The 2006 ULSD Diesel Conundrum

Posted By on May 23, 2005

Statistically, we all expect the price of diesel fuel to drop and the price of gasoline to rise in the summer. It is usually stated that the summer driving season puts a demand on gas, whereas the winter heating season puts the demand on heating oil. This is probably to simplistic of an answer, but this seasonal trait still always seems to exist.

As we approach the summer 2006 Ultra Low Sulfur Diesel (ULSD) Mandate, this seasonal trend is going to be interesting, particularly in how it will effect our overall economy. The summer/fall 2005 seasonal trends will probably reflect the normal swings … but I believe that the spring of 2006 will bring a shock to diesel fuel buyers, as well as all products being shipped using diesel transit in 2006. Fuel driven inflation could be about a year away.

I believe the 2006 change in seasonal trends will be due to the complexity of the ULSD conversion. Last week, in talking with a mid level fuel buyer and then a separate distribution company associated with Marathon diesel fuels from an agricultural supply perspective, I’m becoming more and more convince of a potential problem.

First, Marathon intends to make the switch to ULSD in the first quarter of 2006 when there will still be a supply of dirty D2 in the market. Why is this a problem? Well, projections from the ‘think tanks’ tell us to expect a 6 to 15 cent per gallon increase, BUT talk on the street has concerns that the demand for ULSD will be difficult to meet. The mid-level fuel buyer that I mentioned (he supplies to the Midwest and East Coast through a variety of shipping methods include the massive pipeline known as “the Centennial Pipeline.” are already locking up supplies will California buyers ahead of the game in securing contracts. To add to the mystery in how we will make this change, once pipelines are purged (a massive ‘do it once’ undertaking) and storage tanks are cleaned, the companies can’t go back. This puts a real bind on tanker trucks and depots that must spotlessly clean their tanks in order to prevent contamination of the new ULSD spec fuels. Spotless might be a strong word but from what I’ve been told, just a small amount of today’s D2 will push ULSD out of spec.

The concern is three fold: 1) Having enough supply of the ULSD available to meet the demand, 2) Purging and cleaning pipes, tanks, trucks, etc so as not to contaminate the higher priced ULSD, 3) Once switched having to compete with existing D2 that will be priced lower than ULSD. Concerns at the retail outlet on up is about maintaining cash flow as they make the rotation. Very few facilities have the infrastructure to carry both products as the same time.

The concerns are if a company converts early, they will lose revenue to those still selling dirty D2 and that the price due to shortages of ULSD will initially be far higher than the projected 5 to 15 cents per gallon. Stay tuned and plan ahead for a change in seasonal patterns and potentially fuel cost related inflation pressures next year.

Comments

  • Rich

    Rich,

    This was perfect. Especially the loss of income in switching tanks over. There are not enough severice companies to clean all these tanks. I have to go on the time log they have. I can’t get it done the day before the law goes into effect. That would be ideal economics. Just one of our diesel tanks is 100mb or 100,000 bbls or 4, 200,000 gallons. There is more than one we will have to consider in the switch. At one time the company owned 5 terminals. Regardless, if not us, the new owners face the same hardship. We charged 3/4 of one cent per gallon to store product per month. So the typical terminal operator may have to loose $30,000 per month per 100mb ULSD tank, until this product show up. The tank might be idle two month before D day or perhaps be out of commission due to lack of cleaning. In that event, no ULSD will move out of that terminal and prices could soar is some (not all ) locations. Must keep it clean. Can’t use it! Have to let it sit empty until the ULSD comes up the pipe or the tank gets cleaned. We all can’t pick June 30th of 2006 to get this done. The Colonial Pipeline which has fed my Baltimore MD terminal and New Jersey terminal does not have the ability to pump the ULSD past Richmond VA. You did a great job of showing the massive revenue loss about to be passed to terminal operators. Yes, as you pointed out, the cost will be passed to the consumer. The final issue is that a major supply pipeline will not be able to meet traditional drop off locations along the east coast. The hope is that foreign cargoes take up the slack. This only works with terminals along the coast. The Colonial feeds many inland terminals . So now what? We will find out, and with no planning from the EPA. Wrong law, wrong time and Zero thought in planning.

    Blair .B

  • Troy

    Excellent post. I wonder whether the high price of diesel relative to unleadeed won’t keep down diesel auto sales in the short term. And I wonder whether that isn’t on the minds of VW execs who, for example, aren’t introducing a mk V TDI any time in the near future. Maybe it also helps explain the reluctance of other auto companies to move into diesel, for that matter. Diesel is already expensive. The switch over will push it higher and it will be quite some time before the cost comes back down and the price shock recedes in the collective memory.

    Of course, there’s the emissions worry as well, but I don’t think that by itself that’s enough to explain why VW isn’t bringing a Golf TDI when the Jetta TDI is here.

    Then again, maybe it’s just a poor decision on their part.

Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.