Like many companies, Dietz & Watson Inc., the family-owned Philadelphia sausage and cheese maker, has faced rising costs and supply chain challenges over the past year, including an outbreak of bird flu that has decimated poultry supplies.
But one common thread ties the rising costs of ingredients and products at Dietz & Watson’s Tacony manufacturing facility: rising energy prices, particularly the cost of diesel fuel, the workhorse of fossil fuels.
Diesel powers the farmers’ tractors and the processors’ trucks that produce the raw materials for deli products, as well as the fleet of 100 Dietz & Watson vehicles that deliver the groceries to the stores.
Energy prices have risen across the board over the past year, but since the Russian invasion of Ukraine the price of diesel has accelerated much faster than the price of petrol, leading to staggering numbers outside of the region’s service stations and worrying owners of diesel appliances. The price of diesel affects almost everything – every contractor, every miner, every landscaper, every truck depends on diesel fuel.
In January, a gallon of diesel cost about 11.5% more than a gallon of regular gasoline in southeastern Pennsylvania, which is below the 18% average spread that separated the two prices over the past five years, according to AAA data. But last week, the regional price of diesel had risen to $6.50 a gallon, or 33% more than the average gasoline price of $4.89.
Diesel has been priced at such premiums over petrol before – in the winter of 2018/19, 2015 and 2008, when the price of diesel was more than 50% higher than that of petrol. But in 2008, gasoline prices plummeted after a market crash. Now both diesel and petrol prices are at record highs.
“The cost of diesel is over $6 – like $6.25 today,” said Cindy Eni Yingling, Dietz & Watson’s chief financial officer. “And a year ago it was $3.25.”
Diesel costs take a big bite out of Dietz & Watson, said Yingling’s brother Louis Eni, the managing director of the company founded by their grandfather in 1939.
“It would be difficult to calculate, but the cost of animal feed is increasing, as is the cost of diesel to run the farm-level tractors and deliver the meat,” he said. “The energy costs in the processing plants are increasing. Our logistics costs have increased dramatically due to the cost of diesel fuel.”
The rising price of diesel has caused such a political headache for the Biden administration that last week it floated the idea of releasing fuel from Northeast Home’s seldom-used reserve of heating oil in order to gain some price relief — heating oil is virtually the same as diesel.
But fuel oil reserves are small — containing only 1 million barrels of fuel, about the Northeast’s daily needs. Most energy experts said a release would not affect the market significantly.
An association of small business owners said higher diesel costs will inevitably be passed on to consumers in the form of higher prices.
“The rise in diesel consumption is putting our members under pressure on shipping costs,” said Greg Moreland, director of the National Federation of Independent Business in Pennsylvania. “At each stage of transportation, if you can get the goods you need, the cost has increased. If the company incurs costs, they pass them on to the customer, thus perpetuating the high inflation we are currently experiencing.”
In fact, Eni is already seeing signs that consumers are tightening their belts when it comes to Dietz & Watson products amid rising prices and lower disposable income.
“We can see the volume, the visits per store are going down and people are watching what they’re spending at the grocery store,” he said. “Family used to buy a pound of this, a pound of this and a pound of cheese. Maybe they’ve reduced that to half a pound or three quarters of a pound. We see that sales volume has gone down.”
Rising energy costs are a subject of passionate political blame-pointing – some blame oil and gas producers for holding back production, while others accuse policymakers of discouraging production with anti-fossil fuel rhetoric.
It is undisputed that the energy markets were thrown out of balance during the corona pandemic, causing global consumption to collapse, prices to fall and production to shrink. Consumption, prices and production have recovered as the global economy has recovered, but demand is outstripping supply.
The invasion of Ukraine by Russia, one of the world’s largest oil and gas producers, has further unsettled global markets, particularly in Europe, which is dependent on Russian fossil fuels. European light vehicles, including cars, use more diesel than the American fleet. European demand for diesel is also increasing as electric generators use it to replace Russian natural gas, the price of which has skyrocketed.
Greater demand in Europe for diesel to replace Russian fuel has played a significant role in driving up diesel costs in the United States. The impact is greatest in Northeast markets, which are more dependent on imported fuels after the closure of about half of the region’s refineries over the past decade, including the closure of the Northeast’s largest refinery, Philadelphia Energy Solutions, in 2019.
PES production accounted for about 100,000 barrels of “distillates” per day, a category that includes diesel. These fuels have been replaced by imports, according to the US Energy Information Administration (EIA). But in the past seven weeks, imports of distillates into East Coast ports have fallen to 76,000 barrels a day from an average of 227,000 barrels a day last year, according to the EIA.
According to Philip Verleger, a Denver-based energy economist, under current market conditions, diesel will likely be in short supply for months or years unless regulatory policies controlling production are relaxed or an economic slowdown reduces demand. “In the short term, distillate prices are likely to continue to rise relative to other petroleum products,” Verleger wrote in a recent publication.
U.S. refineries are now running at full steam to meet demand for diesel fuel and jet fuel, said Tom Kloza, global head of energy analysis at the Oil Price Information Service. Fuel producers, who lost money during the pandemic lockdown two years ago, are now enjoying huge profit margins on the fuels they produce, net at $100 a barrel more than crude oil costs, or nearly double.
“Those are epic, epic numbers,” Kloza said. “I mean, there’s no way in the world that refiners ever thought they could make $100 a barrel making diesel on any given day.” The decade’s lost money is now making so much that, Kloza said, “they might as well have a counterfeiting machine there.”
There doesn’t seem to be an end in sight. Stockpiles of diesel are about 103 million barrels, compared with normal storage of about 220 million barrels, he said. US diesel exports to Latin America and Europe are reaching record levels of up to 1.5 million barrels per day.
Some large corporations and institutional fleet owners have mitigated the impact of rising diesel prices by hedging their fuel purchases through purchases on futures markets, the head of NJ Transit recently told New Jersey lawmakers.
A. Duie Pyle, West Chester’s motor freight company, is able to pass on diesel price increases to its customers via fuel surcharges, which after several episodes of dramatic price fluctuations have become standard terms in shipping industry contracts. The surcharges are based on regional governments’ fuel price indices, which are adjusted weekly, said Peter Latta, chief executive of A. Duie Pyle. This virtually eliminates the risk of damage to the carrier from rising fuel prices.
More worryingly, regardless of price, diesel will become increasingly difficult to source. A. Duie Pyle’s fleet uses 61,000 gallons of diesel a day, and Latta is concerned by reports that the country’s current supply of diesel is at its lowest level in 30 years. The Company maintains a constant supply of tank truck supplies to replenish its 508,000 gallon storage tank.
“We kept our tank full in West Chester, not as a price hedge, but as a supply hedge,” Latta said.