Bracing for Higher Fuel Costs — Again

Bracing for Higher Fuel Costs — Again

Trucking companies and the shippers relying on them could see fuel costs take another hit — fired from the bow of the maritime industry.

Lawmakers on Capitol Hill are reviewing legislation calling for tougher pollution standards on cargo and container ships that would require ocean vessels to tap the distillate fuel supply already used by the trucking industry for low-sulfur diesel. Requiring a switch from bunker fuel — considered the dirtiest, highest sulfur fuel on the market — to higher grade distillate fuel could pressure ultra-low sulfur diesel prices upward and sharply increase costs for shippers.

“What powers trucks and planes will soon be what powers ships,” said James Cannon, an alternative fuels expert and president of Energy Futures.

“Demand is very high, and supply is low in the distillate fuel market, and we’re now talking about an entire new industry coming in that’s already bigger globally than the airline industry. Of course, (the trucking industry) has reason to be concerned.”

In 2006, motor carriers began a transition to ultra-low sulfur diesel that cut sulfur emissions by 97 percent from 500 parts per million to 15 ppm. The switch was necessary to support new emissions control equipment upgrades on diesel trucks in 2007 and again next year.

The container lines that feed the domestic trucking industry know that the switch to cleaner-burning fuel is inevitable, but their emissions standards so far have been virtually unregulated. Under current International Maritime Organization regulations, bunker fuel is capped at 4.5 percent sulfur content. By contrast, diesel fuel for land-based carriers in the United States, western Europe and other countries has a sulfur content of 0.1 percent to 0.15 percent.

While some ocean carriers are voluntarily switching to cleaner-burning fuel as they reach port destinations on the West Coast, legislation introduced two years ago by Sen. Barbara Boxer, D-Calif., would have put tighter low-sulfur fuel standards on the fast track. Sulfur content of fuel used by domestic and foreign ships would have been required to be cut from an average content of 27,000 ppm to a maximum of 1,000 ppm by Dec. 31, 2010.

The legislation died before reaching a floor vote, but if tighter maritime legislation is reintroduced and passed this year, an environmentally conscious Congress could put such legislation on an equally aggressive track.

That initial Senate version, called the Marine Vessel Emissions Reduction Act of 2007, was strongly supported in Southern California by Los Angeles Mayor Antonio Villaraigosa and Geraldine Knatz, executive director at the Port of Los Angeles. Both are also ardent supporters of the controversial clean-trucks program at the ports of Los Angeles and Long Beach. While the trucking industry supported the environmental goal of cutting pollution from harbor trucks by 80 percent over the next five years, a major faction of the industry represented by the American Trucking Associations opposed certain requirements that they claim would have re-regulated harbor trucking.

“The question is, how do we skin the cat without flipping the ultra-low sulfur diesel market upside down?” said Randy Mullett, vice president of government affairs for truck company Con-way. Mullett and others in the trucking industry would like to see alternatives in any such legislation include the option of using scrubber technology to reduce emissions after the fuel is burned.

Such technology, which is being tested on cruise ships, can cost an average of $2.8 million for each unit. One manufacturer claims the cost can be paid off in two months and end up being a fraction of the cost of switching from bunker fuel to low-sulfur distillate.

“However, it would also require substantial downtime to retrofit, bigger crews to maintain them, plus the danger of legal actions against them” if too much scrubbed exhaust ends up getting dumped back into the ocean, said Rudolph Kassinger, a fuel consultant for DNV Petroleum Services. “My position has been that when BP, Shell, ExxonMobil and Chevron put scrubbers on all their oil tankers, I’ll be a believer.”

Meanwhile, the abrupt upturn in fuel prices that peaked at $4.75 per gallon last July and the subsequent steep decline to close to the current $2 has added to the turmoil in spot trucking rates.

“There’s a huge difference from where it was last July, when rates were spiking back up as a result of fuel surcharges,” said Geoff Turner, vice president of truck broker Choptank Transport. “The industry didn’t know how high to price rates then, and we’re having the same problem now that rates have gone the opposite way.”

Fuel experts are reticent about trying to predict which way future prices will go even in the short-term.

“My own feeling is the price of oil is probably going to be more in the $40 range than $140 for the next year,” Kassinger said. “I certainly think (the Organization of Petroleum Export Countries’) target is closer to $70, and whether they get there is moot. The fact is, OPEC doesn’t control crude prices; the oil market is just too big.”

Contact John Gallagher at jgallagher@joc.com.