FTR Blog: Get Ready For The Return Of $3 Diesel


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A Major Shakeup

After several years of stability, there is now a major shake up to fuel prices. Crude oil prices are falling like a rock. Currently at $82/Barrel (or down $5 since I started writing this post, which means I have to type faster). This is down from the June average of $105.

The main reason for the drop is falling world demand. The economies of Germany, China, Japan, and Brazil are all experiencing weakness. The U.S. would seem to be the only economic superpower with any momentum.

Another big factor is the increase in U.S. crude production. While natural gas gets all the headlines, fracking has also freed up vast reserves of crude oil. So you have conditions of decreased demand and increased supply, leading to a large oversupply of oil. I don’t have to draw you a graph on this one.

The forecasts are for crude to drop to $76/Barrel. At that point you will see $3/gallon diesel coming soon to a truck stop near you. This would further pump up the trucking industry and be a positive for carriers and shippers alike. (Industry people claim fuel surcharges don’t recoup all the additional costs.)

Gasoline prices have already dipped below $3 in many parts of the country. $76 crude would result in pump prices around $2.60. This is a big deal because gas prices act like a tax on consumer spending. Cullen Roche of Pragmatic Capitalism estimates that for every $10 change in crude prices, consumer spending is impacted by $25 billion. So a drop from $105 to $76 would infuse billions of dollars ($70 billion annual rate) into the economy right before the holidays. Merry Christmas indeed.

And don’t give any credence to those articles claiming that lower crude prices are “not always a good thing.” Yes there are some negatives, but $70 billion additional spending annually is a great thing, period.

Effect on Natural-Gas Powered Vehicles

$3/gallon diesel prices would negatively impact the conversion to natural-gas powered vehicles (NGPV). Sales of NGPV Class 8 trucks had slowed this summer due to the new higher efficiency diesel engines elongating the payback period of NGPV. And this was at $4/gallon diesel. At $3, who is going to buy one? Who knows what other industries will be impacted by lower crude prices? This turn of events may have even fracked up the natural gas industry in the short-term.

More importantly, crude prices may not stop at $76/barrel. Reportedly, Saudi Arabia is running around slashing prices to customers like a used car salesman. Iran and Iraq are also doing the same thing while maintaining production levels. This is not the Arab Spring, but the Arab Spring-a-Leak. This could result in the end of OPEC as we know it. It was assumed that OPEC’s ability to control prices would diminish over time as U.S. and other countries increased production, but, like other world events, it could happen much sooner than expected.

What is the free market price of a barrel of crude? No one knows because it has been a long time since the market was “free.” How low can it go? Well, we may get a chance to find out, and the price may be way beyond expectations.

Author: Don Ake 
Don has more than 20 years of experience in the transportation industry, including 16 years with industry supplier Hendrickson International. Don has a very strong forecasting and market analysis background. While at Hendrickson Don developed forecasting models, methods and processes to accurately forecast Truck and Trailer builds and product demand. Don wrote an industry economic newsletter and gained a reputation as a top industry analyst. His industry supplier background provides a "customer perspective" now that he is with FTR.