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Why Diesel Is Driving Up The Cost Of Everything - YouTube
Channel: CNBC
[1]
Drivers in gas burning cars
have been paying sky high
[4]
prices at the pump.
[6]
Gasoline was responsible
for about half of the
[9]
higher-than-expected rise
in consumer prices in March
[11]
of 2022.
[13]
But another fuel most
Americans will never use is
[16]
pushing up the prices of
goods and sending shockwaves
[19]
through the freight
industry.
[21]
The price of diesel is
probably the bigger headline
[23]
here. Price is absolutely
soaring.
[25]
Diesel hit its highest
recorded price ever on March
[29]
12th, 2022, shortly after
Russia invaded Ukraine.
[34]
Economists say the rise in
diesel prices is driving up
[37]
inflation everywhere.
[39]
Everything that we buy in
the grocery store, things we
[44]
get delivered to our home
are powered by diesel.
[47]
Diesel is key to businesses
trying to get things from
[51]
here to there. Businesses
are paying more.
[53]
It's going to cost us more
as consumers.
[55]
The spike is also hurting
large numbers of the
[57]
country's roughly 2 million
trucking companies.
[60]
The vast majority of those
are small businesses.
[63]
I've got lower profit
margins, because I've been
[65]
spending a whole lot more
money as far as on diesel
[68]
for roundabout, let's just
say for argument's sake,
[70]
let's just say I spend
$10,000 one week now at
[74]
these rates. I'm spending
about 17 to $18000 a week.
[78]
The freight industry is
vulnerable to frequent booms
[81]
and busts, and industry
insiders see another
[84]
bloodbath on the horizon.
[86]
We see when fuel surges as
much as it has over the past
[90]
couple of months -- that's
usually when we see a lot of
[94]
trucking bankruptcies
follow, because these small
[98]
operators that live
essentially on the cash flow
[101]
of their trucking
operations are not prepared
[105]
and don't have the balance
sheets or the cash position
[108]
to absorb these
instantaneous shocks to
[112]
their cash flow.
[119]
Diesel makes up more than a
quarter of the total energy
[122]
used by the transportation
sector.
[124]
The fuel is named for
Rudolf Diesel, the inventor
[127]
of the diesel engine, a
type of engine that uses
[130]
extreme compression to
ignite fuel.
[132]
Diesel engines run on
something called distillate
[135]
fuel. Like gasoline, it
comes from crude oil, but
[139]
diesel is heavier than
gasoline.
[141]
There are several types of
distillate fuel.
[144]
The one used in diesel
engines is usually just
[146]
called diesel.
[147]
Diesel engines produce more
low end torque than gasoline
[150]
engines, which basically
means the engine doesn't
[153]
have to work as hard to
deliver power.
[155]
It makes diesel engines
great for heavy duty
[157]
vehicles that have to tow
or climb.
[160]
Diesel engines also tend to
get far better fuel economy
[163]
per mile than gasoline.
[164]
For that reason, just about
every vehicle that moves
[167]
goods - ships, barges,
trains and trucks - all run
[170]
on diesel fuel.
[172]
It is also used in
construction equipment and
[174]
farm equipment.
[175]
Any time you see surges in
diesel prices, then the
[179]
trucking companies that are
responsible for moving those
[181]
goods end up having much
higher cost to move product
[185]
from point A to point B.
[187]
It's the fuel of the
economy. I mean, everything
[189]
groceries, hardware, store,
clothes, everything has via
[192]
truck and train.
[194]
You're talking about a
profound impact on on the
[196]
transportation networks,
the logistics, and it's
[199]
going to keep going up.
[206]
Russia is one of the world's
largest oil producers.
[209]
In 2021, Russia exported an
estimated 4.7 million
[214]
barrels of crude oil per
day.
[216]
About 2.4 million barrels
of that went to markets
[219]
across Europe. The kinds of
crude oil Russia produces
[223]
- medium to heavier - sour
crudes tend to be well
[226]
suited to producing
heavier, refined products
[229]
such as diesel.
[230]
European demand for diesel
has been a prominent factor
[233]
in the rising cost of the
fuel.
[235]
More than 40% of the cars
in Europe run on diesel.
[239]
In addition to its crude
oil exports in 2021, Russia
[242]
exported 750,000 barrels
per day of diesel to Europe.
[247]
That amounts to about 10%
of the region's demand.
[250]
New shipping fuel
regulations put in place in
[253]
2020 by the International
Maritime Organization
[256]
require that ships use a
form of fuel much closer to
[260]
the diesel fuel used by
truckers.
[276]
A lot of that is due to the
global energy crunch in the
[278]
fall of 2021, when Russia
curtailed shipments of
[281]
natural gas to Europe.
