A labor strike in Venezuela, conflict in the Middle East and a bone-chilling win-ter are all blamed for record-high fuel prices this month. Although costs appear to be subsiding for the first time since the fall, heavy-equipment managers have their eyes locked on fuel rates.

As of March 17, the U.S. Dept. of Energy reported the average gasoline per-gallon price at $1.73 and diesel at $1.75. Retail gasoline reached $2.14 per gallon in California, while on-highway diesel hit $1.99 per gallon in New England. In February, diesel prices abroad rose as well, with the U.K. at $2.81 per gallon and Germany at $2.27.

Source: Dept. of Energy

"The costs of crude oil have been rising since mid-November," says Ron Planting, American Petroleum Institute analyst. Crude oil peaked the week of March 10 at $38 per barrel, then dropped down to $29 the following week, alleviating some concerns among construction professionals.

"We have adjusted our rates, and we hope we've captured it," says William Wagy, equipment manager for Watsonville, Calif.-based Granite Construction. "But right now, it's our slow season so it's not a huge issue yet." He adds that fuel costs will be more significant in late spring and early summer as infrastructure projects begin to pick up speed. "We had some unusual behavior for a while, but there's stability right now–prices seem to have leveled off," adds Paul Doran, vice president of operations for Essex Crane, an equipment rental house in Buffalo Grove, Ill.

Analysts have pinpointed disputes in Venezuela escalating since December as a primary reason for the recent spike. The South American nation is among the top four petroleum suppliers to the U.S. and is ranked fourth among oil exporters worldwide by the International Energy Agency.

Planting says the disruption now is "mostly cleared up," but capacity "is not back to where it was," noting that 200-million barrels were not produced during the strike. "Add to that an uncertainty in the Middle East and a cold winter," and the world had a perfect recipe for higher fuel prices, he says.

During recent cold winter months, the U.S. felt double-digit hikes in demand for distillate and diesel-fuel oil for heat. While Iraq only supplies about 2.3% of the U.S. oil supply, Planting says there is a "fair amount of uncertainty as far as how the conflict and disruption might spread" to other oil-producing nations. According to the U.S. Energy Dept., the U.S. now draws 60% of its oil supply from foreign sources.

On the home front, contractors are holding their breath. According to Wagy, grading machines are the fuel hogs of his earthmoving fleet, which comprises about 1,000 units. For the moment, he says Granite is more concerned about cost impacts on paving materials than on equipment (see p. 34). "We spend more money on asphalt than diesel fuel, so it has the bigger potential of affecting us," says Wagy.

The cost of mobilizing equipment is also a significant factor. Essex Crane, which serves contractors nationwide, owns 500 crawler cranes in its fleet. Many require nearly 50 trucks for transportation and often travel 2,000 miles between jobsites, says Doran. "We work with small and large transportation companies. The bigger companies are well organized, but sometimes the little guys exaggerate their prices based on fuel costs, so we have to go back and renegotiate," he says.

Fuel indirectly constitutes about 3% of Essex Crane's total expenditures, and rising fuel prices affect the company's administrative costs in working with trucking vendors. That creates a "domino effect" throughout the supply chain, with higher rental rates eventually falling in the contractor's lap. Most large-size contractors believe that today's fuel prices are important to monitor even though they may not represent "a drastic effect" on the bottom line, says Matt Servis, equipment manager for Black & Veatch, Kansas City.

Wagy has been trying to forecast the future by studying the past. "We started to see prices rising a good month and a half ago. I looked back 12 years ago during the Persian Gulf war and made my prognosis," he says. "The bottom line is that it may look similar to Persian Gulf war fluctuations, but I think it probably will be slightly worse." According to his analysis, prices doubled during the war period, then settled down by 50% for one year following the war.

But there already have been signs of relief following the onset of war in Iraq, when crude oil dropped below $30 per barrel. Although Planting still advises caution, he remains positive. "The price of crude oil has dropped dramatically in the past few days, and we're feeling that some of the uncertainty is being resolved," he says.

Click below to read more from First Quarterly Cost Report >>

Summary: Surge in energy prices causes cost headaches

Asphalt: Oil prices hammer asphalt paving costs

Labor: Laborers' union cracks into Florida concrete market

Indexes: Commercial building downturn crushes costs

Methodology: Analyzing inflation's split personality