Tank Truck Industry Struggles with Impact from Diesel Prices

April 1, 2000
WHEN a line graph is made depicting the rising diesel prices from January 1999 through February 2000, the result looks like a streak of lightning except

WHEN a line graph is made depicting the rising diesel prices from January 1999 through February 2000, the result looks like a streak of lightning except the prices are headed for the sky, not coming down to earth. At the same time, tank truck carriers feel a good deal like a zapped lightning rod in the middle of a thunderstorm. And shippers are caught in the tempest, too.

The national average for diesel reached $1.47 per gallon in February this year, up from 95 cents in February of 1999, according to Department of Energy statistics. That's a 55% increase. And if some of the soothsayers are correct, the crisis isn't over. Many are projecting a continuation of high prices based on anticipation that the Organization of Petroleum Exporting Countries (OPEC) will continue to restrict crude oil production. Last year, the organization introduced limits that added up to about four million barrels per day from the 75 million barrels in the world market. When winter arrived in the US, fuel oil usage rose, further depleting an already shallow distillate pool. Before OPEC reduced production, crude oil prices were hovering near a single digit price per barrel. By February 2000, crude oil was at $30 per barrel and diesel prices had soared.

"One of the things that surprised us was the power of OPEC," says Don Schneider, president of Schneider National, Green Bay, Wisconsin. "For years, the cartel wasn't disciplined and we all got very comfortable. When the price went down to such a low level a year ago, and while we enjoyed it, that was probably a bad thing. Now we just have to use our best judgment in managing the situation. The market is too volatile and variable to predict."

"As for the near term, I believe that there is a consensus on increasing production possibly in quarterly stages," says D Patrick Maley, a London-based energy consultant and Middle East oil specialist. "The problem is how much production will be increased and how will it be divided. I think Saudi Arabia will push for an overall OPEC increase of between 1.755 to 2 million barrels per day, and it will seek to take about 25-30% of this. However, the outcome of the meeting is by no means a given."

Even if OPEC increases production, the leveling out of storage capacity inventories in storage and refinery production won't happen overnight. And carriers are left to struggle with the damage that has already been done. For now, some industry spokesmen say part of the expense that was incurred without warning will have to be absorbed by the carriers, even though many have introduced surcharges to customers.

Michael Grimm, executive vice-president of sales and marketing, at Quality Carriers Inc, Tampa, Florida, says company managers saw prices going up in September and October, but decided to wait and assess the situation for a longer-term effect. "We watched the price as it hung around in the $1.20s," he says. "Then along came January with $1.30. From there it has just gone straight north.

"In December and January, we started talking to customers about a 2%-3% surcharge. By February, it was becoming clear that it was a different kind of crisis in the Northeast than in the rest of the country. Most of our good customers in the Northeast were understanding and gave a 7%-9% fuel surcharge, if the shipments were picked up and delivered in that area. Overall, we had very good customer response. A few shifted traffic, but very few, and we felt we had to protect our customers and driver operators."

At Schneider National, a number of contracts have fuel adjustment clauses in them. "If diesel costs go down, we reduce the price," says Schneider. "But the clauses were put in with some of our customers at various times and if a customer wasn't comfortable with it in the past, we didn't insist on it. Now, we have no choice but to add the fuel adjustment clause."

Large carriers like Schneider National and Quality Carriers are not alone in the crisis. The fuel hike has hit all carriers, regardless of size. Fred Perino, supply and operations vice-president of Guttman Oil Company, Belle Vernon, Pennsylvania, had to make tough decisions as well.

The company purchases some diesel by contract and some on the open market. Because most of the company's business is conducted locally, it has had some advantages over the companies with long hauls.

"We knew that there were warning signs out there," says Perino. "We saw that inventory levels were excessively low. We knew the propensity was there, knew heating oil demand would have an impact. The warning signals were there. Initially we resisted any pass-through or surcharges to customers only because of customer loyalty. But it got to the point that we had to. Most of our customers are very knowledgeable. They accepted a 2%-6% increase and we review the prices on a weekly basis and adjust accordingly."

Andrew Zaleski, Trimac Transportation president, has a clear view of the North American situation from his office in Calgary, Alberta. Operating extensively in both Canada and the United States, the company must deal with a dual fuel crisis.

"It's very upfront and on my agenda and the same goes for everyone in the bulk transportation industry," Zaleski says. He reports little difference in Canada from what is occurring in the US as companies hustle to keep up with the rising price. Canada's Maritime Provinces suffered similar circumstances as those in the US Northeast. Cold weather caused heating oil use to rise, draining distillate supplies and stimulating higher diesel costs.

