‘Science Fiction’ Diesel Crisis Hammers the Economy’s Transport Backbone

Transportation companies that serve as the lifeblood of the U.S. economy are raising alarms as record diesel prices drive up operating costs. The fuel powering trucks and trains reached an all time high of around $6.31 per gallon on Wednesday, according to AAA.

Diesel prices have surged more than 70% from a year ago. Analysts cited the supply shock created by the U.S. war with Iran as the reason for the sharp increase.

The price movement is creating pressure across transportation businesses that depend heavily on diesel. Executives from trucking and railway companies described unusually volatile conditions while speaking at an industry conference hosted by Morgan Stanley.

J.B. Hunt finance chief Brad Delco offered a stark assessment of the fuel market. “We have seen some of the most radical and abnormal swings in fuel prices that I think we’ve ever seen,” Delco said.

Delco said to expect a drop in earnings of between 5% and 10% from the second to third quarter because of higher costs. That warning was followed by a steep market reaction.

Shares of J.B. Hunt fell more than 13% during Wednesday’s session. The decline ranked among the stock’s worst days since the trucking company went public in 1983.

The broader transportation sector was also under pressure. J.B. Hunt was the biggest loser in the Dow Jones Transportation Average, an index that also includes airlines and rideshare providers.

Those diesel related price pressures could become even more severe in the coming days, according to Patrick De Haan, head of petroleum analysis at price tracker GasBuddy. He said the national average could move above $6.50 within the next two days.

Some Midwest states face the prospect of even higher prices. De Haan estimated that diesel could reach $7 per gallon in Michigan, Ohio and Illinois in the coming days.

California has already moved far beyond those levels. AAA found that the state’s average price for a gallon of diesel had surpassed $8 after climbing almost 20% in the last month alone.

Claude Elkins, chief commercial officer at railway transporter Norfolk Southern, compared those prices with something outside ordinary experience. “We’re talking about $6 diesel, but out here, it’s $8 diesel, we noticed on the way in, which is like science fiction,” Elkins said Tuesday at the Morgan Stanley conference in Laguna Beach, Calif.

Elkins said he keeps a “very cautious eye” on fuel prices and discusses what those levels will “mean for the economy.” Transportation services added $1.9 trillion to the U.S. economy in 2024, according to the Bureau of Transportation Statistics.

That contribution represented more than 6% of the country’s total enhanced gross domestic product. The sector’s size gives transportation executives reason to watch the economic consequences of record fuel costs closely.

“That certainly is something that we have to keep our eyes open to,” Elkins said. “Ultimately, over some period of time, that’s going to be a drag on the consumer out there.”

Retail sales have so far shown resilience despite inflationary pressure linked to energy. Sales rose 1.2% from July to August, while spending excluding autos and gas stations grew at its fastest rate in more than a year.

Still, the record setting increase in diesel prices is colliding with the fall harvest season. Jacob Aiken-Phillips, head of consumer and retail research at Melius Research, said the combination means costs will balloon for producers of crops including corn and wheat.

Economists have warned that higher input costs can eventually produce sticker shock for Americans buying groceries or dining out. Aiken-Phillips said the fuel related inflationary pressure should first be absorbed by farmers, transporters and retailers before reaching consumers through price increases.

Rising fuel costs could also influence technology demand within transportation. George Gianarikas, an analyst at Canaccord Genuity, told clients Wednesday that higher prices could help drive demand for autonomous trucking and electric freight offerings.