that view.

“For the first time since the outbreak of the Iran conflict, we don’t have a fundamental outlook. We just don’t know how to model the endgame,” JPMorgan analysts wrote Thursday about the oil market. “It is becoming increasingly difficult to maintain the assumption that disruption is temporary.”

Russell believes the glass is likely to be half empty. “Most of the time we’re facing a lose-lose scenario,” he said.

—CNBC’s Alex Harring contributed to this report

Correction: Costco recently made the decision to limit the amount of motor oil that members can purchase. Due to an editorial error, a previous version of this article misstated that fact.