Price premium for diesel will increase this month

By James Haughey, Director of Economics, RBI -- Logistics Management, 11/1/2005

WALTHAM, Ma.— The combination of hurricane damage to refineries and political pressure to limit consumer fuel price increases pushed diesel prices up $0.40 relative to gasoline since Hurricane Rita. Diesel prices were stuck at $2.90/gal. early in November while gasoline dropped $0.50/gal. by the week ending October 31. The price premium for diesel probably will get even larger in November. Current gasoline spot prices suggest another $0.20/gal. decline very soon.

The recent diesel price jump—on top of high pre-hurricane prices—for all petroleum products caused unusually rapid increases in crude oil demand on strained supply capacity. This crude oil problem did not affect the price spread between diesel and gasoline, and this part of the energy price problem is already easing. Crude oil prices are now only a few dollars above the peak price reached before the Gulf oil fields were shut down. US crude oil inventory is now 12 percent higher than a year earlier.

The premium for diesel fuel is temporary but likely will persist for several months and will not be fully eliminated over the next year. Surprisingly, the diesel price spike was not set off by too little diesel inventory in early September; inventories were 8% above the previous year when Rita hit but have since sagged and are now a measurable part of the price problem.

Consumer price protection actions included maximizing gasoline production and imports at the expense of other products. Petroleum product imports soared 1 million barrels per day—60 percent of the increase was gasoline. Extra residual fuel was imported by electricity generating station to substitute for 50 percent more expensive natural gas.

There were no added diesel imports until mid-October. The disproportionately large gasoline share of imports was made possible by suspending the regional environmental requirements for using about 60 different gasoline formulations so that more conventional gasoline could be imported from Europe and the Caribbean, drawing on reserve stocks and unused refinery capacity. The result is that gasoline stocks are rising, heating oil stocks are now up 9% from a year ago but diesel stocks are declining and the margin for diesel distributors appears to have widened by about $0.15/gal.