Hours-of-service reform, low-sulfur fuel mandate threaten economy
Many would suggest that recent economic recessions in the U.S. have been caused by external shocks to the system from people who weren't direct participants in our local economies. I think of them as faceless demons wreaking havoc on the economy. This time, however, I think the faceless demons may be us. The federal government has put forth two separate proposals that threaten not only to reduce economic growth but also to cause a recession: DOT's hours-of-service rules and EPA's mandate for low-sulfur fuel (5 ppm).
Let's look at hours of service first. The plan that has been put forth is nothing less than an edict to completely overhaul the operating characteristics of our industry. In its current form, the proposal is not in the bes t interests of truck drivers, the general public or the economy in general. But for now, let's focus on its effect on the economy.
In its efforts to distinguish among the different requirements for different transportation services, the Federal Motor Carrier Safety Administration (FMCSA) divided drivers into five categories. But this doesn't go nearly far enough in recognizing the myriad alternative services provided to shippers in today's environment.
In fact, to meet the requirements of the proposal, we'll need many more drivers than the 49,000 estimated by FMCSA. Not only will this make the driver shortage even worse, it will also increase highway congestion.
But even more critical is that fact that penalties tied to non-compliance are so severe that carriers will avoid doing so. Freight will be delayed, and production or even final sales lost because there's not enough inventory. Manufacturers and distributors will have to increase their investment in idle inventory to avoid coming up short. And all at the expense of capital that would otherwise be used for investment, wages and R&D.
During normal economic cycles, it will take longer to wean excess inventories from the system, leading to a deeper economic decline than if inventories were leaner.
And we haven't even touched on the cost of additional equipment, drivers and maintenance. A sure recipe for inflation.
The second demon is EPA's most recent low-sulfur fuel mandate, which calls for a 95% reduction in the sulfur content of diesel fuel.This will likely mean significant disruptions in fuel availability, cost and inventories. Given the high cost of building refineries, we're stuck with present capacity, which means only marginal ability to adjust volumes and product mix.
Even now, some refineries are having trouble meeting the demand for specific fuels in EPA target zones. Consequently, fuel-quality requirements in those areas have been relaxed somewhat, at least temporarily.
But this might not be such a reasonable solution under the new rules. The exhaust and combustion equipment that would be in place for use with the lower-sulfur fuel (5 ppm) would be rendered useless with even a temporary introduction of fuel with a higher sulfur content. In fact, the fuel's entire distribution system would also be contaminated and would have to be totally purged of the higher sulfur fuel before it could be used again.
Another problem is that about one-third of the incoming crude oil has such a high sulfur content to begin with that refining it to a 5-ppm sulfur diesel would be far too expensive.
The wide-ranging financial impact of these regulations would make it hard to avoid a significant downturn in the economy.