KEY POINTS
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Crude oil and diesel prices have risen in recent weeks due to continued disruptions of production and shipping in key areas.
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Higher energy prices can play a role in raising other input costs, particularly for energy-intensive materials and fuel-intensive shipping.
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Firms will need to more meticulously plan costs, procurement, and operations to protect against rising input costs.
Energy prices have jumped significantly in recent weeks as conflict in the Middle East and Russia have shut off production, refining, and shipping in key areas. This has culminated in record diesel prices and once again elevated crude oil prices.
For the construction industry, rising energy prices threaten to further shrink margins by raising input costs through several channels. Record diesel prices make job site operations and material transportation more expensive, while higher oil prices will keep energy products across the board elevated.
Rising Energy Prices
Energy price inflation reignited in July and August as disruptions to oil extraction, refining, and shipping have continued and, in some cases, escalated across the Middle East and Russia. Crude oil prices have jumped, with both Brent crude oil in Europe and West Texas Intermediate in the US crossing $100 a barrel.
The disruptions have pushed up downstream energy prices as well, with diesel prices reaching over $6.25 a gallon, an all-time record high, according to AAA data.
Average electricity prices to all sectors have also increased, up 4.5% year-over-year to $0.145 per kWh, while average petroleum liquid costs rose 54.7% year-over-year, according to the Energy Information Administration.
How it Affects the Industry
Continued disruptions to energy markets will likely keep prices elevated, delaying needed fuel cost relief for the construction industry. These same disruptions and higher energy prices could also raise costs across other inputs that are energy-intensive to produce or ship.
This environment has pushed the Producer Price Index (PPI) for construction materials up 10.1% year-over-year, with more energy-intensive materials like steel and aluminum seeing significantly higher inflation. Specifically, steel mill products have jumped 23.4%, while aluminum mill products have increased 27.3%.
Shipping costs have increased as well, with the PPI for freight transportation by truck up 14.3% and the PPI for deep sea water freight transportation up 32%, an even larger increase.
Continued disruptions to energy markets will likely keep prices elevated, delaying needed fuel cost relief for the construction industry. The PPI for freight transportation by truck, shown in a chart above, is up 14.3% and the PPI for deep sea water freight transportation up 32%, an even larger increase. Image: ConstructConnect
Facing Higher Energy and Fuel Costs
The construction industry is facing higher energy and fuel costs, whose effects have spilled over to other key input costs. The rising input costs will likely squeeze profit margins for contractors, especially if inflation persists.
This environment will require firms to plan smarter to combat rising input costs. This includes adopting procurement strategies, like locking in material pricing early or including escalation clauses, and more meticulously managing supply chain and job site operations.
Doing so will help stave off future price increases in fuel or materials, as well as lower the use of these inputs which are seeing rapid price increases.
What it Means for the Construction Economy
Energy price inflation has reignited as conflict continues to disrupt extraction, refining, and shipping of energy goods in the Middle East and Russia. Higher oil and fuel prices have partly contributed to an increase in construction materials costs and even steeper increases in freight costs.
Higher prices will squeeze contractor margins for those not prepared. In this environment, firms that plan for these disruptions with procurement, logistics, and job site operation may be better positioned to manage the inflating cost environment.
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