Red dye diesel break is being greeted with a big yawn

Lots of unknowns

But as Matt Muenster of Breakthrough Fuel noted in a memo to his company’s clients, although the executive order was signed this week, there are still plenty of questions. 

“Treasury has five days to confirm it has legal authority to grant the deferral,” Muenster wrote. “As of October 6, no IRS implementing guidance has been published, so the relief is not yet operational.”

He also says in the note that there is no impact on undyed fuel. A consumer would need to buy red dye fuel to get the break, and that brings up the whole issue of how a retailer is going to segregate out the fuel that carries a tax break from the fuel that doesn’t have that relief.

“For most interstate fleets, the practical risk and record-keeping burden outweighs the savings until Treasury and individual states publish clear guidance,” Muenster wrote.

Various trade associations in commenting on the executive order also showed little sign they were embracing the shift.

‘Minimal relief’

In the prepared statement released by the Owner Operator Independent Drivers Association, president Todd Spencer, after a few sentences bewailing the impact of high diesel prices on independent truckers, downplayed the red dye diesel shift. 

“OOIDA believes allowing the wider use of red-dyed diesel will provide minimal relief,” he said. “Market stability is essential to bring down costs for the long haul.”

The “practical risk” Muenster referred to could be seen in an advisory sent out by the joint National Association of Truckstop Owners and the Society of Independent Gasoline Marketers Association (NATSO/SIGMA). 

It said the executive order “is mainly a farm-hauling measure.”

While diesel-consuming equipment on the farm already would be using red dye diesel to avoid the excise tax, that also means that red dye diesel is already being stored separately. That means, NATSO/SIGMA said, that “it lets agriculture and other related businesses with their own bulk dyed storage put that fuel into trucks and haul commodities or equipment during harvest.”

Needs its own distribution system

The NATSO memo then went on to note the practical difficulties the sale of red dye diesel would encounter once it went into the broader market outside the confines of a farm.

“Selling dyed fuel at scale requires dedicated equipment and enough dyed supply at the rack,” the group said in a note to its membership. “Neither marketers nor commercial trucking companies are eager for the supply chain to reconfigure itself in order to accomplish this.”

There also is the issue that various states have taken different paths on red dye diesel, with some of them allowing it and others giving it a waiver for over-the-road use. 

“Truck drivers travel through multiple states in a given day; untaxed fuel purchased in one state doesn’t mean the driver can avoid liability in states that do not waive enforcement,” NATSO said. “Ultimately, for most marketers, the liability and customer risk outweigh any temporary, uncertain benefit.”

Or as Breakthrough’s Muenster said in his company’s summary of the change, “Federal relief does not make dyed fuel legal on-road in any state that has not acted.”

A 24 cents per gallon on a base price in excess of $6 reveals a math that is not likely to be worth the effort, NATSO said.

The executive order says the tax will be “deferred,” and the White House will look at ways to eliminate any liability.

But Breakthrough’s Muenster was skeptical that sort of dispensation could be pulled off.

In his report, on what the tax break means for fleets, Breakthrough said “No forgiveness has been granted. Plan as if the deferred tax will be owed.”

The organization did say the Trump executive order was a “bona fide attempt” to bring price relief. But it doesn’t change the underlying supply/demand dynamics.

The American Trucking Associations’ chief advocacy & public affairs officer Henry Hanscom issued a similar sentiment in that group’s statement on the executive order, saying the ATA “appreciates” the effort. 

The ATA did not get as deep into the details as NATSO/SIGMA. But it expressed concern with the current uncertainty of how the change will work. 

“The practical details here matter,” Hanscome said. He mentioned the deferral with no current forgiveness, and noted that the implementing guidelines from the IRS still have not been published.

“Carriers need clear federal and state guidance on eligibility, reporting, and any taxes that remain payable,” Hanscome said. 

Supply and demand still triumph

Both NATSO and ATA said the basic problem is supply and demand.

“It does not change the broader supply picture that is causing high diesel prices in the first place,” the NATSO note to its membership said. “Even if market participants respond exactly the way the Administration wants, the underlying supply picture remains the same: Diesel inventories remain low, the war in the Middle East continues to constrain trade flows of both diesel and crude, and the Ukraine-Russia conflict is precluding Russian diesel from entering the global market.”

Even if all those problems of bookkeeping and state conflicts could be resolved, Breakthrough’s Muenster said in his report that it will run up an important barrier: the infrastructure to sell red dye diesel on the road doesn’t exist. 

“Most truck stop highway lanes do not dispense dyed fuel, so the practical opportunity for OTR fleets is small,” the report said.

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