Decline in crude oil prices means cheaper diesel for vessel operators, possible demand growth

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While the slump in oil prices is clouding the future for vessel operators with close ties to domestic energy production, others across the industry are benefiting from the corresponding decline in fuel costs.

According to the U.S. Energy Information Administration, the spot price for U.S. Gulf Coast diesel tumbled from $2.91 a gallon on Feb. 2, 2014, to $1.69 a year later, a decline of 42 percent. Other marine fuels have been on a similar trajectory. The last time prices were this low was in the summer of 2009, when the global financial collapse undercut the fuel market.

The steep drop has led to big savings, especially in the bluewater world — the larger the vessel, the larger the savings. Peter Sand, chief shipping analyst at BIMCO, stated during a January webinar that falling fuel prices are saving shipowners about $9,000 a day. The figure is based on a ship consuming 30 tons of fuel a day at $600 per ton (the price in June 2014) compared with the same consumption at about $300 per ton (the price in early January).

While many smaller marine companies are also benefiting, most aren’t seeing savings on that scale. For a lot of domestic operators, the lower cost doesn’t translate directly into savings because their customers cover the price of fuel. 

That’s currently the case for Jubilee Towing of Point Clear, Ala., which has been doing fleet work on the lower Mississippi River since last fall. The company could start profiting from the oil slump this summer, though, when it likely will go back to “tramping” in Mississippi Sound, said company President Lucian Lott. 

“At this point, we will pick up our own fuel,” he said. “Our older equipment pieces are sure enough fuel burners, so it will be nice if costs stay relatively low but not too low. … The low cost of fuel really scares most people and has companies walking on eggshells.”

For the operators who are currently benefiting, there is extra money that can be rolled back into their businesses in the form of equipment upgrades, repairs or new gear.

“Fuel prices are a major share of the costs involved in running a vessel, so this decline in fuel costs is a significant benefit to (our) members,” said Jennifer Carpenter, executive vice president of American Waterways Operators (AWO). “It frees up cash that can be used in other ways, and the steep decline in energy prices over the past three months is frankly good for the economy.”

Carpenter said the lower cost of energy helps manufacturers and should translate into more demand for the movement of petrochemicals and refined petroleum products on the nation’s waterways. Gains in that sector will likely benefit tank barge operators like Houston-based Kirby Corp., which posted record net earnings of $68.1 million during the fourth quarter of 2014. 

The company expects the oil slump to boost its asphalt trade in 2015.

“Lower crude oil significantly expands (the ability) of municipalities and states to buy asphalt,” said Andrew Smith, Kirby executive vice president and chief financial officer, during a January conference call with analysts and investors. “You can buy a lot more for your budgeted dollar. So we think that business is going to be better this year.”

David Grzebinski, Kirby’s president and chief executive officer, said lower fuel costs don’t have a direct impact on the company’s net income because of price “pass-through” in the marketplace. “We work to make all of our businesses fuel-neutral,” he said. 

A potential negative effect from the decline in fuel costs could be a drop in the number of ships scrapped from U.S. and global fleets, Sand said. High fuel prices had encouraged shipowners to order more-efficient replacements.

“The disadvantage in fuel consumption that older ships incur becomes smaller when bunker prices drop,” he said. “In that sense it may reduce the incentive to let them go out of the fleet for breaking.”

By Professional Mariner Staff