Diesel surged past $6.31 to a record high! “Transportation costs for everything” are out of control, and the second US inflation tsunami is likely to be completely ignited

The Zhitong Finance App notes that since the war broke out with Iran earlier this year, car drivers have been watching the gas prices with caution. Although the price of unleaded gasoline has largely avoided its all-time high, diesel was less fortunate — diesel prices hit a record high of $6.31 per gallon on Wednesday.

This is just another bleak milestone in the ongoing ascent. Economists and supply chain experts say that this round of price increases, starting with the transportation industry (trucking and railway companies), will eventually push up the prices of almost every commodity in the economy.

David Russell, head of global market strategy at TradeStation Group, said this is not surprising because diesel is the most commonly used physical input in the economy.

Freight carriers are the first to feel the impact, but if diesel prices remain at record levels, there will be many other losers — consumers and businesses.

The chief commercial officer of the Norfolk Southern Railway said at a meeting at Morgan Stanley on Tuesday that in California, the price of diesel has reached $8.

Consumers have already tasted ahead of time what might happen next through higher gas prices at gas stations. Jeff Leonard, vice president of media and strategic communications at the American Convenience Store Association, said that currently driving up gasoline prices is not only the price of crude oil, but also the price of diesel. The cost of transporting gasoline to gas stations is the main driver behind the continued rise in oil prices.

Leonard said, “Higher transportation costs add a few cents more to the cost of selling fuel — the same goes for credit card processing fees charged as a percentage. The higher the price, the higher this fee.” Retailers face a difficult choice: whether to absorb these increases on their own or pass them on to gas station prices.

“Currently, they are absorbing most of the costs, which usually happens when wholesale prices and costs rise drastically. Now, retail gross profit has been reduced by about 15 cents per gallon, which is usually their net profit margin,” Leonard said.

COST.US (COST.US) recently decided to limit the amount of engine oil that members can buy. The price of engine oil is affected by the crude oil market and refining capacity.

Ship4WD CEO Kalmit Glik said that diesel is the kind of price that no one pays attention to and is not detected until it has entered the cost of everything. Ship4WD is a one-stop digital freight forwarding company and a subsidiary of Israeli shipping giant ZIM (ZIM).” “It infiltrates freight, agricultural machinery, takeout delivery, and home heating, and anyone who runs into a truck at some point during transportation cannot escape it,” Glick said.

The cost of diesel is transmitted throughout the economy and eventually into your bank account, and it may take some time.

“The consumer was the last to feel it, but it wasn't easy at all,” Glick said. It's reflected in grocery prices, delivery fees, and any seasonal item that relies on fast truck transportation, usually a few weeks after prices soar and surcharges are passed through the supply chain. It's different from gasoline — as soon as gasoline rises, drivers can immediately feel the pain at the gas station,” Glick added.

“Truck drivers have been hit most directly, especially many self-employed people, who are unable to adjust quickly when costs rise.” Smaller players may be squeezed out of the market, and capacity will then be withdrawn, which in turn will push freight costs even higher. It's not a linear process,” Russell said.

However, if consumers plan to travel this winter, they may pay more for it.

Russell said, “Travellers will face higher holiday ticket prices because aviation fuel is similar to diesel.” “The rise in diesel prices will spread to the entire economy, and consumers will face rising costs for common goods transported by truck and services such as home improvement,” he added, pointing out that the latest Producer Price Index (PPI) report shows that everything from packaging materials to circuit boards is facing price pressure.

“The longer diesel prices remain high, the list of affected goods and services will only grow longer,” Russell said.

The cost of heating oil is likely to soar this winter

Home heating oil is widely used for home heating in the northeastern United States, and its price is highly linked to the price of diesel because the two are made from the same raw materials.

Mark Wolf, executive director of the National Association of Energy Aid Directors, said that if prices remain at current levels, household heating oil users may have to pay up to 31% more after the winter.

