The real question is how long the price will stay low?

The real question is how long the price will stay low?

While it’s hard to say just how low the retail price of diesel will go, what is fairly certain is the trend line in place since last autumn will continue to run its positive course at least through the rest of the year. What’s more, it looks like the price of diesel won’t rise markedly until 2016. And at that point, it’s expected to increase to an average well below that recorded in 2014.

According to the U.S. Energy Information Administration, the retail price of diesel fuel, which averaged $3.83/gal in 2014, is projected to fall to an average of $2.88/gal in 2015 and then rise to a $3.12/gal average in 2016.

That’s good news for U.S. truckers and for American consumers, the largest driver of our economic growth. Indeed, consider the impact of what economist Kenny Vieth, president and senior analyst of ACT Research, Columbus, Ind., terms the “oil price windfall.” Speaking at April’s National Private Truck Council meeting, he said lower oil prices will help drive GDP growth at least into the second half of 2017.

Vieth pointed out both that “lower fuel costs provide a top-line offset to fleets” and “oil price declines push up discretionary spending [by consumers].” He predicted that diesel may fall perhaps another 25 cents before prices again start to rise.

A sharp and lingering drop in world oil prices has been suppressing the cost of diesel fuel and gasoline in the U.S. That is largely due to oil production booming here of late, and the decision of overseas competitors (chiefly Saudi Arabia) to cut prices, not production, to buy market share.

That strategy backfired. Domestic oil production did not fall off significantly when crude prices did, because “shale-oil producers have gotten so much better at what they do,” says Denton Cinquegrana, chief oil analyst for the Oil Price Information Service, Gaithersburg, Md.

“It used to be said that frackers will go out of business if oil gets below $50 a barrel,” he explains. “But the technology and techniques they use have improved to where they may only need $50 to $55 to break even. So, domestic crude oil is not going away even though prices dropped. The floor of the market is not $70 to $80 anymore. That’s more like the ceiling.”

Cinquegrana contends that provides “plenty of motivation for refiners to turn crude into products.” He adds that the rise in domestic crude production is helping insulate the U.S. oil market from geopolitical shocks, including the crisis in Ukraine and the advance by ISIS. While “crude was at $100 a barrel last year, now it’s at $60, and there’s talk of crude rebounding later in 2015 into 2016 to reach $70 to $80,” he says.

Looking at how those numbers translate into retail diesel pricing, Cinquegrana expects a gallon to run between $2.50 and $2.75 over the next few months, ahead of seasonal harvest and winter heating oil demands. “Diesel will be at the top end of that range by year’s end,” he predicts. “And the expectation for 2016 is that going in, diesel will be [priced] similar to 2015.”

“My current thinking, based on all that I read and have analyzed, is that the price of oil, and therefore diesel prices, will range in the vicinity of where they are currently over the next year or so,” says Jon Gabrielsen, president and CEO of J.T. Gabrielsen Consulting, Smyrna, Ga. He puts that estimate at plus or minus 10-20%, “with some risk that the trend is more likely to go somewhat higher, than lower, but not to a major degree.”

Gabrielsen adds that the key driver of diesel prices is the price of oil. “While in a given week, diesel prices may not track to oil prices precisely, over even a month or so there is a 98% correlation between the price of oil and the price of diesel per gallon.”

In the long run, however, “fuel prices are trending upwards as we exhaust easy-to-recover reserves,” says economist Noel Perry of FTR, Bloomington, Ind. “The recent drop in oil is due to the invention of a new relatively cheap method, the fracking technique. It freed up enough oil to overwhelm the $100 price.” Now, he says, the cheapest fracked oil costs $40/barrel, while oil from tar sands is at about $70 and from really deep water or the Arctic is at $80 or more. 

“Now that the price of crude is at $60 a barrel,” he says, “there is pressure to raise it, because some of the fracked crude comes out above that number, and all the Canadian tar sands and much of the deep water [crude] is also above that. Most experts say that the price will eventually stabilize around $80/barrel. That would keep all the fracking rigs working as well as the Canadian tar sands.”

