Q&A: Tips on how to manage today's diesel

As a fuel supplier, what are the biggest changes you've witnessed over the course of this year?

The biggest change has been watching small and medium-sized businesses, trucking operators among them, absorb fuel costs they can't pass along. Diesel prices have nearly doubled since January. For a 10-truck fleet, that can mean roughly $16,000 more per month in fuel expenses compared with the end of last year, depending on how much fuel they’re using.  

Some operators are running routes at a loss because they can't afford to lose customers. Others are cutting back on fuel purchases to preserve cash flow. For example, one of our customers with a 5,000-gallon tank is now buying just 1,000 gallons at a time rather than filling it. 

These owners are some of the most resilient people I've worked with, but there's only so long they can absorb these costs before something has to give.

What are you seeing right now with wholesale diesel prices? Do prices at the pump typically lag wholesale?

The wholesale market has experienced extreme volatility this year. We've seen our purchasing price move 20 cents or more in a single day more than 30 times, including twice in the past three days.

And yes, retail prices generally lag wholesale movements, although the timing varies by market and retailer. When wholesale prices jump, stations may still be selling fuel purchased at an earlier price. As they replenish inventory, those higher costs work their way through to the pump.

The reverse can happen when wholesale prices fall. That's why a drop in crude oil or wholesale diesel doesn't necessarily mean truckers will see immediate relief when they fill up.

What is your outlook for diesel prices? What would it take to bring them down?

The futures market is pricing some relief into the winter, but that's an expectation, not a resolution of the supply problem, and this year has shown how fast expectations change. 

Global disruptions involving Russia and the Middle East have tightened refined-fuel supplies, and the winter season brings additional pressure. Diesel and heating oil are closely related distillate fuels, so increased heating demand can put further strain on available supply.

Government measures, such as emergency reserve releases or temporary regulatory relief, may help in the short term—but their impact depends on how much additional usable supply they make available. Sustained relief would likely require some combination of improved refined-fuel availability, easing geopolitical disruptions and lower demand.

Prices also come down if businesses and consumers are forced to cut back because fuel is too expensive, and that's hardly the kind of relief the trucking industry wants. 

With price shocks seemingly becoming the "new normal," how should trucking operators think differently about fuel volatility?

The question operators need to ask is what their business looks like if diesel stays at these levels.

For many fleets, fuel is their second-biggest expense after payroll, yet it's often managed with far less predictability than payroll, equipment or insurance. Businesses budget those costs months ahead, while fuel is frequently left exposed to whatever the market does.

The first step is understanding exactly what they’re paying. What's the price above the wholesale benchmark? Does the supplier's pricing move with that benchmark in both directions? And what are the payment terms actually costing them?

Operators also need to understand where they're exposed. A fleet with a fuel surcharge that adjusts regularly is in a different position than one running fixed-rate contracts or dedicated routes where fuel increases come directly out of its margins.

Once they understand those costs and exposures, they can make better decisions about purchasing arrangements, pricing and whether a fuel-management program makes sense.

Is there any way small motor carriers could lock in fuel prices rather than absorbing market swings?

Yes. A fixed-price program locks the price on part of the fuel a fleet knows it will burn.

The key is to start with the gallons where the business has the greatest exposure, such as work performed under fixed-rate contracts or agreements where fuel surcharges don't fully cover increases. Operators don't necessarily need to lock in everything. They can build a position gradually over several months rather than committing their entire fuel volume at one price.

There are trade-offs. If market prices fall below the fixed price, the operator may end up paying more than they would have on the open market. That's why the goal should be cost certainty and margin protection, rather than trying to predict or beat the market.

Another option is a capped-price arrangement, which establishes a ceiling on the benchmark for a premium while allowing the operator to benefit if market prices decline.

The ones that work are run as a program, with someone watching the position and adjusting it as the market moves, not as a one-time contract. That's the question to ask whoever offers you one.

For owners of small trucking businesses struggling with high fuel prices, what is one actionable step they can take to manage costs right now?

Start by calculating what each route and customer is actually costing you at today's diesel prices.

Some smaller operators are holding onto business that may no longer be profitable because they're concerned about losing the customer permanently. That's understandable, but they need to know where they're making money and where they're absorbing losses.

Look at your actual fuel consumption, including empty miles, and compare that expense with what you're recovering through rates or fuel surcharges. If the numbers no longer work, have that conversation with your customer now rather than waiting for another price increase.

You can't control where diesel prices go next, but you can understand where your margins are being squeezed and make more informed decisions about the work you take on.