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BLOWIN' IN THE WIND

DIESEL FUEL VERSUS GASOLINE - AGAIN

by Robert Patton, TDR

u•thor´i•tator n. 1. Person of authority. 2. Expert; reliable source. 3. One that writes gooder.

Authoritator – Use in a sentence: To do this here article on the prices of diesel fuel versus gasoline I needs an authoritator.

With that thought in mind I called the TDR's resident expert on lube oils, John Martin, to see what insight he could bring to help us understand the diesel/gasoline price disparity. For review purposes I gave John two articles: one from Automotive News, 1/30/2012; and one from Light and Medium Truck, February 2011. To keep John's research to a minimum, I highlighted paragraphs from each article where the authors commented on the price disparity. The following are bullet points from L&MT.

Decades ago, diesel was a refinery byproduct and reliably cheaper than gasoline. Each successive federal cap on sulfur content for diesel resulted in higher refiner costs that got passed down the line to truckers.

• When the Department of Energy began its weekly survey of filling stations in 1994, diesel and gas prices tracked one another quite closely. It was not until 1996 that the DOE's weekly survey reported diesel prices were routinely higher than gasoline. The last time the diesel average stayed below the gasoline average for more than two consecutive weeks was in August of 2009. Since that time diesel has remained higher.

• Chief among the domestic factors that contribute to the diesel price premium are the United States' requirement of ultra-low-sulfur diesel fuel and rising demand for diesel from US buyers (the trucking industry).

• Also, DOE economist Tancred Lidderdale commented, "In Europe or China, the growth in diesel fuel consumption is stronger and is expected to stay stronger than growth in gasoline consumption."

• "We've become a net exporter to these countries," said petroleum analyst Phil Flynn, referring, like Lidderdale, to Europe and China.

LM&T conclusion: "There's really one reason" for the spread, said Lidderdale, the DOE economist, "The global demand for distillates is rising faster than global demand for gasoline."

And now, quotes from the 1/30/2012 Automotive News article:

"Diesels offer clear benefits over gasoline. So at a time when automakers have to gear up for stringent fuel-economy rules—and clean-diesel emissions—you might think that diesel's moment has come.

"Automakers have been holding diesels out of the United States for years, but such decisions are especially perplexing today. If there ever was a moment when the North American industry could benefit from a switch to different engine architectures to claim quick and easy fuel-economy improvements, it would be now.

"But if diesels have such obvious problem-solving potential, why wouldn't they end up constituting half of US auto sales?

"So what's the problem?

"Dave Coleman, product development engineer at Mazda North American, cites several challenges. 'Their benefit is just not immediately obvious to US consumers,' he admits. 'It requires some arithmetic and a calculator. The pump price of diesel is higher than gasoline—higher even than premium gas.

"'And the diesel engine costs more to build, so it's more expensive to buy. So you have to calculate what your savings will be over years of driving.'

"One reason for the pump price disparity is that the federal fuel tax on diesel fuel is now higher in the United States than the tax on gasoline. And to exacerbate the price, in the past few years, US refineries have been eagerly exporting refined diesel fuel to Europe and emerging markets. In Europe, diesel pump prices are lower than gasoline prices.

"Allen Schaeffer, executive director of the Diesel Technology Forum, a nonprofit that represents diesel industry manufacturers, says that he admits there are unique American challenges to diesel engines—the pump price difference being number one among them. But he is optimistic that diesel penetration will grow beyond its current meager market share.

"'Why aren't there more diesels already? That's a complex question,' Schaeffer admits. Further Shaeffer comments, 'Some manufacturers just need to see a little more consumer confidence in the technology before they invest in long-term change.'"

Finally, as stated in my introduction, I called "the authoritator," John Martin, for his comments. John gives us the following update:

Diesel fuel was never only a byproduct of the refining process. Refineries consist mainly of very tall distillation columns. Crude oil is pumped into these columns, and specific product cuts are taken off according to their boiling points. Products such as butane come off the columns very early while road tar is one of the last products to come off.

Gasoline is the first motor fuel to come off columns due to its lower boiling point. Then it is sent to the other areas of the refinery (cat crackers, etc.) where it is further processed into the gasoline we purchase at the pump. Diesel fuel and jet fuel come off the column next. (Jet fuel is a more refined, better-filtered version of diesel fuel.) Refiners can adjust the boiling point fractions to increase the yield of one product over another only very slightly. Larger adjustments require a complete refinery reconfiguration (and considerable construction), which often takes years to accomplish.

Before ULSD very little further processing of diesel fuel was done. Diesel fuel was usually additized and sold almost as it came off the column. After ULSD, refiners had to make large investments in equipment and systems to desulfurize the column so the cost of diesel fuel increased significantly.

Still, diesel fuel costs less to produce than gasoline. But, cost isn't really what determines diesel fuel prices. If cost were the determinant, gasoline and diesel fuel at the refinery would always cost less than it does 200 miles down the road. Demand drives fuel cost. Period. It's just like your cities' rock concerts—you can see Barry Manilow much cheaper than you can see Justin Bieber. Or, as Mr.Bill the cat would say, "Acck!"

As was emphasized in the L&MT and AN articles, during the last century refineries were configured to optimize gasoline production at the expense of diesel fuel because gasoline demand was significantly greater than gasoline. Over time things have changed, all of which served to increase the demand for diesel fuel relative to gasoline. Our large over-the-road truck fleets are now 100% dieselized. In Europe, over 50% of new vehicle sales are diesel fuelled because of the diesel's 25-35% better fuel economy. Developing nations such as China and India (Chindia) purchase more diesel fuelled vehicles because they are more cost-effective. Even American passenger cars and light trucks are slowly switching to diesel fuel for better fuel economy.

At the same time, gasoline-fuelled vehicles have become smaller and more fuel efficient. Refiners know that refineries need to be re-configured to produce more diesel per barrel of crude, and 10 or 11 such projects have been on the books for several years. However, active environmentalists automatically fight (or stall) any refinery construction because they hate "Big Oil." These folks have even backed their favorite President into a corner over approval of the Keystone XL pipeline project. He had to delay a project that even he knows is vital to our country in order to maintain environmentalists' votes.

Petroleum refiners have been caught between a rock and a hard place. To survive, they raised the price of diesel fuel so they could maintain profitability. Gasoline is sold at much less profit just to get rid of it. Refineries produce so much product per day that they can't simply store gasoline - there isn't enough tankage available around the world! So, if the price of diesel is more than 125% of the price of gasoline, is it still a good deal? You already know the answer. People who purchased diesel-fuelled vehicles to save money are now forced to spend more money for fuel. We aren't happy!

This price disparity could be straightened out. But, again, the refineries can be reconfigured to optimize diesel fuel production, which would take 2-3 years to accomplish.

A more immediate cause of high fuel prices (particularly rapid price increases) is a questionable accounting practice approved many years ago by our politicians. (Big Oil owns many politicians—Exxon Mobil spends over $450 million per year on lobbying activities). In the last century some uninformed politician introduced legislation allowing oil refiners to use LIFO (last in, first out) accounting instead of the FIFO (first in, first out) accounting they had used previously. This means that the minute there is a higher price out there for fuel or crude oil, everyone can immediately change to that higher price for their products, regardless of the cost of the products in their systems. This really unnerves oil speculators, they react very quickly, and they drive oil prices even higher. Surely you've noticed how rapidly all the stations in your neighborhood raise their prices as soon as one station raises his. Ouch!

John Martin
TDR's Fuel and Lube Oil "Authoritator"