Varied Oil Charges Make Forecasts Difficult, Analysts Say
By Eric Miller, Staff Reporter
This story appears in the July 2 print edition of Transport Topics.
James Burr likens the job of forecasting diesel fuel prices to that of a television weatherman.
“They all start with the same information,” said Burr, an energy analyst and a vice president with FCStone of Des Moines, Iowa. “One says it’s going to rain, another says it’s going to sleet, and yet another says it’s going to snow.”
The same might be said of diesel price forecasts: Even such well-informed analysts as Burr caution that the volatility of oil markets can render a diesel price prediction inaccurate in a flash, much like a fast-moving front can leave a weatherman red-faced.
“We’re one headline away from a 50-cent move in either direction,” Burr said.
With that caveat in mind, Burr and some of his fellow analysts said they expect the price of diesel to continue to hover around current levels, at least through early 2008.
That’s consistent with the Energy Information Administration’s May 2007 short-term outlook, which projects that average prices for on-highway diesel retail will average $2.79 this year but dip slightly to $2.73 in 2008.
Distillate fuel oil consumption is expected to increase by 1.9% in 2007 and 1.6% in 2008, according to EIA projections.
But the larger question might be whether the high cost of diesel fuel, which has nearly tripled over the past seven years, is here to stay.
“The big issue is, to what extent are the price increases we’ve seen the last 3½ years an underlying trend or just transient,” said James Bartis, a senior policy researcher at Rand Corp.
He said that question might not be answered for at least another five years. “It’s a business in which volatility is the norm.”
He said that, as recently as 2003, the price of a barrel of crude oil was in the $20 to $25 range, a far cry from the $60-plus on the current market. And, in 1998, the price was only around $10 a barrel, Bartis said.
As recently as 2002, the average retail price of diesel fuel in the United States was about $1.32 a gallon, according to EIA data. It rose to $1.81 a gallon for 2004, $2.41 for 2005 and $2.71 for 2006.
In the shorter term, Bartis said he believes that diesel prices won’t come down significantly the next 12 months to 18 months.
“Retail diesel fuel prices are likely to remain elevated as long as crude oil prices and world demand for distillate fuels remain high,” the EIA outlook said.
However, not everyone is convinced that diesel prices will remain flat this year. Brad Simons of Simons Petroleum, Oklahoma City, said he fears the cost of diesel could rise at summer’s end and afterward, especially if the winter is very cold. Although diesel inventories are above average, the burgeoning economies of China and India will likely continue to increase the competition for world crude, which in turn can cause diesel prices to move upward, Simons said.
He also said that although crude prices and diesel prices tend to “move together” up or down, supply and demand also are highly significant indicators of price.
Burr, however, said that one reason for his optimism is that diesel inventories are higher than the upper ranges of seasonally adjusted averages. By comparison, gasoline inventories since February have dipped below the bottom of the average range, according to EIA data. That’s one of the reasons that gasoline prices have exploded recently to higher levels than diesel, Burr said.
Refineries wish they could squeeze more gasoline out of each barrel of crude oil, he said, because oil companies currently make more money on gasoline than on diesel. But they can’t, because the process allows only a certain amount of gasoline to be extracted, about 19 of the 42 gallons in a barrel of crude, according to the EIA.
“To make gasoline, they have to make that darned old diesel,” Burr told Transport Topics. Only about 8 gallons of byproduct extracted from a typical barrel of crude is made into diesel.
That “darned old diesel,” of course, is the lifeblood of the trucking industry, and carriers and shippers have had to work hard to come up with strategies to stay competitive and at the same time keep the bottom line healthy.
While fuel surcharges allow carriers to recoup the majority of their extra fuel costs, the higher prices still hurt. For example, Pat Quinn, president and co-chairman of U.S. Xpress Enterprises Inc., Chattanooga, Tenn., said that, even with surcharges, his company still absorbs about 20% of the higher cost of diesel.
A Department of Energy price survey of filling stations on June 25 set the average price of diesel at $2.835 per gallon, while gasoline was selling for $2.982 per gallon.
The most recent price survey puts diesel at 3.2 cents a gallon less than the corresponding date in 2006 but still 42.2 cents above the $2.413 a gallon on Jan. 29, the low point for the year so far.
By far, the largest determination of the price of gasoline and diesel is related to the world price of crude oil, according to energy analysts. The cost of crude equals from 50% to 57% of the total cost of gasoline at the pump, said Al Mannato, fuel issues manager for the American Petroleum Institute.
Other influences on the retail price of diesel and gasoline include refinery capacity, diesel inventories, OPEC production and even the wrath of Mother Nature — as in the case of the price spikes following refinery disruptions after Hurricane Katrina struck the Louisiana coast.
A 2006 investigation of post-Katrina price manipulation by the Federal Trade Commission concluded that during the past 20 years, fluctuations in the price of crude oil have explained 85% of the spikes and declines in U.S. gasoline and prices.
The probe said that refining capacity has increased during the past two decades, even as the number of refineries has declined. The industry added capacity by expanding existing refineries, which appears to be more economical than building new re-fineries, but these expansions have not kept pace with rising demand over the same period, according to the FTC.
