A tank half empty

Dec. 16, 2014
There’s a downside to dropping oil prices

Trucks consume a lot of fuel. The vast majority of it is petroleum-based diesel and gasoline, and fuel is the single largest operating expense for any fleet.  So the current drop in oil prices is very good for the trucking business. Or is it?

Crude oil prices have fallen a jaw-dropping 30% in just the last five months, and refined fuels have closely followed suit. While forecasts didn’t predict such a deep decline, in hindsight it’s easy to understand.  First, the U.S. is awash in new oil sources.  According to the Dept. of Energy, U.S. oil production is at its highest level in almost 30 years.  And while domestic sources are up substantially, global consumption is being depressed by slow economic conditions in the major energy markets of Europe, Asia and South America.  Rising supply and dropping demand equals lower prices when it comes to a highly fungible commodity like petroleum.

Forecasting oil and fuel prices is a dangerous occupation, but the consensus is that these lower prices will stick around for at least the next year.  One of the most reputable analysts, the federal government’s Energy Information Administration, has just predicted that crude oil prices will stay well under $90/bbl. for all of 2015.  That’s $18/bbl. less than it was just this October. Although it’s rarely on a direct one-to-one basis, lower raw material prices do translate into lower refined fuel prices.

So if fuel prices have fallen sharply and seem likely to stay down for the next 13 or 14 months, what’s the downside for trucking with its big fuel bills? I may have to duck a lot of bricks thrown my way, but I say oil this cheap threatens the momentum alternative fuels have just started to gain and that’s bad for trucking in the long run.

Right now, the alternative fuel seen to have the most potential for commercial vehicle fleets is natural gas either in compressed (CNG) or liquefied (LNG) form.  The numbers I’ve seen indicate fleets able to make the expensive conversion to natural gas could get a three-year return-on-investment with crude prices at $100/bbl.

But at $80/bbl., the ROI becomes far less attractive, if not prohibitive, for a typical long-haul fleet.  Factor in the mandated fuel economy improvements that we’ll see over the next few years, and the ROI calculation for natural gas becomes even less attractive.  And with other alternatives like electric, hydrogen and hybrids already at a cost disadvantage to diesel and gasoline, they fare even worse in a cheap oil environment.

Despite all the initial investments in alternative fuels, it takes market demand to drive broad adoption, which in turn is the only way to eventually bring down costs and make the ROI work.  Without at least a reasonable promise of demand, the money for research, development and supporting infrastructure will dry up.

I don’t know what the future holds for the petroleum supply and whether it will remain abundant, but I do know the global push for greenhouse gas reductions is changing our relationship to fossil fuels.  And that’s why today’s cheap fuel is dangerous for this industry.  Trucking is going to need viable alternatives to petroleum, if not today, then in the not-too-distant future.  

  We can’t afford to slow down or abandon development of those alternatives just because oil is cheap for the moment.

About the Author

Jim Mele

Nationally recognized journalist, author and editor, Jim Mele joined Fleet Owner in 1986 with over a dozen years’ experience covering transportation as a newspaper reporter and magazine staff writer. Fleet Owner Magazine has won over 45 national editorial awards since his appointment as editor-in-chief in 1999.

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