Diesel: Fuel for Inflation?

By Steven Mufson
Washington Post Staff Writer
Thursday, March 13, 2008

Lee Klass was hauling 41,000 pounds of hairspray from Florida to Quebec yesterday when he pulled into a truck stop in North Carolina to fill his tank with diesel. The price: $3.999 a gallon.

"Diesel prices are terrible, and they're not getting any better," the 60-year-old Klass, an independent trucker, said in a cellphone interview as he filled the 240-gallon tank. The final tab: $960.

The auto club AAA reported yesterday that both diesel and gasoline prices smashed previous highs. Gasoline rose to a nationwide average of $3.246 a gallon for regular unleaded. Diesel, which has been setting records almost daily for the past three weeks, hit a nationwide average of $3.876 yesterday.

The average price of diesel fuel has been shooting up even faster than that of gasoline, rising more than 50 cents in barely two months. That is not only squeezing profit out of the trucking business but is also driving up the cost of delivering all kinds of goods to American consumers.

"People talk about gasoline, but it's diesel that puts the goods on the shelves," said James Hughes, an independent trucker who yesterday was hauling stone in Maryland, from La Plata to Hollywood.

High crude-oil prices promise even higher pump prices in the weeks ahead.

Crude oil for April delivery rose above $110 a barrel on the New York Mercantile Exchange yesterday before settling at $109.92, in part because the dollar slumped to another new low against the euro. Prices for oil delivery further in the future rose even more; it was not possible to buy a barrel of light crude oil on the exchange for delivery anytime between now and June 2016 for less than $99.25 a barrel.

"If crude stays even at $100 a barrel, then by April or May, gasoline prices have to go up another 40 or 50 cents just to follow seasonal trends and recover the costs of crude that are not being recovered now and get margins back to normal summertime margins," said Lynn D. Westfall, chief economist at Tesoro, a major U.S. refiner.

The rapidly rising price of diesel fuel has the potential to spread through the economy, complicating the Federal Reserve's goal of containing inflation while stimulating growth. According to the American Trucking Association, trucking accounts for about 70 percent of U.S. freight transportation. Last year, the volume of goods shipped by truck fell 1.5 percent from the previous year, the association said.

Klass said that a cross-country trip that cost about $550 in 1999 now costs almost four times as much. He said he recently drove from Kent, Wash., to Orlando and paid $1,993.48 for fuel. Klass said his truck gets about six miles a gallon but that he can't afford to buy an auxiliary motor that would help him save fuel by powering air conditioning or heat in the cab when he is parked.

He said a fuel surcharge that the trucking industry added when prices rose above $1.30 a gallon a few years ago was at the time thought to be "a temporary blip." Now the surcharge is a permanent fixture.

But truckers said the surcharge can't rise fast enough these days. "It doesn't get me ahead of the curve, but helps make sure I'm not run over by the curve," Klass said.

Some analysts said diesel prices may rise over the long term, too, because of structural reasons. More and more Americans are driving cars that use diesel because they get better mileage. And while the number of diesel cars in the United States remains modest compared with those that run on gasoline, U.S. gasoline use may be leveling off or even declining slightly. At the same time, European drivers use diesel fuel almost exclusively. That could squeeze refiners who can change only slightly the proportion of diesel produced from a barrel of crude oil.

Tesoro's Westfall had a different explanation for the recent run-up in prices, however. He said unusually cold weather in Japan, Europe and the United States had boosted demand for heating oil, which is essentially the same product as diesel.

Whatever the reason, the rising pump prices are hurting truckers like Klass and Hughes. "I'm breaking even," Hughes said. "I'm not living; I'm surviving."

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