$2.12 a gallon!

Source: Journal of Commerce Publication date: Feb 14, 2000

Tracking the price of diesel fuel the past 10 months has been like watching the NASDAQ stock exchange, except for one all-important item. Even the go-go NASDAQ market falls now and then.

Welcome to the land of $2.12-a-gallon diesel, which is what the black gold hit in New England last week. Coping with fuel prices that have risen nationally by some 40 cents a gallon since April, trucking companies are scrambling to cover the increases through fuel surcharges, hedge programs and good old-fashioned wrangling with shippers.

On a macro level, trucking interests are urging Washington to tap the 565-million barrel Strategic Petroleum Reserve to take some pressure off the free-market price. Last week Clinton administration officials said they were considering tapping the strategic reserve off the Gulf of Mexico to draw down those supplies for the first time since the Gulf War in 1991.

The administration is under some political pressure to act. American Trucking Associations President Walter B. McCormick and American Bus Association CEO Peter J. Pantuso both have urged the administration to draw down those reserves. But that would be little more than a drop in a bucket for an industry that consumes 32 billion gallons of fuel annually (by Class 8 trucks alone). All told, trucks in this nation log 413 billion miles a year for all business purposes (excluding government and farm use).

Assuming 6 miles per gallon, that's nearly 70 billion gallons of fuel a year.

But it makes good politics for the Washington trade associations to apply some pressure because certainly they are hearing complaints from the industry.

As of Feb. 7, the average on-highway nationwide diesel price was $1.47 a gallon. That compares with 96.6 cents a year ago - just about a 50 percent increase. In New England, it's even scarier - on- highway diesel cost $2.12 a gallon, breaking the $2-a-gallon price that is a psychological, if not a fiscal, threshold.

That is according to the Energy Department's weekly survey of on-highway diesel prices.

"Our fuel is out of control, especially in the Northeast," said Jon Shevell, executive vice president of New England Motor Freight, a top Northeast regional LTL carrier.

Shippers who were accustomed to getting fuel surcharges from their truckload carriers are now getting used to fuel surcharges from their LTL carriers. While fuel can make up as much as 18 percent of a typical truckload carrier's cost, it is usually only around 6 percent of an LTL carrier's cost - until this latest spike took effect.Some carriers are getting those expenses back in fuel surcharges that began last summer. Yellow Freight System officials recently said approximately 1 percent of overall revenue in the fourth quarter came from fuel surcharges - roughly $7 million.

Those surcharge for most carriers began as 0.5 percent until the DOE index of fuel reached $1.15 when it increased to 1 percent. It became 1.5 percent at $1.20, 2.5 percent at $1.30, 3 percent at $1.40, 4 percent at $1.50, if necessary. In an ominous sign, the fuel surcharge application recently filed by Central

Freight Lines, a major intrastate Texas and Southwest regional carrier, goes up to 6.5 percent if diesel prices hit $2.10 a gallon (see chart on next page). The fuel surcharge applies only to line-haul charges in most cases. It usually appears as a separate entry on a shipper's bill.Shippers usually don't mind paying fuel surcharges because carriers can easily justify them. But there is some suspicion by some shippers that those surcharges began just as the LTL carriers were preparing for their general rate increase last year, which the industry took about four months earlier than normal because of a variety of reasons, including capacity and the much-ballyhooed Y2K hype.

"We certainly do not object to fuel surcharges to offset a carrier's increased costs," said Debra Phillips, NASSTRAC executive director. "We do have a little problem with fuel surcharges and general rate increases at the same time. It's like when your kids ask you twice for money - $20 for a compact disc and then $15 for lipstick. It's a little bit easier asking for it once than in two bites. "But the whole (fuel) issue is more complex than LTL and truckload. The air cargo industry is beginning surcharges. It's affecting all aspects of travel," Phillips noted.

The traditional way for trucking companies to combat fuel spikes is through hedge programs. But the sudden drop in fuel costs two years ago burned some carriers, who were left paying for millions of gallons of diesel at, say, $1.10 a gallon when the actual market price was around 90 cents a gallon. Even some savvy operations were stung that way. U.S. Xpress, for example, admitted its fuel hedging program cost it more than $4 million two years ago because diesel prices dropped suddenly.

