Why truckers aren’t jumping for joy at $2.37 diesel

Cheaper fuel would seem like a godsend for businesses in the transportation world. But even with gasoline and diesel at multiyear lows for this time of the year, low prices are a mixed blessing. Also in this issue: An early note for propane customers who are already thinking ahead to next winter.

Elusive Savings

It takes a lot of diesel fuel to haul raw materials and finished goods around the country. So you might expect trucking companies and railroads to be jumping for joy now that diesel is averaging a mere $2.37 per gallon at fueling stations. That compares with an average of $2.87 per gallon one year ago. From 2011 until 2014, diesel averaged close to $4.

But cheap fuel isn’t necessarily a savior for the trucking industry. Bob Costello, chief economist for the American Trucking Associations, says that on average, fuel is the industry’s second-largest operating cost. But the big slide in diesel prices doesn’t herald a financial windfall, he says, since trucking companies typically pass 60% to 70% of their fuel costs on to their customers in the form of fuel surcharges. That means the average trucking firm is only “on the hook” for a relatively small share of the diesel its trucks burn, which limits the upside from cheaper diesel.

Low pump prices are a double-edged sword for truckers. Though saving on the cost of keeping their engines running, many truckers have been hit hard by the same factor that has brought down the price of diesel: The swing from boom to bust in the U.S. oil industry. Up until recently, truckers in places like North Dakota and Texas were doing a good business delivering the pipes, frack sand and other materials needed to drill and hydraulically fracture an oil well in fields such as North Dakota’s Bakken Shale. Then the frenzy of drilling unleashed enough new oil output to send prices plummeting. Now, says ATA’s Costello, the plunge in drilling has idled many truckers who are no longer needed to haul equipment and material to new wells.

Freight railroads face a similar dilemma. According to industry sources, railroads are paying 29% less for diesel this year than last year. And fuel typically represents the second- or third-largest operating expense for freight rail. But just as with trucking firms, railroads are suffering amid the decline of commodity prices in general and oil in particular. Data from the Association of American Railroads shows that trains hauled 20% less oil and petroleum products this May than in May 2015. (The massive 30% drop in coal tonnage hurts even more.)

And unfortunately for the railroads, other types of freight aren’t filling the gap left by declining commodity volumes. For instance, railroads have handled 2.1% fewer shipping containers so far in 2016, compared with the same period last year. “Most economists think the economy has picked up in the second quarter from the dismal 0.8 percent growth in the first quarter,” says AAR Senior Vice President of Policy and Economics John Gray. “But so far, railroads aren’t seeing much of it.”

Even public transit is lagging a bit. After rising briskly in recent years, total transit ridership growth slipped to just 0.35% in the first quarter of 2016, compared with Q1 of 2015. Many of the nation’s buses and commuter trains run on diesel, so they benefit from cheaper fuel costs. But with the price of gasoline down more than 40 cents per gallon from a year ago, it’s not surprising that commuters are driving more. Through the first three months of 2016, total miles driven in the U.S. was up a sizable 4.2% from the first quarter of 2015. That likely means that the clearest beneficiaries of cheaper fuel are the businesses that cater to drivers: Mechanic shops that repair the wear and tear that comes with driving more, tire makers and convenience stores with gas pumps. Their motorist customers have more cash in their pockets after fueling up and can thus afford to also grab a sandwich or a soda (which are far more profitable for the stores than gasoline is).

Propane: Less of a Bargain Next Winter?

Homeowners and businesses that heat with propane probably enjoyed last winter’s prices. At the end of the season, the average retail price paid by residential propane users hit $2.01 per gallon: 28 cents cheaper than in the previous year. The combination of low oil prices and a massive stockpile of propane in storage, plus a mild winter in the East, kept a tight lid on propane prices.

Propane stockpiles are still bulging. In fact, they ended the winter at their highest level ever for that time of year and are now on the rise. But stocks aren’t increasing nearly as rapidly as they did last spring, when the storage level grew by 25 million barrels from mid-March to early June. This season, the build has been on the order of 15 million barrels, a sign that propane output has probably slackened along with the broader slowdown in oil and gas production. The U.S. is also exporting more propane now than a year ago, which should tend to slow the rise in domestic storage levels.

There’s no question that propane will be abundant by the time chilly weather returns this fall. And that should mitigate any significant price rise. But stockpiles probably won’t return to the record amount reached last autumn. And with the shift in the global weather pattern El Niño to La Niña under way, the odds of another extremely mild winter are declining. So propane users would do well not to bank on a repeat of last winter’s bargain basement prices.