The FTC report said the average size of existing refineries has increased so that overall industry distillation capacity increased from 15.3 million barrels per day in 1996 to 17.1 million barrels per day in 2005, or about 11.7%. This increase is equivalent to the addition of more than 15 average-sized refineries (at the 2005 average size of about 115,700 barrels per day).
“Nevertheless, our investigation did not uncover evidence suggesting that expansion decisions resulted from refineries, either unilaterally or in concert, attempting to acquire or exercise market power,” the FTC report said. “Rather, the evidence suggested that the rate of capacity growth was a response to competitive market forces that made further investment in refining capacity unprofitable.”
It also noted, “Our investigation uncovered no evidence indicating that refiners make product output decisions to affect the market price of gasoline. Instead, the evidence indicated that refiners responded to market prices by trying to produce as much higher-valued products as possible, taking into account crude oil costs and other physical characteristics.”
Still, Rand researcher Bartis is skeptical that oil companies don’t know how to use the market to their advantage because they generally make more money on gasoline than on diesel. “There’s so much more manipulation of what goes on in the gasoline markets,” he said. “When you look at diesel, it’s a much more uniform marketplace.”
One large U.S. oil producer, Marathon Oil Corp., is adding more diesel fuel to its market basket. Last fall, Marathon announced it is expanding its refinery in Garyville, La., but will produce gasoline and clean diesel fuels in equal volumes, said spokeswoman Angelia Graves.
“We anticipate diesel demand is going up,” Graves said. Because the refinery is located on the Louisiana gulf coast, it is uniquely positioned to send the diesel to not only all U.S. markets but to Europe, where diesel is more common in passenger vehicles, she said.
It’s still not clear just what effect President Bush’s push for more use of biofuels might have on the price of diesel. Bush has called for a sharp increase in alternative fuels to reduce America’s use of gasoline by 20% within 10 years.
The president’s public proclamations have drawn threatening responses from both OPEC and the U.S. oil industry.
OPEC has warned it could cut production, and some U.S. oil producers have warned they will limit future refinery expansion.
But none of the energy analysts TT interviewed seems to regard these as serious threats, nor are they optimistic that biofuels soon will put a serious dent in U.S. fuel consumption.
“Biodiesel is more wind than it is reality,” Bartis said.
Another analyst, who asked not to be identified, agreed.
“If you took every bushel of corn in the U.S. and turned it into ethanol, it would only meet 4% of the annual demand for fuels,” the analyst said. “We will someday come up with a solution, but the solution is not corn-based ethanol.”
This story appears in the July 2 print edition of Transport Topics.
James Burr likens the job of forecasting diesel fuel prices to that of a television weatherman.
“They all start with the same information,” said Burr, an energy analyst and a vice president with FCStone of Des Moines, Iowa. “One says it’s going to rain, another says it’s going to sleet, and yet another says it’s going to snow.”
The same might be said of diesel price forecasts: Even such well-informed analysts as Burr caution that the volatility of oil markets can render a diesel price prediction inaccurate in a flash, much like a fast-moving front can leave a weatherman red-faced.
“We’re one headline away from a 50-cent move in either direction,” Burr said.
With that caveat in mind, Burr and some of his fellow analysts said they expect the price of diesel to continue to hover around current levels, at least through early 2008.
That’s consistent with the Energy Information Administration’s May 2007 short-term outlook, which projects that average prices for on-highway diesel retail will average $2.79 this year but dip slightly to $2.73 in 2008.
Distillate fuel oil consumption is expected to increase by 1.9% in 2007 and 1.6% in 2008, according to EIA projections.
But the larger question might be whether the high cost of diesel fuel, which has nearly tripled over the past seven years, is here to stay.
“The big issue is, to what extent are the price increases we’ve seen the last 3½ years an underlying trend or just transient,” said James Bartis, a senior policy researcher at Rand Corp.
He said that question might not be answered for at least another five years. “It’s a business in which volatility is the norm.”
He said that, as recently as 2003, the price of a barrel of crude oil was in the $20 to $25 range, a far cry from the $60-plus on the current market. And, in 1998, the price was only around $10 a barrel, Bartis said.
As recently as 2002, the average retail price of diesel fuel in the United States was about $1.32 a gallon, according to EIA data. It rose to $1.81 a gallon for 2004, $2.41 for 2005 and $2.71 for 2006.
In the shorter term, Bartis said he believes that diesel prices won’t come down significantly the next 12 months to 18 months.
“Retail diesel fuel prices are likely to remain elevated as long as crude oil prices and world demand for distillate fuels remain high,” the EIA outlook said.
However, not everyone is convinced that diesel prices will remain flat this year. Brad Simons of Simons Petroleum, Oklahoma City, said he fears the cost of diesel could rise at summer’s end and afterward, especially if the winter is very cold. Although diesel inventories are above average, the burgeoning economies of China and India will likely continue to increase the competition for world crude, which in turn can cause diesel prices to move upward, Simons said.
