Demand for Crude Oil Has Fuel Prices Pouring Over the Top
|Fuel Hogs. Earthmoving equipment burns more fuel than other machinery. (Photo courtesy of Illinois Dept. of Transportation)|
Energy markets showed early warning signs of inflation last October, when the price of crude oil reached more than $51 a barrel during regular trading on the New York Mercantile Exchange. Global price swings, blamed on labor unrest in some oil-producing nations, on top of tight supplies and high demand, sent nominal fuel prices soaring to their highest in history and their inflation-adjusted highest since the early 1980s.
A relatively calm winter seasonprice-wisefollowed by another record-setter in early April, has construction professionals on the watch for more price swings and making bid adjustments whenever possible. "At this point, it appears that the aggravated fuel costs have either been absorbed or subtly passed along to clients," says Karl F. Almstead, vice president of construction costs for Turner Corp. in New York City. Crude oil prices spiked to $58.29 per barrel April 1, falling to the low-to-mid 50s in June.
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Executives eyeing the energy markets are locking in rates as oil suppliers change prices on a more frequent basis. This is especially noticeable for heavy civil contractors that need fuel-thirsty machinery to perform earthmoving work, according to Steve Halverson, president of Halverson Construction Co. Inc., a road-and-bridge builder based in Springfield, Ill.
Hedging on oil supplies gives firms extra security during turbulent times. Dale Warner, corporate equipment manager for C.J. Miller LLC, Hempstead, Md., has started negotiating bulk fuel purchases for three-month windows. "We used to buy right on the rack price," Warner says. "Now weve locked in on a guaranteed price."
The economics of construction fuel add up fast. Halversons company is, among other projects, working as a grading and paving subcontractor for a $20-million, 6-mile highway job near Carthage, Ill. "We have two years to move 1.1 million cu yd of dirt," says Halverson. "Were looking at 1,000 gallons a day."
Similarly, C.J. Miller, an excavation and paving contractor, buys as much as 150,000 gal of fuel every month. That amounts to about 90,000 gal of off-road diesel, 48,000 gal of on-road diesel and 18,000 gal of gasoline, according to Warner. In an attempt to conserve energy, "We have purchased a lot more crew-cab trucks," he says, "The foreman now hauls all the people to the jobsite instead of just himself."
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Light, sweet crude oil started out the year around $42 bbl but has surpassed the $55-bbl mark several times since then. Many industry observers believe the $60- bbl threshold is coming soon. John C. Felmy, chief economist for the American Petroleum Institute, does not speculate on future prices but explains that crude oil prices "have been going up and down with a lot of volatility for the last three years."
Government analysts predict that the price of West Texas Intermediate crude, another price indicator for processed fuel and other petroleum-based products, will average $53 bbl through the third quarter and remain above $50 through year-end 2006. Thats enough to keep monthly gasoline prices above $2 per gal, analysts say. During this years summer construction season, average on-road diesel prices are forecasted at $2.22, according to the U.S. Energy Information Administrations Short-Term Energy Outlook published June 7.
Diesels retail pump price historically trails gasoline, but it now is as much as 10¢ more per gal and even higher in some regions. "We have seen the price of fuel just about double in the last 16 months," says Jim Gleason, president of Charles R. Gleason Co., an earthmoving contractor and aggregate producer in Northfield, Minn.
Felmy says demand for all types of diesel fuel has been "very strong" across the globe. Even though refiners have been producing record amounts of fuel and heating oil, "It has still been a struggle to keep up," he adds.
It is likely that constructions need for fuel "is going to remain high," says Ken Simonson, chief economist for the Associated General Contractors of America, Alexandria, Va.
Prices for off-road diesel fuel, which is not subject to road-use taxes, also are above-average this year. Preliminary figures for Mays Producer Price Index have diesel up 41% since last year. That indicates a considerable surge in the price of wholesale diesel fuel before taxes, according to economists. Over the long-term, todays prices are 129% higher than the same time frame in 2002, which was only 41% higher than the previous three years.
Energy inflation is pushing up the cost of other petroleum-based products besides fuel, such as bituminous roofing materials and liquid asphalt. The cost of moving freight and heavy equipment outfits are rising, too, forcing suppliers to tack on fuel surcharges, "especially for a large crane and transporting equipment," says Shaun Sipe, a project manager for Barnhart Crane & Rigging Co., Memphis, Tenn.
|(Photo by Paul Hartley for ENR)|
The fuel efficiency of capital equipment, which construction teams can likely control the most out of other variables in the petroleum price equation, promises to be a major source of savings. "Fuel is one of the highest operating costs on a machine, between 26% and 30%," says Randy Bushelli, customer support manager for Volvo Construction Equipment North America Inc., Asheville, N.C.
However, fuel efficiency does not come without significant upfront investment, equipment experts warn. "You have to keep upgrading," says Robert Andrade, former vice president of equipment management for Walsh Group,Chicago. "There are models out there where the cost savings will pay for a new machine."
Clean-air initiatives are helping. Newer diesel engines that run on cleaner fuel are becoming more efficient to operate, maintain and repair, experts say. High-horsepower units reached the market early this year on off-road machines and more are expected in January.
The U.S. Environmental Protection Agency issued a rule last year that drops the sulfur content in off-road diesel to 500 parts per million by 2007 and 15 ppm by 2010. EPA requires on-road fuel to be at 500 ppm, with a lower, 15-ppm requirement that kicks in June 2006 (ENR 5/24/04 p. 10). "This isnt your fathers diesel fuel," Felmy says. Ironically, the changes are expected to drive up the cost of fuel production by as much as 7¢ per gal through 2014, EPA estimates.
The regulations also bring more sophisticated engine technology to offset these increases, but many construction firms either do not know how to tap into their machines for fuel savings or are not interested in trying at all, equipment experts suggest.
Tracking fuel in the first place often is a challenge. The disconnect between the office and the field is a main reason why fuel tracking often gets lost among project...