[282]
Also, countries such as
China, low on coal
[286]
inventories, began burning
more diesel for power
[289]
generation. Refinery
capacity has also been down.
[292]
Got a number of refineries
across the country in Canada
[296]
that are switching over to
biofuels.
[299]
And so they're kind of
offline. And on top of that,
[304]
coming into this period,
the inventories of diesel
[307]
were were thin.
[308]
There wasn't a lot in
storage.
[310]
The United States is
actually a net exporter of
[312]
diesel fuel. For example,
in mid April of 2022, the US
[316]
exported 1.74 million
barrels of distillate fuel
[320]
and imported just 154,000
barrels.
[323]
Meanwhile, prices for all
kinds of goods and services
[326]
have been rising for a
variety of reasons and for
[329]
quite some time.
[330]
What's happened in the
current period is two
[333]
things. The pandemic - so
the pandemic has scrambled
[337]
global supply chains,
created shortages for
[339]
everything from vehicles to
consumer electronics, and
[342]
that causes prices to jump.
[344]
And then more recently, the
Russian invasion of Ukraine
[347]
has caused disruptions to
oil, commodity markets,
[351]
agricultural markets, and
that's caused prices to
[353]
jump, particularly for
gasoline and, of course, for
[356]
diesel.
[357]
The spread in price between
diesel and gasoline was
[359]
about a dollar in March and
April of 2022.
[362]
That is a record high and
far greater than the 30 to
[366]
$0.40. That has been the
average over the last few
[368]
decades. Zandi calculates
that about 1/10 of the
[371]
acceleration in consumer
prices over the past year is
[374]
due to diesel costs.
[375]
So is about 17% of the
acceleration in the cost of
[378]
goods.
[379]
Typically, inflation is
about 2% per annum.
[383]
So you take your all the
things you buy, all the
[385]
goods and services you buy
and you look at the price
[387]
today compared to a year
ago, in a typical time, that
[389]
would be up about 2%.
[390]
So you don't even really
notice it.
[392]
But now inflation is 8%.
[394]
That's a big difference
between two and eight.
[395]
And you feel eight.
[397]
You can feel it in when you
shop in the grocery store.
[400]
You can feel it when you
fill your gasoline tank.
[402]
Zandi expects this to
moderate as the Federal
[405]
Reserve raises interest
rates.
[406]
The Fed's goal here now is
to kind of slow down the
[410]
economy's growth rate, slow
demand, and they do that by
[413]
raising interest rates.
[414]
That makes it more costly
to purchase a home, makes it
[418]
more costly to buy a car,
makes it more expensive for
[421]
businesses to invest and to
hire.
[423]
And that slows the growth
in the economy down and that
[427]
takes some of the steam out
of inflation inflationary
[431]
pressures.
[431]
But there is only so much
the Fed can do.
[434]
Most of the problem with
regard to inflation is
[436]
supply. It's the pandemic
supply chains, labor
[439]
markets. It's the Russian
invasion.
[442]
Fed really doesn't have any
control of any of that, so
[446]
they've got a tough job
trying to get inflation down
[449]
when they're working on a
problem whose causes are
[452]
independent of things that
they have control over.
[456]
Even if consumers see better
prices at the gas pump and
[459]
the grocery store, the
trucking industry will
[461]
suffer. As of February
2021, there were about 2
[465]
million trucking companies
in the United States.
[468]
The vast majority of them
are small.
[470]
More than 90% of them have
just six trucks or less.
[474]
97% have 20 or less.
[477]
There are a small handful
of large trucking companies
[480]
that can afford to partly
offset their diesel costs by
[483]
buying wholesale.
[485]
But most companies have to
buy fuel at the pump just
[488]
like any other driver.
[490]
When these prices shoot up,
the truck stops immediately
[494]
adjust the prices at the
pump to reflect that.
[497]
And then if prices go down,
those large trucking
[500]
companies at the wholesale
prices will move down.
[504]
But the retail prices that
are paid at the pump don't
[507]
tend to move really
quickly. The truck stops
[510]
keep them higher for
longer.
[512]
So those small trucking
companies that are buying
[515]
fuel at retail end up
paying much higher retail
[519]
prices than what your
larger trucking companies
[521]
do.
[522]
Companies are supposed to be
able to offset the cost of
[525]
diesel fuel increases with
diesel surcharges.
[528]
Fuel surcharges are
basically agreements paid by
[533]
companies that are using
trucking companies, the
[535]
shippers that are paying
trucking companies to move
[540]
their goods.
[541]
And the idea is that as
diesel prices move up and
[544]
down, trucking companies
can offset that increase
[548]
through these fuel
surcharge relationships.
[551]
This, again, favors bigger
companies.
