A rumbling sound
Not too far down the road is a diesel price spike, and truckers are starting to worry about it.
Every time Chuck Paar makes the over 500-mile round trip from his home in Mt. Jewett, Pa., to Buffalo and Syracuse, N.Y., his 18-wheel tractor trailer carries 25 tons of sand or cement and burns about $265 of diesel in one day. That’s up from as little as $166 for the same route two years ago, and the increased cost of fuel is squeezing already thin industry profit margins. It’s about to get worse. In 16 months, new standards will descend on a corner of the global oil market that may disrupt fuel supplies crucial to transportation industries like trucking, airlines, railroads and ships. While the goal of the change is to reduce sulfur emissions, which cause acid rain, the rules could boost diesel prices by 20 percent to 30 percent, according to the International Energy Agency. That means Paar could be shelling out more than $344 on fuel for each New York trip.
“We bleed diesel,” said Paar, 62, whose brothers, wife and son are all truckers. Diesel accounts for around 20 percent of the operating costs at his company, Sandman Services.
The last time diesel prices shot up as much as the IEA is predicting was mid-2008, according to data from AAA. At that time, crude oil hit a record high of $145 a barrel. This time, the culprit isn’t the raw material, which is around $70, but new rules from the International Maritime Organization. The group is requiring the world’s ocean-going vessels to cut the sulfur content in fuel to 0.5 percent from 3.5 percent.
‘Expensive as hell’
The IEA estimates 3 million barrels a day of high-sulfur bunker fuel is used by the global shipping industry, which handles about 90 percent of the world’s trade. Some ships may keep using the fuel after 2020 by installing scrubbers to clean up emissions, or just ignore the rule and take the chance on heavy fines. A few may switch to new ships that run on liquefied natural gas.
But those options may be too expensive, so the IEA expects many ship owners to upgrade the fuel they use. That would spark a rush on existing supplies of middle distillates like diesel and jet fuel. When the standards kick in at the start of 2020, global demand for diesel could jump by about 1 million barrels a day, to 29.7 million, the IEA estimates.
“The consensus is that it will be expensive as hell,” said John Butler, president and CEO of the World Shipping Council. “It will dwarf anything we’ve seen as an external cost on the industry.”
Trucking companies already are getting squeezed by higher labor costs, reflecting a shortage of drivers. The average hourly wage was $24.14 in June, up 23 percent since June 2009, according to the Bureau of Labor Statistics. For the airline industry, where fuel is expected to account for a quarter of operating expenses this year, companies are likely to pass along costs to passengers and adjust flight plans or plane loads, according to a survey by Macquarie Group Ltd.
Broader impact
The IMO announced the new emission standards in October 2016. If oil prices weaken in the next couple of years, the expected switch to diesel probably won’t have much impact on industries that depend on it, economists said.
But at least one economist, Philip Verleger at PK Verleger LLC, said the impact of the IMO rules could reach beyond transportation industries, especially if the rush boosts demand for crude and sends oil above $85 a barrel.
“It’s actions like this that cause big recessions,” said Verleger. “It’s not like it’s regulating one industry, it’s a whole series of industries.”
“It will dwarf anything we’ve seen as an external cost.” John Butler, World Shipping Council