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Industry Begins Grappling With Rising Fuel Costs

Mon May 15, 2006 - National Edition
Giles Lambertson

Rising fuel prices are pressuring the industry to turn away from — or at least to modify — some traditional business assumptions, yet so far the arc of the industry’s response has been pretty gentle.

Mostly, the industry has reacted to surging fuel costs — for example, insisting on contracts that pass along fuel price increases — rather than acting to outflank almost certain higher costs in the future. No spin moves have yet been executed to sharply and permanently reduce fuel costs. Nor has there yet been much pivoting away from standard fuel-consumption practices and equipment.

But prices continue to rise.

According to the American Petroleum Institute, retail diesel prices rose in April for four weeks in a row, a combined increase of 31 cents.

A year ago, the average retail price of diesel in the United States was $2.26 a gal., with prices on the West Coast ($2.53) and in California ($2.56) leading the way.

After the April surge, the average price across the country was just shy of $2.90 a gal., with the $3-a-gal. barrier already having been breached on the West Coast ($3.10) and in California ($3.16). Actually, a price spike in October temporarily boosted the national average price above $3 a gal.

A Perfect Storm

The fuel cost dilemma is not the construction industry’s problem alone, of course, nor are the roots of the problem a mystery. Some observers have dubbed the fuel crisis the result of a “perfect storm” of circumstances.

That is, political opposition in the United States has kept domestic oil production relatively low. Political instability in oil producing areas of South America, northern Africa and the Middle East have ratcheted up investor fears, which spur irrational pricing.

Refinery output in this country is still recovering from last year’s hurricanes and, in any event, is underdeveloped because of red tape. And China and some other developing nations are siphoning off crude oil that once routinely came to the United States.

Some Wall Street and oil industry analysts predicted last fall that all this eventually would send retail fuel prices to the level of $7 and $8 a gal. None foresaw a return to the halcyon days of buck-a-gallon fuel.

Nevertheless, the historically high prices don’t seem to have had much impact on American gasoline consumers. Sport utility vehicles still are selling. On the other hand, cars with hybrid powerplants and other fuel-efficient vehicles are beginning to zip from automobile showrooms.

School districts across the country — another big fuel user — are reacting more overtly because they have little choice. Schools burn a lot of fuel transporting students — to and from school, on field trips, to athletic events.

But the running of the buses in many districts has begun to drop as costs have risen. Neighborhood stop-and-go routes are being re-examined. Some school officials even are talking about cutting the school week to four days to conserve fuel.

In Comparison …

So different segments of the American economy are reacting differently. The question is, how are American highway and site contractors responding to all this? And what do heavy construction equipment manufacturers and users see as an appropriate response?

“We’re trying to figure out how to cope every day,” said Tom Elmore, president of Eutaw Construction of Aberdeen, MS. “At the same time, we have the machines to work with that we have.”

Elmore stated the obvious: He and all contractors are limited to some extent by the fleet of machines in their yard. The Eutaw president noted, for example, that operating a Caterpillar 627 scraper today costs his company approximately $120 an hour. He said operating the machine 25 years ago cost $20 an hour.

Yet the dirt at project sites needs to be scraped, so his scrapers are kept scraping. One way Elmore copes with high fuel costs, however, is to remove the back engine from twin-engine scrapers. That reduces the machine’s hourly fuel consumption rate of 20 gal.

When a steeper grade or a deeper cut requires the power of both engines, the unit is re-installed.

After fuel costs rose, the company also adjusted how the machines are used, Elmore said. “We used to use scrapers for longer hauls, instead of trucks. Now we don’t do that.”

Bill Wagy, the equipment manager of Granite Construction Company, the Watsonville, CA-based contractor whose crews span the country, readily acknowledges the industry’s “huge appetite for fuel.”

The appetite is hard to miss on job sites. Watching brown clouds form above bulldozers, motorgraders and scrapers is proof enough of how much fuel goes up in smoke on these projects.

A Caterpillar D6 dozer is said to burn between 3.5 gal. (13.3 L) and 6.5 gal. (24.7 L) of diesel an hour when operating under moderate conditions. Fuel consumption of larger dozers like the D11 can be five times that much.

Medium-sized graders push and shove and burn their way through 6 or 8 gal. (23 to 30 L) of diesel each hour, with larger graders consuming several times more than that.

