Skyrocketing Diesel Costs Hammer America’s Construction Industry

Construction companies are grinding their teeth as exploding diesel costs create headaches at jobsites across America.

Construction companies rely on diesel to fuel trucks and heavy equipment, while fuel costs are also embedded in the thousands of truckloads used to deliver materials and equipment to jobsites. Diesel prices hit yet another record national average of $6.52 per gallon Wednesday, up roughly 29 cents from a week earlier, according to AAA.

“Construction is one of the industries hit hardest by soaring diesel fuel prices,” Kenneth D. Simonson, chief economist for the Associated General Contractors of America (AGC), told the Daily Caller News Foundation.

“Firms and their workers have huge numbers of diesel-powered trucks and offroad equipment,” he said. “Jobsites are often far from home.”

Contractors can seldom pass sudden cost increases along after committing to a project, leaving firms squeezed as expenses rise, according to the AGC.

An Iran and Ukraine war-driven global diesel shortage is expected to persist through the winter as disruptions remove millions of barrels of refined fuel from the global market. U.S. diesel supplies also remain strained, with distillate inventories sitting 13% below the five-year average as of Sept. 11 and American refineries operating at nearly 97% of capacity, according to the Energy Information Administration.

“Rising diesel costs drive up the cost of nearly everything America builds. Every excavator, crane, bulldozer, concrete truck, and piece of heavy equipment on a jobsite costs more to operate when diesel prices rise,” Jason Isaac, CEO of the American Energy Institute, told the DCNF. “Those costs ultimately show up in the price of new homes, roads, factories, warehouses, and infrastructure.”

The mounting pressure on diesel supplies has prompted President Donald Trump to back a ban on U.S. diesel exports. The proposal has divided his administration, however, with Energy Secretary Chris Wright saying Wednesday that an export ban would not work and could ultimately push U.S. prices higher by disrupting refinery operations and global fuel markets, according to Reuters.

“An export ban is another Washington gimmick that ignores the real problem: America needs more refining capacity. California spent decades regulating refineries out of business, and now construction projects across the country are paying the price for policies most Americans never voted for,” Isaac told the DCNF.

Diesel typically accounts for at least one-third of construction equipment operating costs, according to United Rentals.

The biggest squeeze can come on contracts priced before the recent run-up in fuel costs. The producer price index for diesel fuel was up 77.8% year-over-year in August, according to Macrina Wilkins, director of market insights at the AGC.

“The biggest issue with a fixed-price contract is that the contractor may have priced the job months ago, when diesel costs looked very different,” Wilkins told the DCNF. “For contractors that can’t pass those unexpected increases along to the project owner, higher fuel costs can come directly out of their margins.”

Construction margins can already be relatively thin, making a sustained increase in fuel expenses particularly significant, Wilkins said.

Fuel expenses also extend beyond the machines operating on a construction site.

“Perhaps most important is that firms pay diesel fuel surcharges on the thousands of deliveries of equipment and material to jobsites and the hauling away of dirt, debris and equipment during and after construction,” Simonson said.

“Higher diesel prices can affect construction materials through transportation even when fuel isn’t a direct component of the material itself,” Wilkins told the DCNF. “Concrete, aggregates and other heavy materials have to be transported to jobsites, and those transportation costs matter because of their weight and volume.”

Paving contractors face another layer of exposure because petroleum is not only needed to operate equipment but it’s used in asphalt. Producer prices for asphalt were up 16.4% year-over-year as of August, according to the Bureau of Labor Statistics (BLS).

Broader transportation costs have also increased. Producer prices for truck transportation of freight were up 14.3% year-over-year as of August, according to BLS, including a 2.0% increase in August alone.

“Those contractors can potentially feel higher petroleum costs both in operating their equipment and in the materials they use,” Wilkins told the DCNF.

Contractors are already changing how they do business to cope with higher fuel costs. An Equipment World poll of 119 contractors, equipment dealers and manufacturers found 81.5% had changed at least one part of their business strategy in response to rising diesel prices. About 40% raised bid prices or hourly rates, while 31.1% added fuel surcharges to contracts.

“Contractors bidding new work have to account for the higher cost environment and the possibility that prices could continue to change,” Wilkins said. “That can mean higher bids or building more contingency into a bid to protect against future increases.”

Those pressures are already affecting some projects. In AGC’s latest workforce survey, 55% of respondents reported having projects canceled, postponed or scaled back during the previous six months, with one-third attributing those disruptions to increasing costs, Wilkins said.

Construction costs had already climbed more than 40% since early 2020, ConstructConnect reported. A July National Association of Home Builders/Wells Fargo survey found homebuilders reported material costs rising an average of 6.7% over the previous year. Nearly 73% reported increases of as much as 15%, while smaller builders reported larger increases than companies building 100 or more homes annually.

“Over time, contractors have to incorporate those higher costs into new bids, which makes projects more expensive for both private developers and public agencies,” Wilkins told the DCNF. “Some owners may decide to scale back, postpone or cancel projects that no longer pencil out.”