Oil Economy

08 May 2008

Pick up nearly any general business magazine today and you will find articles analyzing the climb in oil prices and what it means for the economy. Our industry has especially good reasons to be obsessed with oil.

In April retail on-highway diesel prices reached an all-time high of US$ 2.316 per gallon. As a result, truckers and equipment operators were paying at least 20 % more for fuel than they were a year ago. That hurts, considering that for most trucking companies, diesel fuel follows labour costs as the second-largest cost component.

With profit margins already thin, many companies are trying to offset these costs by imposing a mileage surcharge. We have even heard rumors of owner-operators in the trucking industry who have chosen to park their equipment rather than operate at a loss.

It all boils down to supply and demand. Demand in many industrialized nations in Asia is growing at rates that rival that of the US. In particular, China's growing appetite for oil appears unlikely to slow; its robust economy grew 9.5 % in the first quarter of 2005.

Worldwide, diesel fuel is much more in demand than motor gasoline. US demand for diesel has grown at a rate of nearly 6 % in the last 18 months, compared to a growth rate of 1.8 % for gasoline.

To help meet the growing demand, OPEC announced at its March meeting in Iran that it had increased its production ceiling by 500000 to 27.5 million barrels a day and provided for an identical increase if crude prices did not stabilize. On 5 April, Federal Reserve chairman Alan Greenspan said in a speech that the growth in buffer stocks of oil, if sustained, could “damp the current price frenzy.” The next day, the US Energy Department released figures indicating that US commercial stockpiles of crude oil rose for the eighth straight week.

So far, oil prices have not taken much of a dip. Traders seem to be looking beyond the inventory numbers to the potential for trouble ahead. The International Energy Agency has estimated, that to meet worldwide demand, OPEC would need to produce 29.5 million barrels daily by the fourth quarter of 2005. The most OPEC has ever produced in a day is 30.3 million barrels. Many analysts wonder whether OPEC could produce nearly that amount over an extended period of time.

A year ago, rising energy prices hammered economies in the US and other countries. Business, however, has begun to make adjustments to help keep the economic expansion going, even if oil prices fail to decline. Businesses are using energy costs as a reason to increase prices, and this pricing power is extending to more and more industries.

As always, businesses must raise prices judiciously. The combination of higher energy bills and increased costs for other goods and services (after producers factor in energy costs) is curbing consumer confidence somewhat.

Nevertheless, the US economy has managed to grow almost 4% over the past year despite the escalation of crude oil prices over that time. This well balanced and growing economy seems increasingly resistant to shock. Our members in struggling economies are more at risk.

Regardless of where oil prices head, SC&RA members should look for ways to conserve. Smarter routing can result in big savings. Even proper tyre inflation can improve fuel economy. Of course, the Association wholeheartedly supports efforts by its Allied Industries members to create fuel-efficient equipment.

SC&RA also will work to ensure that governmental actions do not result in wasted fuel. For example, the Association opposes dramatic increases in tolls. Often, exorbitant tolls force truckers to turn to congested alternative routes, where they waste fuel while stalled in traffic.

We' re all in this together.

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