The latest oil-price shock rippling through -2-

West Coast states have long paid some of the highest fuel prices in the U.S., mostly thanks to their modest regional production and the lack of a pipeline connection to the Gulf Coast, the nation's refining hub. Gulf Coast refineries benefit from lower-cost crude coming from Texas oil basins such as the Permian and Eagle Ford. A joint venture by Phillips 66 (PSX), Kinder Morgan (KMI) and HF Sinclair (DINO) was recently finalized, and the companies made the final investment decision to move forward with the proposed Western Gateway pipeline, a 1,300-mile refined-products pipeline system that would create a new fuel-supply path from St. Louis, Mo., and from the Gulf Coast to Arizona and California.

That's cold comfort for California farmers like Yerxa. In early September, Yerxa paid $5 for a gallon of "red" diesel, which is the standard ultra-low-sulfur diesel dyed red to identify it as exempt from some taxes and intended for off-road uses in agriculture, construction, mining and other industries. Only a few weeks later, he was paying $6.50 to $7 a gallon, he said. Earlier in the year, red diesel cost between $3.50 a gallon and $4 a gallon.

"That's a massive, massive increase in pricing," Yerxa said. It also comes as other expenses, such as for water, maintenance and labor, have also increased. All the while, what he earns for some crops is largely stagnant or, worse, has fallen.

"The hard thing is this: We are making as much on things like corn, rice, wheat that we did in the 1970s," he said. Walnuts for next year are going for about 65 cents a pound, a roughly 35-cent loss per pound to growers like him. Processing tomatoes - those used in products such as canned diced tomatoes and ketchup - are also fetching lower prices than they did a few years ago.

Retail looks at controlling shipping costs

Manufacturers and retailers are also walking an oil-products tightrope, trying to balance higher fuel costs with their profit margins, and passing costs along to consumers is not always in their best interest. Doing so at a time when customers are feeling a general inflation squeeze might lead to fewer sales and a loss of market share.

Many are opting to manage their costs and are looking for alternatives, said Ashley Hetrick, supply-chain lead at accounting and advisory firm BDO. The recent sudden spikes in fuel prices are making it trickier.

"A slow rise you can offset with a couple of basis points in your margins," Hetrick said. Diesel spikes and the immediate strain on an organization's near-term costs and cash flow has led businesses to look at the changes they can make to control those costs, she added.

Immediate actions are not necessarily about raising prices, Hetrick said. Businesses are taking "a very close look" at transportation costs, trying to spot inefficiencies and looking to maximize shipping.

In recent days, one of her clients, a medium-size consumer-products company, told its retail clients that for the next 30 days it was not going to ship any orders of less than one truckload, and that anything less would have to be shipped via slower parcel shipping or merged with bigger orders.

Other clients are looking at shipping by rail, which is not an option for every manufacturer, as rail is traditionally slower, less predictable and sometimes not available in the area of either the shipper or buyer. Companies are also taking a hard look at pricier expedited orders, calculating whether some customers can wait or even if some can pick up their orders themselves.

Those are conversations companies are having, but many have not made decisions yet. "They don't want to make any changes that might impact long-term profitability and customer demand," Hetrick said.

Such calculations fall disproportionately on small and medium producers, as big consumer-product companies are moving product on company-owned trucks and selling it by the truckload.

"The impact is being borne more by those retailers and manufacturers who may serve clients on a partial or single pallet. That's where your shipping expenses become very high, particularly if you're going on a non-owned carrier," she said. Those using leased carriers or independent trucks, which add their own fuel surcharges, are trying to get as close to a truckload as they can or limit smaller orders, she added.

The Trump administration has openly considered a diesel export ban but seems to be holding off on the idea, which industry insiders and experts consider would do more harm than good. U.S. refiners would need to reduce production to prevent a diesel surplus that an export ban would create. Fewer refinery runs would lead to lower supply of gasoline and jet fuel, raising prices for those fuels.

With the Hormuz stalemate and ongoing impacts from the Russia-Ukraine war, the U.S. has exported record levels of fuels, but exporting U.S. refining riches has not been a winning strategy in past years.

"Building refineries for export purposes only works in places that have incredibly low crude costs. In other words, the Middle East," York said.

While in theory, new U.S. refineries could be built with exports in mind, there's a much better value-creation proposition in exporting crude, which the country has successfully done.

In the last three decades, most of the growth in refinery capacity has come from other parts of the world, specifically the Middle East, Africa and countries such as China and India, said S&P Global's Chowdhury.

In emerging markets, the growth of the middle and upper classes powered higher rates of vehicle ownership and air travel around the early 2000s, just as demand had largely peaked in the world's big Western economies.

Making current matters trickier on a global level, China is on an economic road that will lead to diminishing demand for transportation fuels, much like the U.S. experienced in the 2000s, according to Chowdhury. In the last 25 years, China has been responsible for 40% to 60% of global growth in transportation fuels, Chowdhury said.

"Our data is showing that they're very close to peaking, if they've not already peaked," he said. "They're now moving from being a very quickly growing market to a stagnating and slower-growth market when it comes to transportation fuels," mostly because of China's massive push toward electric vehicles.

That means that future global oil shocks are likely to resemble 2026 and turn into refining shocks.

-Claudia Assis

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10-01-26 0853ET

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