Cristina Commendatore | FleetOwner
Dean Croke, principal market analyst for DAT Freight & Analytics, during Women In Trucking’s 2022 Accelerate Conference & Expo.

Diesel drives fleet costs, freight market shifts

Nov. 23, 2022
Even as freight demand has been strong, carriers can blame diesel as the culprit for a significant increase in their operational costs. But do they also have to worry about a diesel shortage, and what about asset allocation and demand in 2023?

DALLAS—Diesel prices have been a big part of the current freight market shift from spot to contract that the industry is experiencing today. And for the carriers who stayed afloat amid high operating costs and fuel prices, one industry analyst reassures they’ll make it through the long haul.

Roughly 90% of all loads that are moving on the road today are contract freight. Compare that to a year ago when it was 75% contract, 25% spot, according to DAT Freight & Analytics data, which sees contract rates up about $0.22 a mile year-over-year and spot rates down significantly.

“The reason why contract rates are up is because of fuel,” Dean Croke, principal market analyst for DAT Freight & Analytics, explained during Women In Trucking’s 2022 Accelerate Conference & Expo. “Diesel, which is now $5.31 a gallon compared to $3.73 per gallon this time last year, has been a big part of what has driven this freight market this year.”

Now in peak freight season, shippers are negotiating rates with carriers and brokers. And shippers are mainly the ones carrying the fuel surcharges, which are around $0.69 a mile today in the long-haul segment, Croke pointed out. For reference, on average, trucking fuel surcharges typically vary between $0.46 and 0.55 cents per mile, according to Route4Me.

Every carrier that DAT knows of has been out rebidding their contracts with large shippers and asking for more volume, Croke said, as contracts are coming in about 12% lower compared to last year.

The difference this time around, he said, is that shippers were burned by last year’s lack of capacity. Now, shippers are sending out their bids to a more select group of carriers that played nicely with them last year, Croke said.

“They are saying we can’t give you a rate reduction, but we’ll give you more volume,” he added. “For those in the operations world, more volume and lower rates means you can still make a lot of money.”

However, operating costs for everybody have gone up substantially, Croke said. He explained that it could potentially cost a long-haul carrier running 100,000 miles per year $2.07 per mile, after accounting for mpg, financing, and running possibly 10,000 empty miles.

“Spot rates this week are $1.75 per mile,” Croke said. “That’s a losing proposition for a lot of carriers. If you’re paid a fuel surcharge, then you would be OK, but a lot of carriers in the spot market don’t get into that fuel capture program because their broker is giving them an all-in rate.”

The silver lining: The U.S. Energy Information Administration’s (EIA) diesel forecast for this time next year is $4.23 per gallon.

On top of higher costs, is there really a diesel shortage?

FleetOwner asked Croke about whether there is an actual diesel fuel shortage in the U.S. Just last month, EIA announced there was just 24-day supply of diesel left, sparking fears of a supply crunch.

Croke explained that most diesel and crude oil in the country goes into the Gulf and then is sent to pipelines on the East Coast and West Coast.

“The farther you get away from the point of origin, the more expensive and the tighter demand gets,” Croke said. “In New England, we’ve got low inventory and less capacity. It’s also maintenance season, which gets lost on a lot of folks. This time of year, refineries go into maintenance mode before next summer, so you naturally see a decrease in capacity in terms of diesel.”

Croke also pointed to higher gas prices in Europe because of Russia’s war on Ukraine. What that means, he said, is factories in Europe that can transition between gas or diesel will switch their focus to diesel.

“So, that is creating more demand for diesel that would normally come here,” Croke explained. “Then, with the whole Russia problem, we’ve lost 700,000 barrels a day that’s not coming here. So, less capacity, maintenance season, and what’s happening in Europe is creating the situation we’re in because demand is really high, but inventory is low.”

“Are you going to run out of diesel in 23 days? No,” he added. “We always measure diesel inventories by how many days’ supply we have, but the notion that we might run out of diesel in 23 days would mean that every refinery in the country would stop working. That’s not the reality.”

Asset allocation, new truck orders, and freight demand

Record truck orders just came in, with new orders up 3% year over year. According to ACT Research’s latest State of the Industry: NA Classes 5-8 report, current commercial vehicle market conditions continue to prove resilient in the face of aggressive interest rate hikes.

“For now, business activity in the truck industry rolls on, seemingly unphased by higher interest rates,” Eric Crawford, ACT Research’s VP and senior analyst, said in a statement. “That said, we expect this dynamic to shift in [the first half of 2023], as the Fed continues its aggressive push to subdue inflation.”

“Cracks in the economy are becoming more evident: The impact of higher rates has begun to slow activity in the housing sector, and large layoffs have started in the tech sector,” Crawford added.

Crawford also highlighted the notable continued strength in Class 8 order activity. On medium-duty (MD) and heavy-duty (HD) more broadly, he shared, “MD and HD net orders were both robust, each notching their second strongest month of the year, both on a nominal as well as seasonally adjusted basis. That said, September was the strongest month of the year, so both took a step down sequentially in October.”

“You’ve got a record number of trucks being ordered now that are going to come out of the factory in six to nine months,” Croke said. So, fast forward to, say, August next year, what freight cycle will we be in? Hopefully we’re in the next upswing of the freight cycle, and we’ll need more trucks. But if you don’t, with all those new trucks coming into fleets, all the aged equipment will go into the used-truck market. The used-truck market will be oversupplied and used-truck prices will come way back down.”

See also: Topsy-turvy times for used trucks

Regarding asset allocation for next year, fleets should be aware that contract rates are starting to taper off, with dry van rates down $0.23 and refrigerated down even more.

“The refrigerated markets have absolutely tanked this year, mostly driven by the drought in California, where produce volumes are down,” Croke said. “Droughts in Arizona are also causing lower produce volumes. Citrus crop volumes have been decimated. Produce in general is down about 15%. The whole reefer market is down. Rates are down on the contract side, coming in about 16% lower and about $.06 per mile lower this year.”

Normally between Nov. 1 and Thanksgiving, refrigerated rates for long-haul rise, but this year, that’s not the case.

“We are seeing refrigerated carriers diving in and trying to pick up any load as opposed to hauling produce this time of the year,” Croke said.

Overall, Croke maintained that although the industry is still struggling to find direction in the freight market, demand, for now, remains strong. “Manufacturing numbers look pretty good,” he said. One of the things that I look for is what’s the demand for everything we move?”

More than half of ton miles in trucking come from domestic manufacturing, Croke noted. Imports, on the other hand, represent only about 10% of truckload volume. And in September, trucking moved 4.2% more freight than September 2021, he explained.

“So, when people start talking about how bad the trucking industry is, you’ve always got to look at the demand indicators of the things we haul and move, and things look pretty good,” Croke reiterated. “Sure, we’ve got some headwinds, and we’ll probably have a very shallow recession in the early part of next year, which may or may not happen. Some have argued we are already in it now that inflation is starting to ease and some of the CPI price indices are starting to come down.”

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About the Author

Cristina Commendatore

Cristina Commendatore is the Executive Editor of FleetOwner magazine. She has reported on the transportation industry since 2015, covering topics such as business operational challenges, driver and technician shortages, truck safety, and new vehicle technologies. She holds a master’s degree in journalism from Quinnipiac University in Hamden, Connecticut.