Truckers: Don't Fear Higher Diesel Prices

 |  Includes: USO
by: Dr. Bill Conerly

Higher fuel costs are perennial worries for trucking company leaders, but the concern is quite overdone. The most likely trigger for higher diesel costs is stronger economic growth -- which is good for truckers.

The most likely cause of a future increase in world oil prices, and thus diesel fuel prices, is stronger growth of the global economy. Asia is likely to continue growing. The optimists about China expect growth at a rate of 10% or more, while the pessimists think that growth could fall below 7%. Either way, China will be burning more oil. That's also true for major Asian economies, such as India, Indonesia, and others.

Growth in the developed world is less certain. Europe is in recession now, with major uncertainty about the timing of its recovery. American economic growth is light to moderate. Japan's economy is stagnant still.

Going back to basic supply and demand, prices can rise for either of two reasons: reduced supply or higher demand. Reduced supply is genuinely worthy of worry, especially if it comes suddenly from a Middle East crisis. Given the difficulty of predicting international politics in the Persian Gulf region, a supply cutoff is simply a risk to be kept in mind. The previous two oil disruptions, in 1973 and 1979, caused both higher fuel prices and reduced demand for trucking here in the United States -- double whammies for the industry.

Supply of oil could also fall due to declining production, an idea popularized under the label "peak oil." The concept began with an engineering fact of life: that the typical oil well has a falling production rate over time. This truth was erroneously applied to global oil production, totally ignoring the role that price plays in exploration and development of oil fields. It turns out that when oil prices are high, companies do more exploration and drilling. New technology is developed faster when prices are high. As a result, the supply of crude oil hit an all-time record high last year. No, we are not running out of oil in any meaningful sense.

At the current pace of economic growth, oil demand is rising about as fast as supply, meaning that prices are roughly stable. If prices were to rise sharply for reasons other than a Persian Gulf supply choke-off, it would be because of strong economic growth around the world. And such economic growth is good for truckers because it would stimulate demand for transportation services

Fuel costs are most likely to hover in the low $4 range. Trucking executives should do contingency planning for two possibilities. On the downside, worry about an oil supply disruption that both pushes fuel costs up while trashing demand for transportation. On the upside, consider the possibility of global economic strength, pulling demand upward at the same time that fuel prices move higher.

Truckers also should look at conversion to natural gas, as we discussed in a previous article, "Convert to Natural Gas."