Wagy said the bottom line consequences of costly fuel aren’t ignored at Granite. However, he said company executives haven’t yet considered an “extreme” implication of the trend: The price of fuel could reach a tipping point after which the industry must change how it operates.

At Granite and elsewhere, the industry perspective is pretty much day to day, contract to contract. In the case of Granite, for example, approximately 60 percent of its contracts are relatively short term, with those projects handled by its Branch Division. The projects’ limited duration reduces the risk of the company having to absorb extra fuel costs.

But the company’s Heavy Construction Division specializes in large transportation infrastructure projects with partners across the country. Those long-term endeavors open the company to pricing variables.

“Where rising fuel prices really have an impact is in the two-to five-year projects,” Wagy said. In such situations, “We struggle to anticipate increases in costs.”

Fleet Adjustment

Because Granite officials see a “national trend away from the big earthmoving projects” of interstate highways and major arteries, for example, the inventory of equipment in Granite Construction Company yards is changing. A couple of decades ago, the company operated 44 Caterpillar 651 scrapers; now it has 14 of the machines, according to Wagy.

He noted Granite increasingly uses two-pan scrapers pulled by Cat Challenger tractors, where the terrain allows use of such equipment. That tandem approach has proved to be more fuel efficient than self-propelled scraping.

In some situations, the company also hauls with larger capacity trucks — 55-ton (50 t) instead of 35-ton (31.8 t) — with fewer loads hauled translating into less fuel burned.

Global positioning systems properly used also are believed to produce cost savings, Wagy said.

Earthmoving is more precise when calibrated from space and the work also is more quickly accomplished — which allows engines to be shut off before they burn into profit margins any more than absolutely necessary.

Balancing Cleanliness and Efficiency

In Mississippi, Tom Elmore — like his construction counterparts across the country — must cope with fuel costs by using the equipment he has. Does he think an engineering breakthrough is coming from equipment manufacturers to offset higher fuel prices?

“I think there probably is, but I wouldn’t know to what extent,” he said.

Wagy, on the other hand, believes things will “get a little worse” before they improve. He cited federally mandated emissions standards that are producing new generations of engines for heavy equipment.

“One of the prices of a cleaner engine is a decrease in fuel efficiency,” Wagy noted.

Caterpillar’s new ACERT Technology engines are one manufacturer’s response to the mandated standards. The engines have more efficient combustion chambers and air-flow systems that meet the latest emissions standards. The engines earned for the team of Caterpillar engineers that developed them a “National Inventors of the Year” award in 2004.

“Those engineers,” a Caterpillar press release stated, “were challenged by the highly intertwined relationship of (1) reduced emissions, (2) engine performance, (3) fuel efficiency and (4) engine durability. Those are not necessarily complementary objectives. Improving emissions, for example, can have an adverse effect on fuel efficiency.”

Caterpillar engineers since then have come up with a device to improve fuel consumption in idling engines.

At John Deere headquarters in Moline, IL, the manager of marketing communications, Craig [of fuel burning] has been going on for a long time.

“It used to be that contractors might have known at the end of the day that they burned 8,000 gallons of diesel, but they couldn’t tell you which machines burned what.”

That changed after oil prices pushed themselves into everyone’s consciousness, “but the name of the game still is dirt moved,” Olson said. “Ultimately, it is a matter of dirt moved per gallon burned.”

Deere’s product marketing manager, Mark Wall, cited the latest John Deere excavator as a company response to moving dirt with fuel-burning efficiency. The new 350D excavator replaces the 330C in the John Deere lineup.

What is pertinent to the discussion is that horsepower was increased in the new model to 271 from 246 hp.

Despite the increase in power, fuel consumption of the 350D in various applications ranges from being the same as the 330C to being 4 percent less.

Noted Wall: That means more power to get more work done while expending less energy.

“All manufacturers are striving to get the most out of a gallon of fuel,” he said. “All manufacturers are trying to look at how to do that.”

Wall hedged about peering too far into the future, but he noted that engineers outside the industry are toying with fuel cells and other imaginative solutions. The question is when such solutions will become available for construction equipment.

The new generation of Deere equipment meets the Tier 3 emissions standards now in effect, and Deere engineers are working to meet Tier 4 standards looming just six years away. That mandate will drive the next round of engine development, Wall said.

