The US average for diesel prices this week is $4.14 per gallon. We are now in the midst of one of only two periods in history during which prices have topped $4 per gallon.
In 2008, the first time diesel crossed the $4 mark, prices spiked to those elevated levels for a short period of time. Several geo-political events created supply concerns that drove oil prices upward, but they fell dramatically less than 6 months later as the world economy fell into recession. By the end of 2008, diesel prices once again averaged a comfortable $2.33 per gallon.
In 2012, it seems unlikely that we will see a similar reversal. The world economy is just beginning to emerge from recession, and most economists expect demand for oil to rise both in the near-term and the long-term. We are in the midst of a rising tide.
The upshot of all of this is that high prices are likely here to stay; indeed, though diesel prices are 4 times higher than they were less than 15 years ago, in another decade we may fondly recall when diesel was "only" $4 per gallon.
In 2008, the first time diesel crossed the $4 mark, prices spiked to those elevated levels for a short period of time. Several geo-political events created supply concerns that drove oil prices upward, but they fell dramatically less than 6 months later as the world economy fell into recession. By the end of 2008, diesel prices once again averaged a comfortable $2.33 per gallon.
In 2012, it seems unlikely that we will see a similar reversal. The world economy is just beginning to emerge from recession, and most economists expect demand for oil to rise both in the near-term and the long-term. We are in the midst of a rising tide.
The upshot of all of this is that high prices are likely here to stay; indeed, though diesel prices are 4 times higher than they were less than 15 years ago, in another decade we may fondly recall when diesel was "only" $4 per gallon.
The Impact
Rising fuel prices are a drag on the economy, and can have dramatic impact on certain industry sectors that are particularly dependent on transportation fuels.
According to the Department of Energy, commercial trucks consumed 44 billion gallons of fuel in 2009 (the last year for which statistics have been published). The same 44 billion gallons would cost $88 billion dollars more today than they did in 2009. To put that into perspective, that is the market value of McDonald's and Bristol Myers Squibb put together, lost EVERY YEAR due to the rise in fuel prices. (And if prices rise by another dollar, we can add Dow Chemical to that list.)
Overseas shipping has been similarly affected. According to a New York Times article, contracted shipping costs doubled between 2009 and 2010 for most manufacturers, and the spot rate to ship a $40 foot container from Hong Kong to Los Angeles rose from $871 in July 2009 to $2624 in 2010. Oil prices were not the sole driving factor in that rise, but they were an important one -- and many shippers implemented "slow steaming", reducing transportation speeds to improve fuel economy.
At a macro level, the Bureau of Transportation Statistics reports that gross revenues of 3rd party logistics providers has grown from just over $30 billion in 1996 to almost $130 billion in 2008.
According to the Department of Energy, commercial trucks consumed 44 billion gallons of fuel in 2009 (the last year for which statistics have been published). The same 44 billion gallons would cost $88 billion dollars more today than they did in 2009. To put that into perspective, that is the market value of McDonald's and Bristol Myers Squibb put together, lost EVERY YEAR due to the rise in fuel prices. (And if prices rise by another dollar, we can add Dow Chemical to that list.)
Overseas shipping has been similarly affected. According to a New York Times article, contracted shipping costs doubled between 2009 and 2010 for most manufacturers, and the spot rate to ship a $40 foot container from Hong Kong to Los Angeles rose from $871 in July 2009 to $2624 in 2010. Oil prices were not the sole driving factor in that rise, but they were an important one -- and many shippers implemented "slow steaming", reducing transportation speeds to improve fuel economy.
At a macro level, the Bureau of Transportation Statistics reports that gross revenues of 3rd party logistics providers has grown from just over $30 billion in 1996 to almost $130 billion in 2008.
Bureau of Transportation Statistics, Figure 12 "Gross Revenues of US 3rd Party Logistics Providers Industry"
Higher oil prices are driving transportation and logistics costs upward, which in turn inflates the cost of consumer goods. If economists are to be believed, it will get worse in the long-run.
Fuel Efficiency and the Future of the Trucking Industry
A typical long-haul truck travels between 100,000 and 150,000 miles per year. At today's fuel prices, that equates to $69,000 to $103,500 per year. (Assumes $4.14 per gallon and 6 MPG, which is average for Class 8 combination trucks according to DOE statistics.) The largest private fleets in the country have up to 100,000 trucks (not all class 8), and spend up to $4 billion annually on fuel.
One positive by-product of high fuel cost is that it provides incentive to improve technology. When fuel prices were under $1, fuel efficiency was not a major lever to improve business results. Today, fuel is the number one operating cost (above labor) for many transportation companies. In this environment, companies that can improve their fuel efficiency can achieve a competitive advantage.
In the long run we may see a major shift to alternative-fuel powered vehicles, which have great potential for clean and efficient transportation. Natural gas in particular appears to be promising, and some major manufacturers are already introducing commercial models. However, the infrastructure that is required to enable mainstream adoption of these technologies is massive, and so it will likely be a decade or more before these are viable to the average fleet. In the meantime, diesel trucks being sold today have an average lifespan well over 10 years.
Transportation fleets will not sit idle waiting for these new technologies, and won't change out entire diesel fleets at once when alternative fuels do become viable. There are options (which are improving every day) to increase the efficiency of existing equipment by addressing inherent sources of inefficiency. These include aerodynamic improvements, tire technologies, engine oils, engine designs, and hydrogen-diesel enhancement. All of these have demonstrated some level of fuel-efficiency improvements, and we believe PEM cell-based hydrogen-diesel enhancement is most promising of all, with expected fuel economy gains of 10% or more.
As fuel prices continue to rise, investments in these technologies will become more and more valuable. At today's fuel prices, a 10% improvement in fuel economy is worth approximately $7000 to $10,000 per year for a long-haul truck. In many cases, these technologies could pay for themselves within a year -- and we expect to see fleets increasingly making those investments.
One positive by-product of high fuel cost is that it provides incentive to improve technology. When fuel prices were under $1, fuel efficiency was not a major lever to improve business results. Today, fuel is the number one operating cost (above labor) for many transportation companies. In this environment, companies that can improve their fuel efficiency can achieve a competitive advantage.
In the long run we may see a major shift to alternative-fuel powered vehicles, which have great potential for clean and efficient transportation. Natural gas in particular appears to be promising, and some major manufacturers are already introducing commercial models. However, the infrastructure that is required to enable mainstream adoption of these technologies is massive, and so it will likely be a decade or more before these are viable to the average fleet. In the meantime, diesel trucks being sold today have an average lifespan well over 10 years.
Transportation fleets will not sit idle waiting for these new technologies, and won't change out entire diesel fleets at once when alternative fuels do become viable. There are options (which are improving every day) to increase the efficiency of existing equipment by addressing inherent sources of inefficiency. These include aerodynamic improvements, tire technologies, engine oils, engine designs, and hydrogen-diesel enhancement. All of these have demonstrated some level of fuel-efficiency improvements, and we believe PEM cell-based hydrogen-diesel enhancement is most promising of all, with expected fuel economy gains of 10% or more.
As fuel prices continue to rise, investments in these technologies will become more and more valuable. At today's fuel prices, a 10% improvement in fuel economy is worth approximately $7000 to $10,000 per year for a long-haul truck. In many cases, these technologies could pay for themselves within a year -- and we expect to see fleets increasingly making those investments.
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