But that's not all,” he said. “Households will suffer a triple blow: heating oil first, then high fuel prices that everyone must bear, plus the distribution of all products depends on diesel, so the average household will really struggle,” Wolf said.

Wolf's organization has been lobbying Congress for additional funding for federal heating aid programs, but he said that since Congress adjourns until November, this seems unlikely to happen.

“Unless states step in, low- and even middle-income families will face serious difficulties. Everything is so expensive that families can't afford fuel without making major sacrifices,” Wolf said.

One possible lifesaver is this year's super El Niño event — the US National Weather Service predicts that temperatures in the Northeast will be much higher than normal for the season.

Steve Blau, chief supply chain strategist at supply chain software provider Infios, believes there is still room for further price increases.

“There are many factors that influence prices. “The decline in refining capacity in the Gulf of Mexico states, combined with the shutdown of most Russian production due to the war in Ukraine and the attack on Saudi oil pipelines, created a 'perfect storm',” Blau said.

He said that any other unforeseen supply disruptions, such as the end-of-season hurricane or another geopolitical event, could push prices higher, but given market and geopolitical volatility, many experts are unwilling to make clear predictions about further increases.

Saudi Arabia is taking steps to put more oil into the market, which lowered the price of crude oil on Thursday.

Why is the price of diesel so high, and why is it difficult to fall back

Jack Buffington, an associate professor of supply chain management at the University of Denver, said that although oil prices are largely under control, the reason why diesel prices have skyrocketed is not because crude oil prices are under pressure, but because of insufficient global refining capacity.

“Oil distribution has become a problem due to the blockade of the Persian Gulf and Red Sea, but the impact is not as severe as the loss of refining capacity in Russia and the Middle East — Russia in particular,” Buffington said, pointing out that almost 100% of the world's available refining capacity is currently being used.

“This does not mean that 100% of the world's production capacity is working, but rather that 100% of undamaged production capacity is running. In other words, about 20% of the world's production capacity is discontinued, which is where the bottleneck lies,” Buffington said. But even if conflicts around the world were to end today, prices would not begin to drop significantly.

“Some people mistakenly believe that the price of diesel will drop once the actual exchange of fire stops, but this is not the case considering net refining capacity,” Buffington said, adding that it may take a year or more before the price falls back to the $4 level.

The biggest losers right now are vehicle carriers, particularly small companies and individual car owners and drivers.” “Large carriers are often better able to protect themselves through fuel surcharge mechanisms,” Blau said. Shippers that don't have fuel protection clauses in their contracts — manufacturers, retailers, and distributors — also end up paying more when carriers increase freight or fuel surcharges.

But large trucking companies were not immune to the impact. Trucking giant J.B. Hunt's chief financial officer Brad Delco said the company experienced “the most drastic and abnormal fuel price fluctuations” it had ever seen and record diesel prices, which dragged at least $10 million in profits. The company warned that future profits would decline due to the adverse effects of diesel.

“Farmers will be hit hard by high prices, as transporting fertilizer and crops, and operating tractors and combines will require extensive use of diesel,” Blau said. These costs are hard to pass on,” Blau said. This has become a major disadvantage for the Republican Party in the midterm elections in agricultural states.

Construction, public transportation, and food delivery are all likely to be crushed by higher prices. The construction industry is particularly vulnerable, as all heavy machinery that consumes commodities such as cement and gravel is driven by diesel.” They may also be squeezed due to the need to complete the work at the contract price,” Russell said.

Blau said shipping companies will try their best to adapt — reassess routes, carriers, modes of transportation, inventory and delivery priorities because “every mile counts” when diesel gets that expensive.

He said that simply “absorbing higher costs on your own” is not a winning business strategy.

Glick said there will be a handful of winners in this round of soaring diesel prices. One of them is refiners with strong distillate margins, which benefit from widening cracking spreads — that is, the difference between crude oil prices and wholesale prices of petroleum products.