Fuel-Price Spread Near Four-Year High Despite Recent Diesel, Gasoline Changes

This story appears in the Jan. 7 print edition of Transport Topics.

U.S. retail diesel prices declined a combined 2.7 cents a gallon over the final two weeks of 2012, to reach $3.918, while the gasoline average rose 4.4 cents to $3.298 over the same span, the Department of Energy reported.

Despite the movements in opposite directions, the price differential between the two fuels remains near historically high levels, according to DOE data.

While the spread of 62 cents on Dec. 31 was below the 69.1-cent differential two weeks earlier, it was far above the 19.6-cent gap on June 18.

The Dec. 17 price spread of 69.1 cents was the highest since December 2008, according to DOE data. Diesel has been consistently more expensive than gasoline since August 2009.

Growing global demand for U.S. diesel exports has been driving the diesel-gasoline divide, said Sean Hill, an economist for DOE’s Energy Information Administration.

“There are opportunities now to meet demand in Latin America, in Europe, and to get a good price for it by exporting diesel produced in this country,” he said. “That wasn’t there a couple years ago.”

The increasing spread between the fuels started in earnest during October. Over a four-week span between Oct. 8 and Nov. 5, the price spread jumped by 27.4 cents a gallon and has remained more than 50 cents ever since.

A similar pattern played out in 2011, with the spread also rising above the 65-cent mark late in the year after coming as close as 10.1 cents on May 16. During 2010, however, the spread never climbed higher than 30.6 cents.

Hill said the United States is now a net exporter of diesel, largely because it’s more profitable for refiners to export it than to build inventory levels in this country.

Unlike the United States, many countries, especially in Europe, use diesel as the main fuel for passenger cars, which contributes to the worldwide demand for diesel, he said.

Phil Flynn, an analyst at Price Futures Group Inc., Chicago, also cited the growth in U.S. diesel exports as one of the reasons for diesel’s price premium over gasoline.

Global demand for diesel tends to rise during the winter, he said, corresponding with the growing season in South America, which brings higher diesel consumption in agriculture, along with cold weather in Europe and more demand for heating fuel.

The adoption of ultra-low-sulfur diesel also raised the price of diesel relative to gasoline, he added.

Flynn said the spread between diesel and gas should remain high for the next couple of years. “Fifty to 70 cents is going to be a normal premium, I think, over gasoline.”

However, that will change eventually as the transportation industry increasingly switches to natural gas, Flynn predicted.

“I do think we’re going to see a shift away from diesel, and demand will start to fall in the U.S. and that should bring the spread in. But I don’t think that’s going to happen overnight,” he said.

Diesel is being phased out as a heating fuel, and it’s also going to be phased out as a fuel of choice for much of the transportation sector, especially local delivery and utility fleets, Flynn said.

The difference between diesel and gasoline prices hasn’t gone unnoticed by carriers.

Larry Kallmeyer, president of truckload carrier Kallmeyer Bros. Enterprises, Hermann, Mo., described the price spread as “dramatic, to say the least,” but he added that diesel has remained at a relatively consistent level recently, helping the company better understand what its fuel expenses will be.

DOE said after its Dec. 31 survey of fueling stations that the diesel average dipped 0.5 cent, after falling 2.2 cents on Dec. 24. Overall, diesel has now declined five straight weeks and 10 out of the past 11 weeks since hitting a four-year high of $4.15 on Oct. 15.

Nevertheless, diesel remained 13.5 cents higher than the price 12 months earlier, $3.783.

Flynn said the relatively mild temperatures so far this winter could bode well for diesel prices. That’s because refiners may be able to shift more attention to producing diesel instead of heating fuels, which come from the same portion of a barrel of crude oil as diesel.

Gas prices have moved in the opposite direction, rising 4.1 cents to $3.298 on Dec. 31, after edging up 0.3 cent Dec. 24, DOE reported.

DOE’s Hill said gas prices went up because of the holidays. “That was an expected jump that happens every year,” he said.

Following its increase last week, the average gasoline price was almost identical to its year-ago level, with the latest price sitting a tenth of a cent lower than 12 months earlier.