He also said that although crude prices and diesel prices tend to “move together” up or down, supply and demand also are highly significant indicators of price.
Burr, however, said that one reason for his optimism is that diesel inventories are higher than the upper ranges of seasonally adjusted averages. By comparison, gasoline inventories since February have dipped below the bottom of the average range, according to EIA data. That’s one of the reasons that gasoline prices have exploded recently to higher levels than diesel, Burr said.
Refineries wish they could squeeze more gasoline out of each barrel of crude oil, he said, because oil companies currently make more money on gasoline than on diesel. But they can’t, because the process allows only a certain amount of gasoline to be extracted, about 19 of the 42 gallons in a barrel of crude, according to the EIA.
“To make gasoline, they have to make that darned old diesel,” Burr told Transport Topics. Only about 8 gallons of byproduct extracted from a typical barrel of crude is made into diesel.
That “darned old diesel,” of course, is the lifeblood of the trucking industry, and carriers and shippers have had to work hard to come up with strategies to stay competitive and at the same time keep the bottom line healthy.
While fuel surcharges allow carriers to recoup the majority of their extra fuel costs, the higher prices still hurt. For example, Pat Quinn, president and co-chairman of U.S. Xpress Enterprises Inc., Chattanooga, Tenn., said that, even with surcharges, his company still absorbs about 20% of the higher cost of diesel.
A Department of Energy price survey of filling stations on June 25 set the average price of diesel at $2.835 per gallon, while gasoline was selling for $2.982 per gallon.
The most recent price survey puts diesel at 3.2 cents a gallon less than the corresponding date in 2006 but still 42.2 cents above the $2.413 a gallon on Jan. 29, the low point for the year so far.
By far, the largest determination of the price of gasoline and diesel is related to the world price of crude oil, according to energy analysts. The cost of crude equals from 50% to 57% of the total cost of gasoline at the pump, said Al Mannato, fuel issues manager for the American Petroleum Institute.
Other influences on the retail price of diesel and gasoline include refinery capacity, diesel inventories, OPEC production and even the wrath of Mother Nature — as in the case of the price spikes following refinery disruptions after Hurricane Katrina struck the Louisiana coast.
A 2006 investigation of post-Katrina price manipulation by the Federal Trade Commission concluded that during the past 20 years, fluctuations in the price of crude oil have explained 85% of the spikes and declines in U.S. gasoline and prices.
The probe said that refining capacity has increased during the past two decades, even as the number of refineries has declined. The industry added capacity by expanding existing refineries, which appears to be more economical than building new re-fineries, but these expansions have not kept pace with rising demand over the same period, according to the FTC.
The FTC report said the average size of existing refineries has increased so that overall industry distillation capacity increased from 15.3 million barrels per day in 1996 to 17.1 million barrels per day in 2005, or about 11.7%. This increase is equivalent to the addition of more than 15 average-sized refineries (at the 2005 average size of about 115,700 barrels per day).
“Nevertheless, our investigation did not uncover evidence suggesting that expansion decisions resulted from refineries, either unilaterally or in concert, attempting to acquire or exercise market power,” the FTC report said. “Rather, the evidence suggested that the rate of capacity growth was a response to competitive market forces that made further investment in refining capacity unprofitable.”
It also noted, “Our investigation uncovered no evidence indicating that refiners make product output decisions to affect the market price of gasoline. Instead, the evidence indicated that refiners responded to market prices by trying to produce as much higher-valued products as possible, taking into account crude oil costs and other physical characteristics.”
Still, Rand researcher Bartis is skeptical that oil companies don’t know how to use the market to their advantage because they generally make more money on gasoline than on diesel. “There’s so much more manipulation of what goes on in the gasoline markets,” he said. “When you look at diesel, it’s a much more uniform marketplace.”
One large U.S. oil producer, Marathon Oil Corp., is adding more diesel fuel to its market basket. Last fall, Marathon announced it is expanding its refinery in Garyville, La., but will produce gasoline and clean diesel fuels in equal volumes, said spokeswoman Angelia Graves.
“We anticipate diesel demand is going up,” Graves said. Because the refinery is located on the Louisiana gulf coast, it is uniquely positioned to send the diesel to not only all U.S. markets but to Europe, where diesel is more common in passenger vehicles, she said.
It’s still not clear just what effect President Bush’s push for more use of biofuels might have on the price of diesel. Bush has called for a sharp increase in alternative fuels to reduce America’s use of gasoline by 20% within 10 years.
The president’s public proclamations have drawn threatening responses from both OPEC and the U.S. oil industry.
OPEC has warned it could cut production, and some U.S. oil producers have warned they will limit future refinery expansion.
But none of the energy analysts TT interviewed seems to regard these as serious threats, nor are they optimistic that biofuels soon will put a serious dent in U.S. fuel consumption.
“Biodiesel is more wind than it is reality,” Bartis said.
Another analyst, who asked not to be identified, agreed.
“If you took every bushel of corn in the U.S. and turned it into ethanol, it would only meet 4% of the annual demand for fuels,” the analyst said. “We will someday come up with a solution, but the solution is not corn-based ethanol.”
