June 30, 2022

Botu Linum

The Car & Automotive Devotees

Economy feeling effects of record fuel prices

6 min read

DALLAS — There is little evidence that fuel prices, which are setting records almost weekly, will drop anytime soon.

This has many economists concerned about the cycle of the supply chain, especially when it comes to commercial motor vehicles.

According to ACT Research’s latest release of the North American Commercial Vehicle Outlook, a mild recession may be on the horizon.

“We find ourselves in a turbulent environment, where still significant positive and increasingly negative economic forces are crashing into one another,” Kenny Vieth, ACT president and senior analyst, said. “With inflationary shocks emanating from Ukraine, the Fed’s task of engineering a soft landing has become increasingly challenging.”

He continued, “We believe downward pressures are building, and the probability of recession continues to grow. We think the probability of a mild recession is now nearly as likely as that of our base-case scenario. With the current head of steam that includes healthy consumer and business balance sheets, strong employment demand, and pent-up manufacturing sector activity, this inflation driven economic slowdown is on one hand somewhat unique. On the other, traditional recession predictors are in play: Fed rate hikes, high energy prices, negative exogenous events and falling equity valuations come to mind. We believe the odds of a recession materializing, in some form or fashion, are essentially 50/50 relative to our slowing topline growth into a modest freight recession base case.”

Rising prices at the pump are a key driver in the highest inflation that Americans have seen in 40 years. Gasoline set a record $5.10 national average per gallon over the weekend. Diesel has been at a record $5.70 per gallon, on average, for a few weeks now.

And unlike gasoline prices, diesel prices can directly affect the goods and services Americans rely on to live their daily lives.

Diego Davalos, owner of Houston Affordable Movers, told the Houston Chronicle that he’s had to double his transportation fee to help offset the $800 a day he spends fueling his moving trucks on the way to apartment complexes around Houston. But the increase to $140 from $70 is more than some customers can afford.

“We’re losing repeat customers,” he said, noting that revenue has fallen by about 15 percent year over year, “because we’re charging more than we did last time.”

Large companies such as tank barge operator Houston-based Kirby Corp. and Omaha-based rail company Union Pacific have contracts that factor in the fluctuating the cost of diesel, according to the Chronicle’s report.

Smaller shipping companies in Houston are working to do the same. JH Walker Trucking now charges fuel surcharges across the entirety of its business after recent diesel price hikes, said Houston Walker, the company’s chief financial officer.

Everyone seems to have a favorite villain for the high cost of filling up.

Some blame President Joe Biden. Others say it’s because Russian President Vladimir Putin recklessly invaded Ukraine. It’s not hard to find people, including Democrats in Congress, who accuse the oil companies of price gouging.

As with many things in life, the answer is complicated.

WHAT IS HAPPENING?

Gasoline prices have been surging since April 2020, when the initial shock of the pandemic drove prices under $1.80 a gallon, according to government figures. They hit $3 in May 2021 and cruised past $4 this March.

On Saturday, the nationwide average for a gallon ticked just above $5, a record, according to auto club AAA, which has tracked prices for years. The average price jumped 18 cents in the previous week, and was $1.92 higher than this time last year.

State averages ranged from $6.43 a gallon in California to $4.52 in Mississippi.

WHY IS THIS HAPPENING?

Several factors are coming together to push gasoline prices higher.

Global oil prices have been rising — unevenly, but sharply overall — since December. The price of international crude has roughly doubled in that time, with the U.S. benchmark rising nearly as much, closing Friday at more than $120 a barrel.

Russia’s invasion of Ukraine and the resulting sanctions by the United States and its allies have contributed to the rise. Russia is a leading oil producer.

The United States is the world’s largest oil producer, but U.S. capacity to turn oil into gasoline is down 900,000 barrels of oil per day since the end of 2019, according to the Energy Department.

Tighter oil and gasoline supplies are hitting as energy consumption rises because of the economic recovery.

Finally, Americans typically drive more starting around Memorial Day, adding to the demand for gasoline.

WHAT CAN BE DONE TO GET MORE OIL?

Analysts say there are no quick fixes; it’s a matter of supply and demand, and supply can’t be ramped up overnight.

If anything, the global oil supply will grow tighter as sanctions against Russia take hold. European Union leaders have vowed to ban most Russian oil by the end of this year.

The U.S. has already imposed a ban even as Biden acknowledged it would affect American consumers. He said the ban was necessary so that the U.S. does not subsidize Russia’s war in Ukraine. “Defending freedom is going to cost,” he declared.

The U.S. could ask Saudi Arabia, Venezuela or Iran to help pick up the slack for the expected drop in Russian oil production, but each of those options carries its own moral and political calculations.

Republicans have called on Biden to help increase domestic oil production — for example, by allowing drilling on more federal lands and offshore, or reversing his decision to revoke a permit for a pipeline that could carry Canadian oil to Gulf Coast refineries.

However, many Democrats and environmentalists would howl if Biden took those steps, which they say would undercut efforts to limit climate change. Even if Biden ignored a big faction of his own party, it would be months or years before those measures could lead to more gasoline at U.S. service stations.

At the end of March, Biden announced another tapping of the nation’s Strategic Petroleum Reserve to bring down gasoline prices. The average price per gallon has jumped 77 cents since then, which analysts say is partly because of a refining squeeze.

WHY IS U.S. REFINING DOWN?

Some refineries that produce gasoline, jet fuel, diesel and other petroleum products shut down during the first year of the pandemic, when demand collapsed. While a few are expected to boost capacity in the next year or so, others are reluctant to invest in new facilities because the transition to electric vehicles will reduce demand for gasoline over the long run.

The owner of one of the nation’s largest refineries, in Houston, announced in April that it will close the facility by the end of next year.

WHO IS HURTING?

Higher energy prices hit lower-income families the hardest. Workers in retail and the fast-food industry can’t work from home — they must commute by car or public transportation.

The National Energy Assistance Directors Association estimates that the 20% of families with the lowest income could be spending 38% of their income on energy including gasoline this year, up from 27% in 2020.

WHEN WILL IT END?

It could be up to motorists themselves — by driving less, they would reduce demand and put downward pressure on prices.

“There has got to be some point where people start cutting back, I just don’t know what the magic point is,” said Patrick De Haan, an analyst for the gas-shopping app GasBuddy. “Is it going to be $5? Is it going to be $6, or $7? That’s the million-dollar question that nobody knows.”

The Trucker Staff contributed to this report.

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Economy feeling effects of record fuel prices