Jamal Cotton knew his business model was busted when diesel, at about $4.90 a gallon in South St. Paul last week, was relatively good news.
“It just keeps getting harder and harder,” said Cotton, who stopped at the Stockmen’s truck stop with a load of steel pipe on his way from St. Paul to Kentucky. “As a small business owner, I pay the bill myself.”
Cotton recently paid $6.15 a gallon on the Pennsylvania Turnpike, while the average US diesel price last week was $5.25, up 44% since mid-January.
For independent truck operators like Cotton, the economic damage from rising oil and fuel prices is immediate and severe. For everyday drivers, the prices at the pump are frightening, but not necessarily a budget breaker.
But high fuel prices — for consumers and businesses — pose a greater threat to the US economy if they continue and rise even higher.
At least some of the fuel price increases are ultimately passed on to store shelves by hauliers and transport companies. And consumers could cut back on spending to offset higher gas prices.
“The challenge with energy is that it permeates the entire economy,” said Tendayi Kapfidze, chief economist at Minneapolis-based US Bank. “When prices are volatile, they can upset the delicate balance of the economy.”
US unemployment is low, wages have risen and consumer debt-to-savings ratios are relatively healthy. “Consumers have a relatively strong balance sheet, even compared to pre-COVID,” Kapfidze said. In general, “consumers have a lot of capacity to spend.”
However, inflation is running hot and biting into purchasing power. In February, the US consumer price index (CPI) rose 7.9% year-on-year, hitting a 40-year high. Energy costs rose 26% year over year, including a 38% increase in gasoline prices.
The Federal Reserve last week began the daunting task of taming inflation without stifling growth — a particularly tall order in a turbulent energy market. The Fed voted to raise interest rates for the first time since 2018, heralding several more rate hikes.
Motor fuels account for only 4% of CPI. But increases in the price of gas and groceries are particularly noticeable to consumers, as both are bought frequently.
“Buying fuel is a very visible form of consumption, so it can affect consumer confidence — and that confidence can affect consumer behavior in other areas of the economy,” Kapfidze said.
The reference price for US crude oil started 2022 at around $75 a barrel and shot up to $124 earlier this month before settling at around $105 on Friday. Gas prices followed, hitting a nine-year high in Minnesota and averaging $3.93 a gallon on Friday, up from $2.78 a year ago, according to the AAA. Nationally, the average price was $4.27.
Gasoline prices today are nowhere near the inflation-adjusted $5 per gallon recorded in Minnesota in 2008 and for a very brief period in 2013. The same is true for diesel prices, although unlike gasoline, diesel is now peaking in nominal terms in Minnesota and across the country.
At Stockmen’s Thursday, Cotton found $180 for three-quarters of a tank to power a Ford F-450 with a 24,000-pound trailer in tow. He owns the truck, as does the big truck being repaired in his hometown of Cleveland.
As an independent owner and operator, Cotton, 36, books freight from a variety of clients across the country. Like most owner-operators, he is at the mercy of high fuel prices. Shippers and brokers are not receptive to requests to share increases in fuel costs, he said.
“They’re going to say, ‘Yeah, diesel is at an all-time high, but we can just find another trucker,'” Cotton said. He’s cutting costs — buying fewer restaurant meals on the street, for example — and trying to book more rides to offset rising diesel costs. “It’s less profit and more work.”
Independent drivers who have long-term contracts with a trucking company can usually negotiate fuel surcharges. And drivers employed directly by trucking companies aren’t personally at stake because of rising diesel costs, said John Hausladen, executive director of the Minnesota Trucking Association.
Trucking companies often charge truckers with fuel surcharges, but when costs are rising as dramatically as they have been recently, “it’s very difficult for the trucking industry to bounce back,” Hausladen said. Even if the truckers accept a truck fuel surcharge, that cost will likely be burned into their finished goods. Someone has to pay.
Fuel surcharges are rising or appearing in several industries. Ride-hailing services Uber and Lyft added such fees last week. St. Paul-based Ecolab, a global cleaning products giant, last week introduced a temporary 8% to 12% energy surcharge on all goods.
Airlines have started increasing fuel surcharges on international flights. For domestic flights, high fuel costs will further push up ticket costs; Seating is becoming increasingly scarce as people travel in more comfort following a sharp drop in COVID-19 cases.
“Airlines have a huge demand for leisure travel — it’s at an all-time high,” said Bob Mann, an airline industry consultant.
Like the airline business, the hotel industry has been hit hard by COVID-related travel restrictions and is now seeing a healthy increase in demand. “We’re seeing it with advance bookings for the summer,” said Robert Kisabeth, chief operating officer of Willmar-based TPI Hospitality, owner of 34 hotels in Minnesota.
Kisabeth is keeping a close eye on gas prices, which can wreck consumers’ holiday plans if they get too high. At $4 a gallon, he’s not worried.
“As long as we don’t break the five dollar mark, we’re in good shape,” he said.
The current oil price shock has sparked speculation about a return to the stagflation – high inflation coupled with slow growth – that plagued the 1970s.
But Louis Johnston, an economics professor at the College of St. Benedict and St. John’s University, noted that the US economy has changed a lot since then. In 1970, gross domestic product was a 50:50 mix of goods and services; today, services make up at least two-thirds.
The number of barrels of oil it takes to produce $1 of GDP has fallen by 60%, he said. “I’m really frustrated with using the 70’s as a template.”
But gasoline costs may fundamentally change consumer behavior over the long term, Johnston said.
The gasoline price shocks of the 1970s ushered in an era of smaller cars. Then, after oil prices fell and gasoline prices remained relatively low for years, sales of trucks and sport utility vehicles skyrocketed.
“People reacted to that [lower gas prices] not by investing their savings, but by buying bigger vehicles,” Johnston said. Persistently higher gasoline prices could also shift consumers towards electric vehicles or gas-electric hybrids.
Glenn Marston Jr. of Stillwater bought a hybrid in 2012 and upgraded to an all-electric vehicle in 2016.
“I’m old enough to remember gas lines from 1979 and [the gas price] Shock from 2005 to 2008. I remember how that affected my family and as soon as I was able to get an electric vehicle, I got one,” he said. “I am now free of oil prices affecting my ability to travel.”
Minneapolis’ Ian Stade switched to an electric-gas hybrid in 2017, and like Marston, the switch was due to both climate change and fuel savings.
“Fuel costs in the US are cyclical and it seems like Americans have a short memory,” he said.
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