Rising Diesel Prices in 2019
Over the past several years, the U.S. national average diesel price has been steadily increasing, according to the U.S. Energy Information Administration. From a low of $2.465 on June 26, 2017, prices increased to a recent high of $3.394 on October 15, 2018—an increase of 38 percent. Even after recent price decreases in late 2018 and early 2019, on-highway retail prices remain at levels over $3 per gallon. Due to new regulations, there is potential for even greater price increases starting in the second half of 2019.
Worldwide supply and demand determine crude oil prices, but recent environmental standards have a hand in rising prices as well, and will continue to do so over the next few years. The International Maritime Organization (IMO) has established tighter standards for sulfur content in fuel, reducing sulfur from 3.5 percent to 0.5 percent starting January 1, 2020. Sulfur content in fuel can be reduced by either adding fuel scrubbers (retrofitting vessels) or by including lower sulfur content fuel vs. traditional bunker fuel. This standard will help support the United Nations’ Sustainable Development Goals and the 2030 Agenda for Sustainable Development. And while these new fuel standards are focused on large ships, the trucking industry will also be impacted.
If all parties were to comply at a 100 percent rate, a total of 3 million barrels per day (bpd) would need to be either scrubbed or replaced with lower sulfur fuel in 2020. Having refining capacity for up to 3 million barrels per day of lower sulfur fuel diverted to marine fuel will likely have a bullish impact on all fuel prices. Put simply, IMO 2020 compliance = higher diesel fuel prices.
“Diesel fuel prices will almost certainly have upward pricing pressure in the back half of 2019 and 2020 as the maritime shipping industry shifts to cleaner fuels,” said Steve Larsen, Ruan's director of procurement and fuel.
Refiners are now expected to accelerate maintenance work normally scheduled for Fall in order to take advantage of expected higher margins in the last half of 2019, according to Bloomberg.
Monitoring, compliance, and enforcement of the new IMO standard is up to governments and national authorities of IMO members (all non-landlocked countries). Having individual member nations responsible for their own participation and compliance causes significant uncertainty, but initial estimates indicate a 70 percent compliance rate. This compliance will be driven primarily by the United States and other developed nations, as well as large shipping firms that are expected to comply regardless of operating location. Regardless of which countries opt to participate, the demand for lower sulfur diesel fuel will likely continue to increase.
According to a recent report by the American Transportation Research Institute, the average cost of operating a truck is steadily increasing, with fuel making up 22 percent of that cost in 2017. Compliance with the IMO regulations will result in upward pressure on this metric if diesel prices increase as expected.
There are additional upward diesel pricing pressures due to increases in state IFTA (fuel tax) rates, as well as discussions about increasing the federal IFTA rate as part of an infrastructure funding mechanism. Increased federal IFTA rates are supported by the U.S. Chamber of Commerce.
Carbon taxes levy fees on production, distribution, or use of fossil fuels based on carbon intensity, according to the American Trucking Associations. There are 25 states either promising or exploring carbon taxes, with eight states (primarily East Coast plus Washington) considered most likely to enact carbon taxes.
With IMO impacts expected plus upward tax pressures, diesel costs are expected to continue rising in late 2019 and into 2020. Ruan’s Fleet Services team will continue to monitor these trends and regulations to ensure that our customers are aware of and prepared for any changes in fuel prices and availability. As changes occur in the industry, Ruan is dedicated to consulting with our customers on the best solutions for their needs.