Contractors Get Reprieve At the Pump
As the price of crude oil bottoms out at its lowest market value in more than four years, the bottom-line fuel costs of many construction-fleet managers are lighter. But equipment managers are taking this market depreciation with a grain of salt, knowing from experience that the price will bounce back sooner rather than later.
"It's very nice to have the dip right now," says Arne Ruud, corporate equipment manager for Broomfield, Colo.-based Guy F. Atkinson Construction LLC. "But there's no assurance it's going to go on for any length of time."
Both Brent and WTI benchmarks for crude oil have landed near $50 per barrel, down from roughly $100 per barrel a year ago. At the pump, gasoline in the U.S. has fallen to an average $2.21 per gallon, and diesel is at $3.14 per gallon, according to the Energy Information Administration.
When considering the long-term viability of equipment, managers like Ruud have to project costs such as fuel and future market value for their equipment, two factors influenced by crude-oil business. Price volatility in the fuel markets makes that job harder, they say.
Adoption of alternative fuels could suffer, too. For example, the U.S. Dept. of Energy lauds natural gas as an alternative fuel that burns cleaner than diesel and is mainly produced domestically. Early in his tenure, President Obama made it a point to promote the consumption of American fuel and praise natural gas for its economic and environmental benefits.
But the drastic drop in gasoline and diesel prices has equipment managers thinking there's no reason to change from those traditional fuels, according to Thad Pirtle, vice president and equipment manager at Traylor Bros., Evansville, Ind. Seeing low diesel prices definitely sways him to keep buying and maintaining diesel construction machines, he says.
"There's no way you could pencil it out and change something over to natural gas now, with the fuel prices the way they are," Pirtle says. "You'll have to see oil back over $100 dollars per barrel before you see natural gas being feasible."
This mentality pushes further into the future the likelihood of an industry transition to natural-gas machines, especially considering the process of planned acquisitions. "There's probably about a year's worth of analysis that they end up doing before they actually make the decision to do the purchasing," said Steve Tam, vice president of the commercial vehicle sector at ACT Research Co.
Swings in diesel prices also cause confusion for equipment managers like Pirtle, who has to estimate costs for bidding while the market is in constant flux.
"We're a bit confused on future estimates, future bidding," Pirtle says. "It's out there a year and a half, two years away before [projects] could start, so it's made it a little bit unstable."
Even if low diesel prices forestall a transition to natural-gas engines, fuel prices will climb and make alternatives economically viable again in less than a year, predicts Frank Manfredi, president of Cocoa, Fla.-based market research firm Manfredi & Associates.
"The price of oil is going to go back up into the range that makes all of these alternatives economic," said Manfredi. "I think this is just a short-term, six-month, maybe nine-month effect."
Residual Values
Manfredi is also wary of the effect the oil industry has on retail prices for new and used construction equipment. When oil production slows, equipment sales and purchases drop, which disrupts the market for machinery, he observes.
"Oil companies are shutting down exploratory well drilling, and some fracking activity has ceased, so the more expensive sources for oil are no longer economic," Manfredi says. "Equipment that's used in that sector—it's more likely they're not going to be bought or purchased."
This surplus also concerns Pirtle, who wants his machines to retain as much retail value as possible. "If the oil field contracts, you're going to see a lot of equipment and a lot of construction equipment on the market," Pirtle says. "A contraction can be devastating on that side of the market, at least on the equipment end, if it goes to extremes."
Andrew Agoos, principal of Orlando, Fla.-based Agoos Consulting and veteran of Hubbard Construction Co., Neff Rental LLC and Caterpillar Inc., says equipment managers will face the tumultuous oil sector the same way they always have: with common-sense solutions.
"It makes sense to control idling, which is just wasted fuel, and it makes sense to control unneeded trips," Agoos explains. "It makes sense to have 8-mile-per-gallon Class 8 trucks instead of 5½-mile-per-gallon Class 8 truck. I think we'll all do that, and we'll keep doing that, whether fuel is $2 per gallon or $4 per gallon."