[554]
Usually the larger trucking
companies are the ones that
[556]
have these fuel surcharge
relationships built into
[559]
their contracts. The small
trucking companies don't.
[562]
Small trucking companies
operate predominantly in the
[565]
spot market, and so they
basically are responsible
[569]
for paying for their fuel
out of whatever they charge
[572]
the customer and have to
eat any increases.
[575]
Whereas the larger trucking
companies are largely able
[578]
to pass those increases off
in fuel surcharges, which
[582]
offset their increases and
their exposure to fuel
[584]
prices.
[585]
Lyle Hankins runs Dow
Trucking with his wife
[588]
Latoya. Based in South
Carolina, he has about 16
[592]
trucks. The company has
good relationships with
[595]
companies that have
operations in South
[597]
Carolina, such as BMW and
Dollar General.
[599]
But when truckers are
returning from trips out of
[601]
state, they have to get
their loads on the spot
[604]
market through brokers.
[605]
You have to do a spot for
coming back from the
[608]
brokers. You don't receive
a fuel surcharge in most
[611]
cases.
[612]
Hankins doesn't buy
wholesale diesel.
[614]
The fuel pump pricing has
been brutal.
[617]
One day I was actually at
the pump with one of my
[620]
drivers and the guy was
changing the sign and the
[623]
guy across the street was
changing his sign.
[625]
So he went up 2 cents the
guy across the street went
[627]
up 3 cents. This guy
changed his sign up and
[630]
went up 4 cents. They both
looked at each other, gave
[632]
each other thumbs up, and
went up 5 cents.
[634]
I'm like, For real?
[637]
What about me?
[638]
The fuel spikes have been
just another one of the
[640]
challenges the business has
faced over the last few
[642]
years.
[643]
Nothing is stable.
[644]
Everything is always up in
the air.
[646]
Some loads get canceled.
[647]
Some loads never make it.
[649]
Some loads are a month and
a half out, and I might have
[653]
had to push it out another
two weeks just because of
[657]
logistical reasons behind
it.
[659]
There's just no rhyme or
reason to it.
[662]
Hankins has tried to expand
into new businesses to stay
[665]
afloat and grow.
[666]
He has taken on more
intermodal trucking jobs.
[669]
That is where shipping
containers are placed
[671]
directly on trucks.
[672]
He has bought more
equipment. He has begun
[674]
offering classes for people
trying to get into the
[676]
trucking industry.
[677]
Dow also has a roadside
service business.
[680]
He has even tried his hand
at some Web3 business ideas.
[684]
I know that sounds like
weird when you talk about
[686]
trucking industry and web3.
[688]
Well, it's a whole other
market that we hadn't really
[690]
tapped into. So now that
we've tapped into it,
[694]
despite a revitalization of
the trucking industry.
[697]
We actually have NFTs.
[698]
I mean, it's just different
ways of working so that you
[701]
can actually still sustain.
[703]
And now we're actually
moving things using
[705]
cryptocurrency versus
actually using the dollar.
[709]
Hankins said he is luckier
than some, including friends
[711]
of his, who are trying to
get out of the business.
[713]
I can afford to take some
losses here and there and I
[717]
can float my fuel prices.
[719]
But actually with the
losses that I'm taking and I
[721]
can still sustain, but
other people that I know
[725]
cannot because some of them
are newer and I just don't
[728]
have the capital to do so.
[729]
It is unclear when prices
will fall.
[731]
One petroleum analyst said
in April of 2022 that prices
[735]
could remain high for
another 6 to 12 months.
[738]
That is especially given
the likelihood of sanctions
[740]
on Russian oil.
[741]
It depends on how quickly
US producers can ramp up
[744]
production. They are
dealing with the same supply
[747]
chain shortages so many
other companies are facing.
[749]
While surges in gasoline
prices have sparked interest
[752]
in electric and hybrid cars
and SUVs.
[755]
Trucking industry. Insiders
say don't expect to see
[758]
large electric semi trucks
taking over the highway
[761]
anytime soon.
[762]
The reality is it doesn't
make a lot of sense for
[764]
trucking companies to go
invest in electric vehicles
[768]
because the infrastructure
isn't there.
[771]
And the equipment, the
trucks themselves have not
[775]
been proven out to be able
to haul freight around the
[779]
country and match the
performance or the unit
[783]
economics of a diesel
truck.
[785]
And we don't think it's
going to happen.
[787]
We think it's still a few
years out.
[790]
Countless supply shortages
have starved the global
[793]
economy since early 2020.
[795]
As with many other goods
and materials in short
[798]
supply, there are no
feasible alternatives to
[800]
diesel fuel in the short
term.
[803]
For now, diesel engines
will continue to move just
[806]
about everything, whatever
the cost of doing so.
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