Fuel consumption on a construction machine depends on several factors, ranging from the heft of a load to the skill of the machine’s operator.

But the machine’s engine and the soundness of its design mostly determine how expensive it will be to operate. That and the fuel powering it, of course. The price of diesel fuel is a moot point, after all, if a machine is powered by compressed natural gas or an electric motor.

An Academic Perspective

Aviad Shapira of the Israel Institute of Technology is a visiting professor at the University of Wisconsin-Madison in the Department of Civil and Environmental Engineering. He is co-author of a new book, “Construction Planning, Equipment and Methods.”

Shapira said part of the fuel cost problem in the United States is its affection for diesel engines. He cited construction cranes as an example.

“There’s a big difference between the traditional American equipment culture, which relies heavily on diesel-powered mobile cranes, and the European culture, which uses mostly electric-powered tower cranes,” he said.

“In recent years, though, there are indications that this situation may be changing. American contractors now appear to have greater appreciation for the advantages offered by tower cranes,” Shapira said. “Certainly one of these advantages is the electric engines — not only saving on fuel but also operating much quieter.”

Shapira noted that Wisconsin mobile crane manufacturer Manitowoc a few years ago bought the French tower crane manufacturer, Potain. He saw that buyout as evidence that electric-powered fixed cranes are gaining favor in the United States in vertical construction situations.

“I’d also add,” Shapira said, “that the culture of diesel engines here is so strong that even some of the tower cranes traditionally used here are diesel-powered, not electric.”

Tipping Point Coming

Jeffrey Nelson, a professor of construction management and a colleague of Shapira’s on the UW-Madison campus, believes that America is moving to a tipping point on fuel costs.

Nelson said that when the point is reached, it will “require some behavioral modifications” and a fundamental re-examination of construction projects and equipment.

“We need to be addressing this issue now,” Nelson said. Furthermore, he believes engineers and scientists are key players in any such reassessment of resource management.

He added a cynical perspective, which he attributed to Winston Churchill: “When all other options have been exhausted, then we will do what is right.”

Still another industry observer noted that a fuel efficiency incentive other than profit margin is beginning to be incorporated into some contracts — an environmental incentive.

Roberto Nunez, a lecturer and senior extension specialist in North Carolina State University’s College of Engineering, said energy efficiency in projects is becoming a focus of the industry.

Begun approximately five years ago, the movement Nunez cited is fostering “more interest in trying to document how efficient we are” in construction.

“What is beginning to happen is that most larger projects have a green component, an energy-efficiency component,” the professor said. “The most important projects eventually will require contractor certificates showing where materials came from, how far they came to a work site, how much fuel was used per unit of construction material.”

The result will be that, for example, a “green building” will be certified environmentally friendly not only in respect to its operation but also in its construction. In other words, fuel consumption efficiency will be stipulated in the contract.

A Taxing Discussion

In March, when the price of a gallon of diesel cost $2.56, more than half (52 percent) of the retail cost was attributed to the price of crude oil. Another 21 percent was pegged to refining costs and 5 percent to distribution.

But 21 percent of the cost of that gallon of diesel is taxes — 53.8 cents, to be exact. While federal and state tax totals vary from state to state, they uniformly constitute a real chunk of the price at pumps. (Diesel for off-road use is not subject to federal and state taxes.)

Political pressures are building to roll back the tax.

In North Carolina, for example, Gov. Mike Easley has proposed a freeze in the state’s fuel tax, which is calculated twice a year. The state’s tax on gasoline is 29.9 cents, one of the highest in the region.

But knocking back the tax also would reduce the flow of revenue into the federal highway trust fund, which would shrink the number of construction projects in the country. Therefore, the chief executive officer of the Associated General Contractors of America (AGC) went to Washington to argue against a “symbolic” tax break.

“While many AGC members are detrimentally impacted by the rising prices of oil, gas and diesel fuel, we strongly oppose efforts to repeal or reduce any gas or diesel fuel taxes,” Stephen Sandherr testified before a committee. “The tax gimmick will not be passed onto the consumer, so it will not result in lower gas prices; however, it will definitely cut federal aid for highway and transit construction.”

Sandherr instead called for reform of domestic and foreign energy policy.

Given the pace of reform on Capitol Hill, some contractors and manufacturers wisely are not waiting for such reforms to materialize before responding to the high fuel costs. They know how long it takes to change direction. CEG

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