Diesel’s Big Price Jump Puts Pressure on Contractors

SOURCE: Drive Insight | December 19, 2022

The price for a gallon of diesel quadrupled since last year amid supply chain issues and project cost hikes. Diesel cost surges have put pressure on contractors, increasing claims, defaults and project costs, according to a report from Levelset, a New Orleans-based construction software company.

  • The U.S. has just 25 days of diesel supply on hand, the Levelset report noted, citing data from the Energy Information Administration. While the report emphasized that the country will not run out of the fuel in that time period since new diesel shipments arrive daily, the tight quantities are further magnifying supply chain disruptions.
  • Russia’s war on Ukraine, refinery shutdowns due to COVID-19 and Hurricane Ida all contributed to reduced refining capacity of diesel over the past year, according to the report.

It’s not just the Levelset report that is highlighting the issue for contractors. 

The price for a gallon of diesel increased about 33% since last year, according to a report on material pricing and supply chain volatility from Linesight, an Ireland-based global construction consultant. Additionally, prices will remain close to those current highs given the prospect of further supply chain disruptions, slow economic growth, high inflation and rising interest rates, according to Linesight. 

At the same time, about 98% of all energy use in the construction industry comes from diesel, according to a Diesel Technology Forum report

The result is construction projects, which are heavily reliant on diesel, have experienced their own pricing volatility.

For example, Madison Square Garden Entertainment increased the price tag for the MSG Sphere project in Las Vegas to close to $2.18 billion, up from its prior estimate of approximately $2 billion, according to its fiscal 2023 first quarter earnings report. 

While the company didn’t specifically call out diesel as the culprit, David Byrnes, MSG chief financial officer, pointed to global supply chain pressures as one driver of the increase, along with inflation and project complexity, during MSG’s earnings call.

No cause for panic

While those impacts are real, researchers have emphasized the circumstances surrounding diesel’s price increase haven’t reached crisis levels. 

For example, though it “will be painful at the macro level,” the diesel shortage will be “hopefully manageable at the micro level,” according to a report from Mansfield Energy, a Gainesville, Georgia-based provider of oilfield services to the oil and gas industry.

From a broad perspective, that means consumers and businesses will feel the pinch in the form of higher costs. But at the local, load-by-load level, “supply will still be available for those for whom diesel is a business-critical priority,” according to Mansfield.

Still, several analysts and contractors are forecasting market conditions for construction prices in general, which are impacted by diesel costs, to get worse before they get better. 

The year-over-year price escalation for construction materials overall in 2022 remains between 9% to 12%, said Michael Hardman, vice president of Turner & Townsend, a U.K.-based global real estate and infrastructure consultancy.  

Those increases will keep rising at least for the next year. By 2024, Hardman pegged material prices to grow approximately 25% to 28% from 2020 levels.

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