Diesel Prices Continue To Soar

| December 5, 2007 | 0 Comments

When was the last time you spent $800 to fill up at the gas station?  If you’re a long haul truck driver it probably occurs more frequently than you would like.  John, an independent long haul trucker had this to say in his interview with the Sioux City Journal just a few days ago:

“You’ve got tires and oil changes, you’ve got lube jobs, all these things cost,” Litts says.  “Now, $3.50 for the fuel rate?  Nobody in their right mind can pay it.  It is crazy.  I pull in to fuel up, and now instead of $300 or $400, it is $700, $800 to fill this truck up.”

John is right, this is crazy.  The nightly news covers the rising price of oil everyday but they seem to have forgotten the impact on the little guy. Higher oil prices lead to higher gas prices that you and I become aware of every time we fuel up.

Rising oil also impacts diesel prices which isn’t as visible but still has a big impact on our pocketbooks.  Trucking infrastructure is well-developed in the United States.  And because everything US consumers purchase is hauled by trucks, rising fuel prices impact overall costs on everything from toothpaste to food (and the government says there is no inflation!)

Additional fuel costs need to be passed along to someone and that someone is you and me.

The prices of diesel really started creating a stir in 2005 when it passed $2.30 a gallon.  Some in the industry viewed this as a critical point where many truckers start to lose money.  Truckers traditionally measure their profits in pennies per mile driven and cutting costs is the only way to survive.  Nowadays diesel prices are topping $3.50 a gallon and profits in the industry are hard to find.

Clearly, making a living from trucking is very difficult.  While rising prices can sometimes be passed along to customers, the volatility of that price increase is not always perfect.  A few months back, many large consumers of fuel started adding surcharges to their invoices.  Everyone from cruise lines to airlines to global transportation companies are doing it now.

Yet, as you might have guessed, there is a problem.

Those that stick their customer with a fuel surcharge are sometimes still losing money.  Diesel prices have been moving up so quickly, 18% since September alone, that the fuel surcharge is not covering the actual cost. This problem has been exposed most significantly in the companies that make up part of the Dow Jones Transportation index.

The iShares Dow Jones Transportation Index (IYT) hit a new 52-week low just a few days ago.  This index is made up of companies like FedEx
(FDX), United Parcel Service (UPS), Norfolk Southern (NSC), Overseas Shipholding (OSG), and Ryder (R).  You will notice something very interesting in the index; shipping and rail transportation companies are doing very well, while the trucking companies are continuing to struggle.

As the cost of trucking rises I believe companies with large quantities of goods to ship will look to other options.  Shipping and rail are the most likely choices.  If you are going to invest in transportation companies I would stay away from those with large exposure to diesel and look to trucking alternatives like shippers and rail companies.

Another way to play this situation is through the use of puts.  If you anticipate diesel prices to continue to rise, as I do, you may look to establish puts on some of the companies with the greatest exposure to these fuel price increases.

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