Higher business costs from rising energy prices eating into profits

Since the depths of the recession, the U.S. economy has recovered with some industries expanding at a fast clip. Railroads and trucking companies have benefited with an uptick in business from the nascent economic recovery, but according to a recently published report, higher energy prices are starting to eat into their profit margins. 

The New York Times reports that railroad and trucking companies have been especially hurt by the precipitous rise in the price of oil since the beginning of the year. Diesel prices are currently at their highest levels since 2008 and the increased business costs were on display when Union Pacific and Arkansas Best Corporation posted quarterly earnings that were below analysts' expectations.

Though the U.S. manufacturing sector has experienced over 20 consecutive months of growth, the higher diesel prices could heavily impact the industry, according to analysts. "The manufacturing sector is hit disproportionately hard by higher diesel prices," Manufacturers Alliance economist Donald A. Normal told the news publication. "Simply to move all this stuff around, it is really hard to affect any cost savings. You have little in the way of alternatives."

It's the increased costs that are starting to worry investors and consumers alike; the former is concerned that growth will taper off as businesses battle rising costs, while the latter group isn't confident with the current economic climate as they pay more at the pump - and at stores as well.

This week, President Obama called on members of OPEC to increase the supply of oil, but analysts are not confident that a sudden rise in oil supplies will occur. Moreover, the recent spate of uprisings in the Middle East and North Africa, along with the ongoing conflict in Libya, are spurring unease among industry watchers as they predict future shocks to the oil supply may happen.

In its first quarter earnings report last week, Union Pacific stated that it paid an average price of $2.88 per gallon during the quarter, representing a rise of 33 percent from the price it paid the year prior; during the first three months of the year, Union Pacific spent $200 million more on fuel than in the same time period in 2010. Though the company posted its best first quarter earnings ever, the rising fuel prices are portents of what's to come, investors fear.

Nonetheless, some analysts contend the higher energy prices are actually a good sign for the train industry. According to experts, higher oil prices tend to coincide with higher prices for all commodities; usually, such a phenomenon occurs during periods of economic expansion as higher demand drives up values.

Further, railway companies also benefit in another way from higher oil prices as more companies will shift the transportation duties to them away from trucking outfits as trains provide a more energy efficient mode of delivery goods throughout the U.S.

Still, Werner Enterprises executive vice president John J. Steele contends there is no silver lining to the surge in energy prices. "You are paying at the pump sooner than what we are able to recover from our customers," he said in an interview.

"But the biggest issue is the effect it has on the consumer," he warned. "It is taking away dollars that they can spend and that translates into a drag on the economy, and that means there are less loads in our system. Retailers are about half of our customer base."