It’s bad enough paying more than $4 a gallon to fill your gasoline tank. Now imagine paying $6 a gallon, or more, for diesel fuel.
Actually, you don’t have to imagine it. You’re picking up the tab for diesel fuel every time you buy groceries, clothing, furniture, or anything else delivered by truck, train, or cargo ship.
“Ultimately the consumer’s going to pay,” said Charlie Itz, president of Itz-Ohlson Transport, a Chelsea-based trucking company. “It has to be passed through. There’s no company big enough to absorb that money.”
High diesel costs are a major reason for the worst US inflation rate in four decades, and they’ve become a huge drag on the economy. It’s gotten so bad that the Biden administration is considering a plan to lower diesel prices by releasing part of the US home heating oil reserve. That’s 1 million barrels of low-sulfur heating oil, which is almost identical to diesel fuel. But it’s not enough — the US consumes about three times that amount of diesel every day.
Last week, two of the nation’s biggest retailers, Walmart and Target, blamed higher transportation costs for first-quarter earnings that fell well below expectations. Target’s chief executive Brian Cornell said that higher diesel prices sliced $1 billion from last quarter’s profits. The company’s stock plunged 25 percent in a day, helping drive the S&P 500 down for a seventh straight week.
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In addition, Framingham retailer TJX, operator of TJ Maxx and Marshalls stores, said its pretax profit margin for fiscal year 2023 would be reduced by up to 1.6 percentage points because of higher shipping costs.
After California, New England has the highest diesel prices in the United States, with a regional average of $6.37 a gallon as of May 23, according to the US Energy Information Administration. But even in Gulf Coast states like Texas, where diesel is averaging $5.21, the fuel sells for about $2.18 a gallon more than this time last year.
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Though both are made from crude oil, diesel is heavier than gasoline and harder to ignite. But diesel contains a lot more energy per gallon than gasoline, making it a more efficient fuel. That’s why diesel is favored in big trucks, railroad locomotives, and seagoing ships.
So why has the price of diesel increased even more than gasoline?
The economic whipsaw unleashed by the pandemic gets most of the blame, said John Auers, executive vice president at Turner, Mason & Co., an oil-industry research firm in Dallas.
“Refining capacity was shut down during the period of the COVID lockdown,” Auers said, as energy producers foresaw a long, slow recovery. But the global economy bounced back with unexpected vigor, and with it, the need to fuel thousands of cargo ships and millions of delivery trucks.
In response, oil refineries have hit the accelerator, according to Dean Foreman, chief economist at the American Petroleum Institute. “We’ve got historically strong refinery production,” he said, with US facilities running at more than 90 percent capacity.
However, Foreman said that on the East Coast, diesel supplies are “critically low.” That’s partly due to a June 2019 explosion and fire that forced the closure of Philadelphia Energy Solutions, the East Coast’s largest refinery. In addition, Foreman said, there’s no pipeline to carry cheaper Gulf Coast diesel fuel to New England. Bringing it in by truck or rail would be too expensive.
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And then there’s the complex impact of the war in Ukraine. Start with the loss of Russian oil. There go about 200,000 barrels of crude oil per day that the United States once imported from Russia, as well as half a million barrels per day of semi-refined oils that were processed into diesel fuel in East Coast refineries.
Then comes the obligation to help other countries that’ve stopped buying Russian oil. In January, the United States exported 682,000 barrels per day of “middle distillates,” like diesel, jet fuel, and heating oil. In April, Foreman said, that number hit 1.4 million barrels per day. It’s the “demand pull” from overseas buyers that’s pushing prices even higher.
And in turn, higher fuel costs are driving up prices throughout the US economy. It’s hard to say exactly how much in each industry. Retailers don’t always pass the higher costs onto customers, instead accepting lower profit margins. But as high costs persist, consumers will eventually pay.
Food and grocery prices are especially vulnerable. “Large-scale agriculture is based on relatively inexpensive energy,” said Willy Shih, a professor at the Harvard Business School. That means huge quantities of diesel to drive tractors, combines, and other farm machines. Diesel trucks and trains are needed to deliver fertilizer and other supplies and to haul away the ripened crops.
Trucking companies cope with pricier diesel by calculating the basic cost of hauling a load, then adding a separate fuel surcharge that varies with the price of diesel. John Garvey, vice president of Garvey Transport in Holbrook, said that in January, his company’s surcharge was an additional fee of 25 percent. As of May, it had risen to 55 percent.
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“We are eating a little bit of it,” Garvey said. “We are not as high as a lot of companies.”
Itz of Itz-Ohlson said his company levies a 60 percent surcharge, “and I don’t think we’re done yet.” One of his customers, Steve Sciuto, president of Mutual Sales in Derry, N.H., an importer and distributor of beach products, said that so far his company is swallowing the extra surcharge.
“Basically we’re digging into our profit,” said Sciuto, whose company receives containers full of beach umbrellas and toys from China. Half his customers are small mom-and-pop retailers, but others are major retail chains. None are willing to pay more. “We kind of set the prices and we have to live and die with that for the season,” Sciuto said.
The fuel tanks of a typical big rig hold about 150 gallons of diesel. Filling those tanks would have cost about $500 a year ago. Today, it’s roughly $1,000. And since such trucks get between 6 and 9 miles per gallon, it’s like paying almost a dollar in fuel for every mile traveled.
It’s not quite as bad as it sounds. The nation’s biggest trucking companies actually pay much less for fuel than the pump price. They purchase contracts that allow them to pay the wholesale price, plus a small markup. Even so, today’s wholesale price hovers around $4.50 a gallon, compared with $2 a year ago and $2.80 as recently as February.
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Dean Croke, a longtime trucker and principal analyst for Oregon-based DAT Freight & Analytics, said independent truckers are hardest hit, because those who operate a single truck have very little bargaining power. They can’t easily pass higher fuel costs onto their clients, who can just find a driver who’ll work for less. Croke said that the indies may adopt an array of survival strategies — squeezing in one extra trip per week to bring in more revenue, eliminating idling at rest stops to save fuel, or simply driving slower to boost fuel economy.
In the long run, there are only two possible cures for the diesel crunch. One of them — a big increase in diesel inventories — won’t happen anytime soon. The war in Ukraine still rages, US oil output is still well below its 2019 level, and even if more crude becomes available, the United States still needs additional refining capacity to turn it into fuel.
That leaves only one option — a nationwide economic slump. “There’s no relief in sight unless we have some significant slowdown in demand,” Auers said. “It’s not going to go away, unless we get a recession.”
Hiawatha Bray can be reached at hiawatha.bray@globe.com. Follow him on Twitter @GlobeTechLab.