Diesel prices starting to settle down

By |  January 18, 2023
Says Allen Schaeffer of the Diesel Technology Forum: “COVID caused a lot of layoffs at refineries around the world. It also caused a delay in the start-up of new refining capacity, which would have increased supply.” Photo: photovs/iStock / Getty Images Plus/Getty Images

Says Allen Schaeffer of the Diesel Technology Forum: “COVID caused a lot of layoffs at refineries around the world. It also caused a delay in the start-up of new refining capacity, which would have increased supply.” Photo: photovs/iStock / Getty Images Plus/Getty Images

“For the last few years, even before the Russian crisis, diesel has sold at a premium to gasoline in the U.S.,” Williams-Derry says. “One reason is higher federal and state taxation. Another is the shift to lower sulfur diesel. That’s been very good for clean air but has also slightly increased the price of diesel relative to gasoline.”

Low inventories

The fact that distillate inventory is running low around the world has only added to upward pricing pressure.

“As economies have recovered, the supply of crude hasn’t kept up with demand,” Lipow says. “For all intents and purposes, diesel levels are the lowest they’d been since 1951. The world has been living on borrowed time if you will, by drawing down inventories.”

Diesel supplies are tight in most U.S. regions, Lipow notes. Nationally, inventory supply has been running at 25 days – down from its normal 30- to 35-day level.

Of particular concern is the East Coast, a region with high population centers, high heating oil demands and a lack of refining capacity. In late 2022, the region had only 13 days’ supply of diesel – down from 26 a year earlier. One exception to the trend is the Gulf Coast with its robust refining capacity and limited requirement for home heating.

In a perfectly fluid market, one would expect dwindling inventories and growing demand to stimulate higher production at the world’s refineries. Yet there are roadblocks, one of which is a carryover from the worst days of the pandemic.

“At the peak of the pandemic in 2020, diesel demand had gone down by 30 percent and refineries were losing tons of money,” Lipow says. “At the same time, they were getting older. In the U.S. they were also facing more environmental restrictions, especially in California.”

Refinery operators were put on the spot as the pandemic softened demand for their products and the Biden administration moved away from fossil fuels.

“Suppose you’re looking at spending several hundreds of millions of dollars, perhaps even a billion dollars, to comply with new environmental regulations,” Lipow says. “In an environment where the demand for your product is going down, you may well decide to simply shut down.”

The slim levels of diesel inventory leave the market vulnerable to unexpected shocks.

“All you need is one little hiccup in the supply chain or a problem with a pipeline or a big cold snap in the Northeast,” Schaeffer says. “The next thing you know higher prices and shortages are back in the news.”

Growing capacity

Not all is doom and gloom in the energy picture.

Despite the cost and the delays required for creating new refineries or upgrading older ones, some new capacity is coming on stream in the first half of 2023.

“Kuwait and Oman are building brand-new large refineries,” Lipow says. “Two new refineries have just come on stream in China. And we’ve got another large refinery coming on stream in Nigeria.

“Closer to home, Mexico is building a new refinery, known as Dos Bocas, coming online in the next couple of years,” he adds.

Lipow figures these new refineries will produce some 2 million barrels a day, equivalent to about a 1.5 to 2 percent increase in world refining capacity.

Another contributor to an increase in diesel supply is the green energy movement.

“We are seeing a tremendous growth in investments to produce biodiesel and renewable diesel,” Schaeffer says. “Having more renewable biofuels helps not just keep the price down a little bit, but it also helps with more supply being available.”

Major oil refiners jumping onto the green bandwagon include Phillips 66, Marathon Petroleum and Chevron. All are investing in new refining capacity or transitioning older petroleum operations to make more renewable diesel.

Other companies, such as Marathon and Diamond Green Diesel, are joining the effort. All told, the past year has seen the production of 3.2 billion gallons of green diesel – about two-thirds of which was biodiesel. Schaeffer figures production should top 15 billion gallons by 2030.

Currently, renewable diesel and biodiesel account for about 5 percent of U.S. diesel demand, and there have already been some favorable effects. The Clean Fuels Alliance America, an organization of biodiesel producers, estimates that renewable fuels account for slightly more than 3 cents a gallon of price suppression.

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