According to the Ontario Trucking Association, rack prices for diesel in Ontario were 176% higher in February 2000 than in the same time in 1999. "Recent increases are among the highest seen since the time of the Gulf War in 1991," the association states. "There appears to be no end in sight."

Although fuel surcharges are not unusual for Harold Marcus Tank Truck Service in Bothwell, Ontario, some customers balked at the 7% surcharge proposed in February, says Denis Marcus, operations manager. "We had some people flatly refuse and say that it wasn't in the contract," he says. Marcus has storage capacity of 60,000 gallons, but fuel purchased at the lower price was long gone by February. "We buy it right off the rack, now," he adds.

Zaleski points out that shippers have become more cooperative as the crisis has continued and received more publicity. "They understand the realities," he says.

J Thomas King, Ashland Chemical Company vice-president, purchasing and logistics, says that Ashland has had no shortage of carriers to move products. Most of the company's transporters are core carriers, dedicated to Ashland. But, he points out, shippers must be willing to cooperate with carriers. "If they don't, they are going to find themselves without anyone to handle their goods for them," he says. "We work off a cent-per-mile formula so that when the price reaches a trigger point, we start giving relief."

Nevertheless, King notes that a year ago when crude oil was $12 per barrel and diesel was selling at 97 cents, no carriers offered Ashland a rate cut. "We do remind them now that they were ominously quiet then," he says.

In addition, Ashland maintains a private fleet of about 500 trucks that have to be kept operating. "So, we feel this as a fleet operator ourselves," King says.

Not only does Ashland have to accommodate its carriers, it must have cooperation from its customers to understand the margin with which the chemical company must operate, King says.

All of this issue that surrounds the tank truck industry means that companies with a sound financial foundation and strong business acumen can be expected to contend with the situation while others with high debt loads and less management expertise may find their business in jeopardy. Others may face bankruptcy.

Complicating the issue even further is the hardship that has been placed on owner-operators, who generally have fewer resources to handle vacillating fuel pri ces. If a significant number lose their ability to operate, carriers, who are already grappling with a lack of qualified drivers, will be even harder hit.

Quality Carriers passed the surcharge through to their owner-operators, and occasionally was required to subsidize them if inadequate surcharges had been negotiated. Owner-operators comprise more than 70% of the company's driver pool. "That was an expensive process, but we came out of those two months with our drivers in place and kept our customers happy," says Grimm.

Schneider National adjusts compensation for its owner-operators as well. "These drivers are independent business people and they need to have an adequate amount of business," Schneider says. "They have to be financially solid so that they can operate. We just can't tolerate losing them."

The survival of owner-operators and even some carriers are threatened by extraordinary diesel prices that averaged $1.294 in a 28-week period between August 23, 1999, and February 28, 2000. Even if prices are averaged for a 60-week period, the average is $1.165. These averages also reflect an overall average of the US regardless of regions. Diesel prices rose as much as 60% in New England and the Central Atlantic states.

William (Bill) George, president of Groendyke Transport Inc, Enid, Oklahoma, considers a low of 97 cents to a high of $1.18 as normal for operations.

"I know that fuel cost has affected our bottom line by four operating points," says George. "That means that for every dollar we bring in while the price is high, it is costing us four additional cents to operate."

And what's worse for the tank truck industry is that there is no way to recoup the losses already sustained, and few ways to operate more efficiently. "The truck miles are the same as they were," says George.

Trimac has introduced a 5%-8% increase like most of the other companies. However, Zaleski points out that payments lag as much as 30-35 days. "We are playing catch-up," he says.

There are a few steps companies can take to reduce diesel usage. "We can work on operating costs reduce truck idling as much as possible, buy more bulk fuel, and encourage drivers to fuel at our terminals when they can," says George. "We have to be a smart buyer of road fuel."

Schneider points out that Environmental Protection Agency (EPA) regulations require engine manufacturers to produce engines that meet air quality standards, and in the process the engines use more diesel. "This has put a negative on our fuel consumption," he says.

Of course, North American carriers share the crisis with European carriers. The prices on that side of the Atlantic have risen almost as drastically as those on this side. According to statistics from the Department of Energy, prices in the United Kingdom rose from $3.47 (US dollars) per gallon last year to $4.77 in February 2000, a 38% increase.

On the continent, the price increase in a year has varied as much as 38% in Germany and 20% in Italy. The price (in US dollars) last year was $2.15 in Belgium, $2.29 in France, $2.06 in Germany, $2.61 in Italy, and $2.38 in the Netherlands. At the end of February this year, carriers buying diesel in those countries were paying $2.67 (Belgium), up 52 cents; $2.98 (France), up 69 cents; $2.84 (Germany), up 78 cents; $3.12 (Italy) up 52 cents; and $2.88 (the Netherlands), up 50 cents.

