Diesel surges past $6.31 to a record high! The "transportation cost of everything" spirals out of control, and a second inflation tsunami in the U.S. may be fully ignited.

Notice that since the war with Iran broke out earlier this year, motorists have been watching gasoline prices at the pump warily. While unleaded gasoline prices have largely avoided hitting record highs, diesel has not been so lucky - on Wednesday, diesel prices hit a record high of $6.31 per gallon. This is just another grim milestone in a continuing climb. Economists and supply chain experts say this round of price increases, starting with the transportation industry (trucking and railroad companies), will ultimately drive up the prices of almost everything in the economy. David Russell, global head of market strategy at TradeStation Group, said this is not surprising because diesel is one of the most widely used physical inputs in the economy. Freight carriers are the first to feel the impact, but if diesel prices remain at record levels, there will be many other losers - consumers and businesses. Norfolk Southern's chief commercial officer noted at a Morgan Stanley conference on Tuesday that diesel prices in California have already reached $8. Consumers have already had an early taste of what may come next through higher gasoline prices at the pump. Jeff Lenard, vice president of media and strategic communications at the National Association of Convenience Stores, said that what is driving up gasoline prices now is not just crude oil prices, but also diesel prices. The cost of transporting gasoline to gas stations is the main force behind the continued rise in fuel prices. Lenard said, "Higher transportation costs add a few more cents to the cost of selling fuel - the same is true for percentage-based card processing fees, which rise as prices rise," leaving retailers with a difficult choice: absorb these increases themselves or pass them on to pump prices. "Right now, they are absorbing most of the cost, which typically happens when wholesale prices and costs rise sharply. Now, retail margins have been compressed by about 15 cents per gallon, and that is usually exactly their net profit margin," Lenard said. Costco (COST.US) recently decided to limit the amount of motor oil members can buy, as motor oil prices are affected by the crude oil market and refining capacity. Karmit Glick, CEO of Ship4wd, said diesel is the kind of price no one pays attention to until it has already entered the cost of everything. Ship4wd is a one-stop digital freight forwarding company and a subsidiary of Israeli shipping giant ZIM. "It seeps into freight rates, agricultural machinery, food delivery, and home heating. Anything that touches a truck somewhere along the route cannot escape it," Glick said. It may take some time for diesel costs to pass through the entire economy and eventually reach your bank account. "Consumers are the last to feel it, but they do not feel it lightly," Glick said. "It shows up in grocery prices, delivery fees, and any seasonal goods that depend on fast truck transport, usually weeks after the price spike, after surcharges ripple through the supply chain step by step. This is different from gasoline - when gasoline rises, drivers feel the pain immediately at the pump," Glick added. Truck drivers are hit most directly, especially many owner-operators, who cannot adjust quickly when costs rise. "Smaller players may be squeezed out, capacity exits with them, and that in turn pushes freight rates even higher. This is not a linear process," Russell said. But if consumers plan to travel this winter, they may end up paying more for it. Russell said, "Travelers will face higher holiday airfares because jet fuel is similar to diesel." "Rising diesel prices will spread throughout the economy, and consumers will face higher costs for ordinary goods shipped by truck as well as services such as home improvement," he added, noting that the latest Producer Price Index (PPI) report shows price pressure on everything from packaging materials to circuit boards. "The longer diesel prices stay high, the longer the list of affected goods and services will only grow," Russell said. Home heating oil costs could soar this winter Home heating oil is widely used for household heating in the northeastern United States, and its price is highly correlated with diesel prices because both are made from the same feedstock. Mark Wolfe, executive director of the National Energy Assistance Directors Association, said that if prices remain at current levels, home heating oil users could pay as much as 31% more after winter sets in. But he said that is not all. "Households will be hit with a triple whammy: first heating oil, then high gasoline prices that everyone has to bear, plus all goods deliveries depend on diesel, so ordinary families will really struggle," Wolfe said. Wolfe's organization has been lobbying Congress for additional funding for the federal heating assistance program, but he said that looks unlikely because Congress is in recess until November. "Unless states step in, low-income and even middle-class families will face serious hardship. Everything has already become so expensive that families cannot afford fuel without making major sacrifices," Wolfe said. One possible savior is this year's super El Nino - the National Weather Service predicts temperatures in the Northeast will be well above seasonal norms. Steve Blau, chief supply chain strategist at supply chain software provider Infios, believes there is still room for prices to rise further. "Many factors are affecting prices. Declining refining capacity in Gulf Coast states, plus the Ukraine war shutting down most Russian production, and attacks on Saudi pipelines, have created a 'perfect storm,'" Blau said. He said any other unforeseen supply disruption, such as a late-season hurricane or another GEO Group Inc political event, could push prices even higher, although given the volatility of the market and GEO Group Inc politics, many experts are reluctant to make firm predictions about further increases. Saudi Arabia is taking steps to put more oil on the market, which pushed crude prices lower on Thursday. Why diesel prices are so high, and why they are hard to bring down Jack Buffington, associate professor of supply chain management at the University of Denver, said that although oil prices have been largely contained, diesel prices have surged not because crude oil prices rose under supply pressure, but because global refining capacity is insufficient. "Oil distribution has become a problem because of blockades in the Persian Gulf and the Red Sea, but its impact is not as severe as the loss of refining capacity in Russia and the Middle East - especially Russia," Buffington said, noting that nearly 100% of currently available global refining capacity is being utilized. "That does not mean 100% of global capacity is running, but that 100% of undamaged capacity is running. That is to say, about 20% of global capacity is offline, and that is where the bottleneck is," Buffington said. But even if conflicts around the world stopped today, prices would not begin to fall significantly. "Some people mistakenly believe that once the actual shooting stops, diesel prices will fall, but given net refining capacity, that is not the case," Buffington said, adding that it could take a year or more for prices to fall back to the $4 level. The biggest losers right now are full truckload carriers, especially small companies and owner-operator drivers. "Large carriers tend to be better able to protect themselves through fuel surcharge mechanisms," Blau said. Shippers without fuel protection clauses in their contracts - manufacturers, retailers, and distributors - ultimately also pay more when carriers raise freight rates or fuel surcharges. But large trucking companies have not been immune either. Brad Delco, chief financial officer of trucking giant J.B. Hunt, said the company experienced the "most severe and abnormal fuel price volatility" it has ever seen and record diesel prices, resulting in at least a $10 million hit to profit. The company warned that future earnings would decline because of the adverse impact of diesel. Blau said farmers will be hit hard by high prices because transporting fertilizer and crops, as well as operating tractors and combines, all use large amounts of diesel. "These costs are hard to pass on," Blau said. This has already become a major disadvantage for Republicans in agricultural states in the midterm elections. Construction, public transportation, and food delivery could all be crushed by higher prices. Construction is especially vulnerable because heavy machinery that consumes commodities such as cement and gravel is entirely powered by diesel. "They may also be squeezed because they need to complete projects at contract prices," Russell said. Blau said transport companies will do their best to adapt - reassessing routes, carriers, modes of transport, inventory, and delivery priorities, because when diesel is this expensive, "every mile matters." He said simply "absorbing higher costs yourself" is not a winning business strategy. Glick said there will be a few winners in this diesel price surge. One is refiners with strong distillate margins, which benefit from widening crack spreads - the difference between crude oil prices and wholesale petroleum product prices.