How low can it go? Diesel at 6-year lows, falls below gasoline prices in about half the U.S.

Unless you’re a major oil company or in the oil exploration business, the precipitous fall in the price of crude oil is providing a major and unexpected financial dividend.

Truck shippers, in particular, are reaping a windfall as their fuel surcharges are dropping like leaves in the autumn breeze.

According to the fuel surcharges listed for the Old Dominion Freight Line tariff (and the same for most major trucking companies), LTL surcharges were 16.5 percent in mid-August, compared with 28.5 percent a year ago. ODFL’s truckload surcharge was 32 percent, compared with a whopping 56 percent a year ago.
 
Of course, California is the exception to this. Because the Golden State mandates special low-emissions fuel produced only in its refineries, California prices remain high. LTL surcharges in California were 18.5 percent and TL surcharges were 34 percent, according to the ODFL web site.
 
Diesel prices dropped to a six-year low at press time, falling more than 40 percent from year-ago levels. The drop was especially precipitous in July when prices fell 18 percent. For major consumers like trucking companies and their customers, this was like a Christmas bonus in July.
 
Because of the volatile nature of fuel prices, shippers are accustomed to tough negotiations with carriers of those surcharges. Now that diesel prices have fallen, shippers say more will be expected of them to keep those savings for their companies.
 
“The ongoing decrease in the cost of diesel certainly helps us from a financial perspective,”  Jeff Brady, director of transportation & logistics for Harry and David, the specialty gourmet food retailer, told LM. “However, after the several years of high fuel, many shippers began tracking diesel much more closely

“Now, as it drops, we are further challenged to develop the crystal ball of ‘What will diesel do?’ at an even more rapid pace. Furthermore, we have to now work hard to ensure that we don’t get greedy and assume fuel will stay this low,” Brady added.
 
Brady says shippers need to find a balance––monitor, review, forecast and reap the benefit but be aware that the situation is fluid. “There are two things you can count on––fuel will go back up and if it doesn’t, carriers will slightly increase rates to accommodate and continue to help recover margins in overall rate,” he predicted.

Because of the sliding nature of fuel surcharges, trucking companies say they roughly break even during periods of instability in diesel costs (which is not surprisingly, nearly all the time).

Trucking executives say privately they may lose a little money when prices spike upward (because of the usual 30-to-45-day lag in billing practices) but they give that right back when prices drop suddenly, as they have this year.
 
The Department of Energy’s weekly survey of national on-highway diesel was $2.617 in mid-August, compared with $3.843 a year ago. Even more remarkably after years of being more expensive than gasoline, diesel was cheaper than regular gasoline in roughly half the states, according to auto club AAA.
 
In the past, diesel had cost more than gasoline because U.S. refineries export much of their diesel output. That leaves less available for the domestic market, and federal taxes are higher for diesel than for gasoline. But as gasoline demand has risen around the world, refineries are running full out worldwide to meet that demand, resulting in a relative glut of diesel fuel, experts say.
 
Oil analysts explain that the drop in diesel would indicate a worldwide glut in crude oil is becoming a glut in refined products as well. This could keep diesel prices at these depressed levels well into 2016, they say.
 
The drop in diesel costs also is a result of heavy investments by refiners in recent years to make a range of products known as “middle distillates” that include diesel, jet fuel, heating oil and kerosene.
 
Refiners also are able to sell their diesel onto the global market, analysts say, further depressing prices. For example, Saudi Arabia more than doubled its diesel exports in May from April. China’s net diesel exports rose to 160,000 barrels a day in June broke a record, according to Citigroup Inc.
 
“All those people sitting around boardrooms for five years talking about how diesel is going to be the fuel of the future and how they’re going to invest in diesel, well, there you go,” Mark Anderle, director of supply and trading at fuel distributor TAC Energy, recently told the Wall Street Journal.
 
Whether diesel stays at these current depressed levels is an open question.  Diesel prices tend to rise in the fall and peak in the winter heating season, while gasoline prices usually decline after Labor Day. Another wild card is China, which set a record for diesel imports in June. The strengthening U.S. dollar vis-à-vis the recently devalued Chinese renminbi or yuan also is a factor in the price of crude, which is priced in U.S. dollars.
 
Truckload carriers in particular are benefitting from the lower cost of diesel. Because they run longer lengths of haul often in excess of 1,000 miles on average, TL carriers spend roughly 13 percent of their revenue on fuel – their second largest cost after labor and equipment. LTL carriers, on the other hand, run a hub-and-spoke system with average lengths of haul in the 500-mile range. A typical large LTL carrier spends about 7 or 8 percent of revenue on fuel.
 
Werner Enterprises, the nation’s fifth-largest TL carrier, spent $57.4 million on fuel in the second quarter, compared with $92.1 million in the second quarter of 2014. That $57.4 million was 10.1 percent of its revenue this second quarter compared with fuel being 17 percent of revenue in the year-ago quarter.
 
Contrary to what some shippers may think, the effect of dropping fuel prices does not go automatically to a carrier’s bottom line. Quite the opposite, actually.
 
Con-way Freight, the nation’s second-largest LTL carrier, is a good example. Con-way Freight has second quarter revenue of $916.9 million, a 2.5 percent decrease from last year’s revenue of $940.5 million. Con-way President and CEO Doug Stotlar told analysts on a recent earnings conference call that the revenue decline was primarily due to lower fuel surcharge revenue and lower tonnage, partially offset by improved pricing.
 
Whether this can last is an open question. U.S. oil production hit a record 9.51 million barrels a day in May. The U.S. now produces more oil domestically than it imports. Imports were 9.47 million barrels a day in May. Congress is now debating whether to lift the decades-old ban on exporting domestic oil, a practice began in 1973 to combat the Arab oil embargo. That looks like it will happen, at least in Washington allowing U.S. crude oil to be exported to Mexico.
 
With Iran set to normalize relations with the U.S. and the West, its oil fields can be counted on running full out, adding to the further worldwide glut. All this is extraordinarily good news for U.S. motorists, as well as all users of the transportation system.