Most asphalt contractors focus on the obvious costs: labor, equipment, overhead. But there's a hidden force driving your material costs that many in our industry don't fully understand: the energy markets. At Asphalt Unlimited LLC, we've spent decades studying these connections, and what we've learned might surprise you.
The Foundation: Asphalt Is Energy
Let's start with the basics. Liquid asphalt isn't just another construction material. It's a direct byproduct of crude oil refining. When refineries process crude oil, they separate it into various products based on boiling points. Gasoline comes off first, then diesel, then heating oil, and finally, at the bottom of the distillation column, you get the heavy, thick material we call asphalt.
This means your asphalt costs are fundamentally tied to what happens in global energy markets every single day. When crude oil prices move, asphalt prices follow. But the relationship is more complex than most contractors realize.
Beyond Crude Oil: The Energy Web
While crude oil gets most of the attention, several other energy commodities directly impact your asphalt costs:
Natural Gas: Refineries use massive amounts of natural gas to power their operations. When natural gas prices spike, refining becomes more expensive, and those costs get passed through to asphalt pricing.
Heating Oil and Diesel: These products compete with asphalt in the refining process. When demand for heating oil or diesel increases, refineries shift production toward these higher-value products, reducing asphalt supply and driving up prices.
Gasoline: Summer driving season doesn't just affect gas prices at the pump. When gasoline demand peaks, refineries maximize gasoline production, which can create asphalt supply constraints.
Propane and Other Light Ends: These lighter petroleum products influence the overall economics of refinery operations, indirectly affecting asphalt production costs.
The Timing Problem Every Contractor Faces
Here's where it gets challenging for contractors. Energy markets move fast, sometimes changing dramatically within weeks or even days. But your business operates on longer cycles. You bid projects months in advance. You sign contracts with fixed prices. You need to predict costs for work that won't happen for six months or more.
Traditional approaches to this timing mismatch often fall short. Some contractors try to track crude oil prices, but that's only part of the equation. Others build in large safety margins, which can make them uncompetitive in the bidding process. Many simply guess and hope for the best.
The Correlation Reality
Through our research developing The Synthetic algorithm, we've discovered something remarkable. Using 17 years of market data, we found that a properly weighted combination of energy futures prices correlates to actual asphalt values with a 0.98324 Pearson correlation coefficient. That's essentially a perfect relationship.
This isn't just academic theory. It means the energy markets are actually telling you what asphalt prices will be, if you know how to listen. The challenge is that most contractors don't have the time, expertise, or tools to interpret these signals.
What This Means for Your Business
Understanding energy market connections can transform how you approach asphalt procurement:
Better Bidding: Instead of guessing future asphalt costs, you can make informed estimates based on forward energy prices.
Improved Timing: Energy futures can signal whether asphalt prices are likely to rise or fall, helping you time your purchases and inventory decisions.
Risk Management: Knowing the relationship between energy markets and asphalt costs opens up new ways to protect your margins, including financial price protection strategies.
Competitive Advantage: While your competitors are guessing, you can be working with real market intelligence.
The Practical Application
At Asphalt Unlimited, we've taken this market intelligence and made it accessible through tools like our Daily Asphalt Index and Futures Prjections found in our Asphalt App. These systems automatically track the relevant energy markets, apply the appropriate weightings and calculations, and translate the results into actionable asphalt price forecasts.
But even without sophisticated tools, understanding these connections can improve your decision making. When you see crude oil prices trending up, start thinking about your asphalt needs. When natural gas prices spike, expect refining costs to increase. When heating oil demand rises in winter, be prepared for potential asphalt supply constraints.
Looking Forward
The energy markets aren't going away, and their influence on asphalt pricing will only grow more important as global energy dynamics continue to evolve. Contractors who understand these connections will have significant advantages over those who don't.
The question isn't whether energy markets affect your business. They already do, every single day. The question is whether you're going to understand and use these relationships to your advantage, or continue operating blind to one of the biggest cost drivers in your business.
At Asphalt Unlimited, we believe knowledge is power, and market intelligence is profit. The energy markets are speaking. Are you listening?