Emanuele Remondini, president of Star Trasporti Internazionali SPA, operates a fleet across Europe from headquarters near Milan, Italy. He, too, has watched the diesel prices climb. Remondini sees the problem grounded in the use of diesel-driven engines and calls for development of alternative fuels.

"There are persons who say that the engines are ready and have been for a long time, but the oil and gas industry and car manufacturers are trying to delay its application," he says. "We are victims because we have no other alternatives."

Meanwhile, carriers everywhere must continue to provide top-quality customer service and meet requirements that shippers stipulate, particularly where hazardous materials are concerned. Equipment repairs can't be delayed or forgone, and parts have to be stocked. The companies are already lean personnel wise so cuts can't be made in the workforce.

There are, however, some fortunate circumstances. For example, many companies have the latest computer technology online as a result of Y2K upgrading. Many tractor cabs are linked to offices through satellite tracking devices, which allows coordinators immediate contact with drivers.

"We could not manage the number of trucks and people we have without computers," says Grimm. "When something comes along like this, you have to have access to as much information as possible. There are several Internet services that keep diesel prices posted for every state on every day. We are tied into those programs to double check the exact price in each location."

Any advantages carriers can find are helpful. Although the diesel storm has some spots free of thunderclouds, nobody is finding any rainbows, and many in the industry are concerned that the crisis will be continuing. As a result, there have been calls for federal intervention. The American Trucking Associations (ATA) has led the trucking industry's charge with its president, Walter McCormick Jr, calling on Congress to take emergency action. He defines prices as "out-of-control" and warns that the trucking crisis could interrupt the country's booming economy, subsequently resulting in inflation and recession.

ATA is supporting Senate Bill 2161 that asks a one-year moratorium be placed on certain diesel fuel excise taxes and requires the Secretary of the Treasury to transfer amounts to the Highway Trust Fund to cover any shortfalls.

A 17% reduction in the price of diesel would occur if the bill goes into effect, supporters estimate. According to the Senate web site, the bill was in the Finance Committee for consideration March 2.

On February 24, McCormick addressed the Senate Committee on Energy and Natural Resources. At that time, he outlined three actions the government should take. ATA wants the Strategic Petroleum Reserve opened to drive prices down and asked for a federal investigation into any illegal diesel price gouging and profiteering that may be occurring. The third action requests that the United States try to convince the Organization of Petroleum Exporting Countries (OPEC) that stable and reasonable prices are in the world's best interest.

As for the future, Grimm points out that as spring thaws in the cold regions, there will be less demand for heating oil, which will allow more diesel production, but he expects prices to stay far above the 1999 average, depending on the OPEC decision.

Maley predicts that the price of crude oil a year from now is likely to be somewhat lower $20-$25 per barrel. "My crystal ball is no better than the next person who follows the subject, but I would estimate it is likely to be lower than the current $25-$30 range for a number of reasons," he adds.

He says world oil demand will be reduced in parallel with slower worldwide economic growth. In addition, he sees slightly increased non-OPEC production and increased OPEC production in conjunction with more cheating among OPEC members than since the March 1999 agreement.

"There is a tendency among refiners to rebuild stocks in light of this winter's problems, and different market psychology is rising because of a different US economic outlook hinged on this year's elections," Maley says. Also he believes that the US shortages, particularly along the East Coast, were due largely to refiners lowering production runs in response to the inability to recover sharply higher crude costs. This effect should disappear with the experience of this winter, he adds.

"Having said all of this, the possibility of any number of unexpected events needs to be factored in, such as the recent civil unrest in Nigeria, a major supplier to the US," Maley says. "If the situation leads to a conflict, the impact on the oil supply cannot be predicted."

Meanwhile, carriers continue to struggle with the situation at hand. "We are fighting for every penny right now," says George. "We are going to continue to scrape and fight. We will be analyzing all our programs for cost values, but ultimately the world crude market, and its effect on our business, is out of our care, custody, and control."

Cliff Harvison, president of the National Tank Truck Carriers, put the crisis in perspective when he addressed the Transportation Club of Houston, Texas, March 7, 2000.

"Since both US political parties have decided that we will not explore for oil on our domestic lands and shores, the industrial base and the individual consumer have become captive to OPEC. Until we decide to escape from this prison, the price for product will remain volatile and if we're hauling your product, you will have to pay for that volatility."

About the Author

Mary Davis