Posted By RichC on May 31, 2006
Although slightly lower fuels prices were not what most consumers expected this past the Memorial Day Holiday weekend, many were glad to see the relief. Nationwide the prices of gasoline have drifted down a little bit from their high … none too soon for many energy squeezed citizens.
According to the Energy Information Agency, the west coast had the most expensive gasoline over the weekend at $3.21/gallon, although down 4.4 cents from last week. The Gulf coast states had the least expensive fuel averaging $2.74/gallon, down 4.6 cents. Our own midwestern jewel on the lake, Cleveland Ohio, was the lowest priced major city for the second straight week at $2.71/gallon. I was shamelessly looking for an excuse to play with my new Palm Treo 700p’s camera, so today on my drive across Ohio clicked least expense fuel price postings I could find. Hey … $2.43/gallon … unfortunately diesel continues to frustrate trucking and construction equipment operators. (and ‘non-biodiesel’ powered VW TDIs)
Since I’m blogging about fuel prices, now might be a good time to comment on the upcoming change from Low Sulfur Diesel (LSD) to the mandated cleaner diesel fuel known as Ultra Low Sulfur Diesel (ULSD). A regular forum/email list poster at CinciTDI is in a position to understand the ‘petroleum’ industry from the inside and occasionally shares his insight. He posted a few recent comments from a meeting dealing with the challenges “Majors and Indepentant shippers” face in ‘flipping the switch’ as it were. I’ll share some of his post below. (thanks Blair)
We were told a 6 week transition period would be needed to test the pipeline system, to see if ULSD can be shipped from Origin Point to Destination Point and maintain specification. This transition grade of ULSD would be called 69 grade. At present, we ship LSD under the code of 74 grade. The new ULSD will be designated 61 grade diesel.
During this period, the pipeline requested we ship ULSD at origin point – but- would not guarantee ULSD at ‘delivery point’ for the first three movements. A temporary army of mobil testers would monitored the pipeline’s final delivery points as to sulfur content. I only recognized a situation of paying a 1 to 4 cents a gallon premium for ULSD – but – we having no guarantee the quality will remain ULSD at destination during the test period. I refused to participate unless destination specifications met origin specifications. Seemed other shippers did the same. I saw no 69 ULSD grade diesel shipped on it’s maiden ( Titanic ) voyage.
I have no clue what this will do to final 61 grade – ULSD. I assume the EPA will have to allow all shippers a new fudge factor or make someone other that shipper, like myself, finance the fist trial shipments on any pipeline. This all seemed to be put into place with zero thought to simple economics. Imagine being a refiner. You are asked to invest in a more expensive grade of diesel at origin point, but the return on investment was not there at delivery point. FERC regulations were already filed for the Monday following this meeting. That only left two working days to amend the filing – you’re guess as good as mine. I will post when 61 grade starts to ship.
As to the price difference of ULSD vs. LSD? You saw the 1 to 4 cents a gallon premium above and I assume you are all cheering. Not so fast, let’s look at what really happened. You are not seeing the real ‘ additional’ cost of ULSD. We have been paying the premium for ULSD – while getting just LSD. 80% of a refiner’s output will be ULSD – 20 % LSD. ( this makes the 20% LSD a rare commodity – to a oil trader , marketer or end user). Since LSD is still legal and cheaper than LSD, the industry continues to buy the cheaper LSD. I personally have not purchased one gallon of ULSD and will refuse to do so until it is the same price as ULSD. What started out as a arguable 18 to 32 cent premium of the clean grade over the lower grade has made a move where LSD has risen in value to ULSD. ULSD has not fallen to just 4 cents a gallon over LSD. In other parts of the country ( New England) ULSD and LSD are just 1 cent per gallon away from each other – or should I say LSD has risen to almost the higher price of ULSD. It will continue to do so. 4 cents to me is $40,000 per batch. I and others in the industry will always buy the cheaper diesel and capture this margin – even at a quarter of one cent discount. Why not, it’s legal. I also have no clue what terminals can handle the ULSD. ULSD is a commodity with severe storage problems at this time along with limits on the pipeline. The chance of a shutdown is great with going off specification by a margin of one part per million.
Diesel use to sell for less than gasoline, not long ago. Diesel costs less to refine. Now the older style 500PPM LSD prices in gasoline ranges. Diesel is counter – season to gasoline. Their peak demand or bell curves occur at different times of the year. Gas demand peaks in the summer . Diesel seems cheaper when compared to gasoline in the summer. That tends to vanish in the winter when heating oil dips into the diesel output. I would not expect diesel to return to it’s tradition level of being cheaper than gasoline. The above EPA ruling and its massive confusion is why – as is the over 40 cents per gallon you pay for the dozens of boutique formulas of gasoline. In effect, we kept bidding up 500ppm LSD knowing it did the job and always cost less. If a guy offers you ULSD at a cost far more than LSD, you buy the cheaper diesel and keep doing so until the discount goes away. We just got to a point where we now bid one cent a gallon under ULSD for LSD. I expect this will go to one quarter of one cent. Remember, a quarter of one cent is still $2500 on a batch. Again, this is why you lost your discount on the diesel to gasoline margin. This was the cause of the diesel price swing into gasoline territory, even before the official debut of ULSD.
The pipeline company ended the meeting telling us they will have to file shut down procedures with the FERC. It’s a mind boggling process to start the pipeline sequence with all these new grades of products and to time the shipments out of all the tanks or origin, to all the tanks at destination. They said not to call us anymore for favors on a Friday afternoon. We have no room for error anymore with all the tight shipments of new grades of gasoline and the stringent procedures needed to ship ULSD. In other words, if I start a shipment out of Texas and then find out my tank failed in the South East – two or three of these could trigger a shut down. They were not kidding. We had a ‘ spur line’ shipment shut down today followed my a main line freeze of one cycle followed by a possible allocation of pipeline space tomorrow.
I expect more regulations to come at the worse time. Hurricane season opens in days. Don’t think I’m being bitter – I have the luxury of history to form this opinion.