Diesel fuels the nation’s ground shipping industry and farmers, just two of the many contributors to the nation’s 8 percent inflation.
Inflation is a representation of increasing costs — the rate of increase in prices over a given time frame — and it eclipsed 8 percent in September this year. That means that prices were an average of more than 8 percent higher in October of this year compared with September 2021.
It’s a very technical method of amalgamating the litany of cost factors into one number, but the contributing factors are far more ordinary and plainly understood.
One of those factors is the cost of shipping and driving, including the price at the pump for semi-trucks.
According to AAA, the nationwide average price of diesel on Monday last week was $5.338 per gallon — $1.70 higher than one year ago. Diesel in Texas at that time was sitting at $4.724 per gallon, $1.40 more than this time last year.
With those prices, semi-truck drivers are paying upwards of $1,000 to fill up their tanks. Every additional penny they have to pay increases the prices of the goods they move.
“Trucks have been delivering everything other than babies since the 1800s,” John Esparza, president and CEO of the Texas Trucking Association, told The Texan.
Everything in the grocery store was delivered by truck, either entirely or as a middleman between seaports and airports to the store. According to Esparza, over 88 percent of communities in Texas rely exclusively on trucks for delivering food and other necessities. The other 12 percent are close to ports but require trucks to shepherd the goods from point A to point B.
So there’s a cost factor applied in the logistical phase of the supply chain caused by diesel’s woes, but that’s on top of the impact at the beginning of the chain.
“Five-dollar diesel is a killer,” Sam Snyder, a rancher in Moran, told The Texan back in August. “The fuel price absolutely is the killer ‘round here.”
Farmers and ranchers are struggling to adjust to the high fuel costs, which affect the ability to till their land and caretake their herds. That adds to the cost everyday consumers pay for a pound of beef or an ear of corn at the grocery store; so far, that’s just two compounding costs, from the same source.
The high prices indicate a higher premium on the diesel supply that does exist, but the amount of diesel in storage shows how difficult it’s been for supply to catch up to demand. U.S. diesel storage at the end of October was at the lowest point since 1951.
Anthony Livanios, economist and CEO of U.S. Energy Stream, attributes the shortage to a few factors: demand being higher in the fall due to harvests and winter preparation by power plants switching to heating oil, refineries shutting down or curtailing output for maintenance purposes, and the Russia-Ukraine conflict that has led to a large reduction in fossil fuel imports from Russia.
Livanios sees the diesel costs getting worse during the winter. As demand for the already limited supply grows, so too will the shortages; demand will accelerate the shortages and the shortages will accelerate the price increases.
“Unfortunately, not much can be done in the short term,” Livanios said. “In the middling term, we can set better policy to incentivize new, modern day refineries.”
There has not been one new large-scale refinery built in the U.S. since 1976, only modest increases in refining capacity through expansions of existing refineries. Due to a variety of factors, the currently existing refining capacity has more proverbial mouths to feed.
A barrel of crude oil can be turned into all kinds of different products: gasoline, diesel, biofuel, asphalt, and more.
The various markets demanding these products compete with one another for the existing refining capacity, which is not limitless. When a new segment of demand is added to the equation, that further compounds the competition.
One such example is the International Maritime Organization’s regulatory switch from bunker oil to diesel for cargo ships due to emissions concerns. That means that America’s truckers are no longer competing against just each other and the agriculture industry for the existing supply of diesel, but now against the maritime shipping industry as well.
Another factor is the Renewable Fuel Standard, which has driven refining capacity otherwise used for gasoline or diesel toward producing biofuels.
That just adds further to the cost of the diesel.
Oil and gas companies have shied away from investing the massive capital necessary to build new refineries when they do not see a clear return on their investment. Due to federal regulations such as in the Clean Air Act, building a refinery costs more than investors are willing to front.
That has led to a lack of growth in the industry. When the last large refinery was constructed, there were 250 across the U.S. but now there are just half that number. The same phenomenon is occurring in Europe, which faces an even more problematic winter because of their historical reliance on Russian fossil fuel — from which they’re now almost entirely cut off.
No matter how much the U.S. would like to insulate itself from factors abroad, the energy market is an international one, and events in Europe affect what Texans pay at the pump.
There’s the refining bottleneck, and then there’s the woes at the wellhead. This week, the Energy Information Administration revised its 2023 estimate of increased crude oil production to 21 percent less than it had previously projected — a difference of about 130,000 barrels per day.
Similar to his statement earlier this year, President Joe Biden criticized oil and gas companies last month for making “record profits” and called them “war profiteers.” He also suggested the government levy a windfall profit tax on those companies — a tax levied on large, unforeseen profits.
The taxes lottery winners pay are one such example of a windfall tax.
A reason oil and gas companies are making such large profits is that the prices of their commodities are higher than they were before the pandemic. Despite that, these companies do not see the opportunity for a return on investment for either drilling operations or refining projects. Last year, upstream investments — operations at the front end of the fossil fuel supply chain such as drilling — totaled $800 billion, a 50 percent decline over the previous five years.
Livanios attributes this trend, that investors are hesitant to dump in more capital, to the environment caused by federal and international policy.
“We have a delusion that we can reach the energy transition overnight,” he said. Driving that “delusion,” he added, is a preference placed on reducing emissions above all else. “We’ve had a climate policy but not an energy policy, focusing only on emissions above all other factors.”
He also added that the Jones Act — a law that requires ships moving goods between U.S. ports to be owned, built, flagged, and crewed by Americans, reducing the available fleet to move products like diesel from Texas to the Northeast — adds to the cost problems.
This prevailing wind of compounding cost and difficulty is trickling down to the everyday trucker, Esparza said.
“I’ve seen many small operators saying ‘we’re done’ — the headache of trucking is becoming the heartache of America,” he stated.
As in any industry, when costs rise, the first to be pinched are the small operators with less cash flow and capital available with which to weather tough times. Ninety percent of the goods moved throughout Texas are hauled by those small carriers.
There are over 65,000 trucking companies in Texas and one out of every 14 jobs is in trucking, Esparza added. He also said that it’s not uncommon for these truckers to go two months between payments — 60 days of shouldering the fuel costs and all others associated with their industry.
Like with the Jones Act, fewer truckers mean a higher premium paid for the products they move.
It’s a less direct impact, but every consumer pays for the price of higher diesel costs — whether or not they have ever touched that green handle at the fuel pump.
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Brad Johnson
Brad Johnson is a senior reporter for The Texan and an Ohio native who graduated from the University of Cincinnati in 2017. He is an avid sports fan who most enjoys watching his favorite teams continue their title drought throughout his cognizant lifetime. In his free time, you may find Brad quoting Monty Python productions and trying to calculate the airspeed velocity of an unladen swallow.
