Crack Spread – Blame Diesel Cars

Posted By on August 10, 2005

With oil prices on the rise again what can we surmise? A couple of days ago, U.S. light, sweet crude for September delivery rose to a record of $64 a barrel. What is interesting is to dig into the ‘crack spread’ between the different grades of refined light oils.

Crack Spreads
Those in the energy business observe ‘crack spreads’ and how dramatically they affect industries that are fuel intensive, such as shipping and aviation.

Jet fuel for example has had a much wider gap than in 2002. The spread was less than $3.00 per barrel then and is $11 per barrel today. This is extremely painful to airlines who are already cash strapped and suffering from high fuel prices. Fuel cost is only second to labor in the airline industry; they are all struggling to find ways to compete with such large price changes.

Gasoline has also seen changes in the ‘crack spread.’ The difference is $7.75 from a 2002 spread of $4.14 per barrel. That’s a double in spread compared to a quadruple that jet fuel has had. Motorist are feeling that at the pump this summer.

According to the Wall Street Journal, crude oil adjusted for inflation is the highest since November 1982. It still remains below its inflation-adjusted peak price of $94.77 set in April 1980, though. Many traders believe conditions are right for that number to eventually fall, but just as many believe that supply is really not that short and that significant gains are being made to put more crude oil into the system. I don’t believe anyone really knows?

What’s causing the Jet Fuel ‘crack spread’ change, Diesel Cars?
Well if you can believe staff reporter Melanie Trottman, who writes in the WSJ “Heard on the Street Column,” she is places the blame on diesel cars in part. She states, “Jet fuel and diesel fuel have similar components, and soaring demand for diesel-powered vehicles, particularly in Europe, is pushing up prices for both fuels. Greater industrial demand for diesel in China also has played a role. Airline executives complain that refiners, which in the past decade came off a long period of weak profit margins, have been slow to add new refining capacity, which is contributing to the high prices.”

Hmm … what’s going to happen when the ULSD hits the US next year and diesel cars sales, which are already seeing growth, are way up? VW and Mercedes are the lone diesel ‘car’ sellers today, but many European diesel manufactures are ramping up to export more diesel to the US.

Afterthought: According to their forecast, hybrids that currently account for 0.5 percent of the U.S. market are expected to conquer 3.5 percent of the American market by 2012. Diesels – a category of vehicles the USA has still not taken to – will grow from 3 per cent to 7.5 per cent. (JD Power)


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