"This is not a good market to initiate hedging," said Leo H. Suggs, chairman, president and CEO of Overnite Transportation Co., Richmond, Va., the nation's fifth-largest stand-alone LTL carrier which has some fuel hedging programs in effect. "You have to be able to see what the market is going to be three, six, 12 months down the road. Unfortunately, the price never really triggered enough long- term purchases to get us heavily hedged for 2000. You have to look at hedging as insurance. It's still a good strategy when fuel costs appear to be artificially low. That's when you have to look at it as a strategy. Right now, I think it's artificially high."

Reasons for the increase abound. They range from a cutback in production by the Organization of Petroleum Exporting Countries to harsh winter weather cutting into heating oil supplies (which use the same basic crude oil product as diesel), and perhaps plain old gouging. California Attorney General Bill Lockyer has been asked by the California Trucking Association to look into complaints of profiteering. That came as the six major oil companies in that market posted a six-fold increase in profits after a series of refinery accidents that led to a sharp drop in fuel product in the Golden State (which hardly has to worry about home heating oil supplies).

In New England, the price of diesel has become the source of legend. As recently as early January, the price in that sector was $1.45, about the national average. But in the last month, it has enjoyed a rise in price that even NASDAQ high-flier Qualcomm could appreciate. One New England-based trucker pulled into a fuel stop to sleep. By morning, the price had risen 25 cents a gallon. Others are reporting fuel spikes of as much as 60 cents a gallon in a week.The wholesale price of a barrel of benchmark West Texas Intermediate crude oil was selling for around $29 at press time last week. That's nearly an eight-year high. Speculation on oil futures on the New York Mercantile Exchange have been more volatile than usual lately, reacting sharply to rumors such as Saudi Arabia and Norway expressing comfort in the direction oil inventories are going, thus perhaps triggering an increase in the output of worldwide production. But who knows?

The next big production move is not expected to come until OPEC meets in late March to officially determine quotas. ATA already has asked Secretary of State Madeline Albright to jawbone some OPEC members in an attempt to increase oil production, especially Kuwait and Saudi Arabia if not Iran and Iraq."The Secretary should make a special effort to seek an oil production increase by the countries on the Arabian peninsula whose continued existence and current prosperity is due to the decision by the United States to send a half million troops to their defense only a decade ago," ATA's McCormick wrote in a letter to President Clinton. "Such an increase in production will help in the longer run in the effort to correct diesel price inequities."

FUEL SURCHARGES

How high will they go?

FUEL PRICE PER GALLON SURCHARGES AT BUT LTL LTL LEAST LESS THAN $1.10 $1.15 0.50 percent 1.00 percent $1.15 $1.20 1.00 percent 2.00 percent $1.20 $1.25 1.50 percent 3.50 percent $1.25 $1.30 2.00 percent 5.00 percent $1.30 $1.35 2.50 percent 6.00 percent $1.35 $1.40 2.75 percent 6.50 percent $1.40 $1.45 3.00 percent 7.00 percent $1.45 $1.50 3.25 percent 7.25 percent $1.50 $1.55 3.50 percent 7.50 percent $1.55 $1.60 3.75 percent 7.75 percent $1.60 $1.65 4.00 percent 8.00 percent $1.65 $1.70 4.25 percent 8.25 percent $1.70 $1.80 4.50 percent 8.50 percent $1.80 $1.90 5.00 percent 9.00 percent $1.90 $2.00 5.50 percent 9.50 percent $2.00 $2.10 6.00 percent 10.00 percent$2.10 $2.20 6.50 percent 10.50 percent Note: Fractions of less than one-half will be dropped; Fractions of one-half cent or greater will be increased to the next whole cent. Source: Central Freight Lines Every carrier's fuel surcharge index is a little different so shippers are advised to check the small type. This is a chart of the application for surcharges filed recently by Central Freight Lines, Waco, Texas. It uses the Department of Energy's national on-highway diesel price announced weekly on the DOE hotline, (202) 586-6966. Publication date: Feb 14, 2000 ) 2000, NewsReal, Inc.

Link:

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-- Carl Jenkins (Somewherepress@aol.com), February 18, 2000

Answers

$1.629 a gallon here in NE Ohio for 89 octane. I hate to drive anywhere anymore.

-- Powder (Powder47keg@aol.com), February 18, 2000.

Carpool, anyone?

-- (kb8um8@yahoo.com), February 18, 2000.