As Perry sees it, the key question is “when the price will make that major move. I think late this year. U.S. production has stopped growing because drilling is down by half. It should soon start to decline. In the meantime, there is enough inventory around that lower prices are still possible, but they won›t last. Crude will average somewhere around $60/barrel this year and $80 next year.”

However, he notes that “short-run fluctuations could take us back to below $50 this year and get us over $100 temporarily once the market begins its real move up. Such volatility is the nature of commodity markets. The move from $60 to $80 is the equivalent of a 15% increase in diesel.”

Economist Chris Brady, principal at Commercial Motor Vehicle Consulting, Manhasset, N.Y., points out the impact market volatility plays. “While oil prices are determined by supply/demand factors, short-term volatility is a result of financial factors. Since the financial crisis, crude oil has become more of a financial asset. Crude prices in the short term are influenced by changes in relationships among financial assets — stocks, bonds and commodity prices, including for crude, and currency exchange rates.”

He says to expect short-term volatility in crude prices. That’s why in his view, retail pricing is not the only marker in this game. “I believe fleet executives should focus on a diesel fuel strategy related to volatility up as well as down,” he suggests. “However, this makes hedging difficult, since hedges are usually related to a change in prices in one direction.”

Buy Smart - On the Road or at Home

Even the most fuel-efficient fleet can further reduce its fuel spend by how it buys the diesel it must consume. Mike Meehan, vice president of sales for Fleet Advantage, Fort Lauderdale, Fla., which provides equipment financing and lifecycle cost management to large private fleets, contends that no fleet can afford not to be strategic about how it buys fuel.

Meehan recommends taking a data-driven approach to make sure fuel is being purchasing wisely by drivers on the road.

“It comes down to the fleet directing where the drivers should buy fuel,” he explains. “With today’s software, you can program a truck’s route from beginning to end without deviations and advise where to by fuel” at the best price along the way. “A fleet can also benefit by publishing a report each week on fuel buying that will encourage drivers to comply. Drivers will ‘compete’ to not be at the bottom of that list.”

Issuing fuel cards to drivers, he says, can “provide ease of transaction for drivers and effective recordkeeping while also helping avoid fraudulent purchasing.”

Some fuel cards will batch fuel purchases and issue volume-based pricing after a certain period, according to fleet management software provider Fleetio, Birmingham, Ala. The company points out that while those features could potentially save a fleet money, they could also include “added requirements or fees that other cards may not. The key here is to have an idea of what you are currently spending on fuel (and where), and if that trend will continue, increase or decline in the foreseeable future.”

Fleetio also says a number of fleet-management products now integrate with major fuel card providers. This can create a direct link to other vehicle information to provide better analysis and decision-making across a fleet’s operation.

If you can buy bulk fuel, even better, says Fleet Advantage’s Meehan. He argues that “on-site fueling done with any kind of regularity will save the most over the long run compared to fueling only on the road.” He distinguishes, however, between a fleet contracting for on-premises bulk fueling vs. opting for a company that provides mobile on-site fueling.

Meehan says the latter approach “sounds good but, according to the data we’ve seen, there’s always more fuel spend as [those vendors] tend to pump as much fuel as they can at a given time. But a bulk fuel supplier will do the data analytics to show the fleet that installing their above-ground tank sized to the operation will save them compared to fueling on the road, as well as speak in terms of return on investment.”

That’s because the bulk supplier “can build that infrastructure investment into the fleet’s fuel spend or show the cost to capitalize it,” explains Meehan. “Typically, the fuel supplier selected will design, engineer and build the storage and fueling equipment for the fleet” as a turnkey solution.

“Still,” he adds, “the best way to save money on fuel is to burn less of it.”

David Cullen

David Cullen

Business/Washington Contributing Editor

Washington Contributing Editor David Cullen comments on the positive and negative factors impacting trucking – from the latest government regulations and policy initiatives coming out of Washington DC to the array of business and societal pressures that also determine what truck-fleet managers must do to ensure their operations keep on driving ahead.