All energy prices are up and probably going up to higher levels, including gasoline. Under any fuel pricing scenario, diesel is still the most energy efficient internal combustion engine on the planet. Making any personal car technology choice requires taking the long view on all the factors involved, including performance, purchase price, owning and operating costs, useful life, resale value and fuel prices. Beginning in 2008, consumers will have more fuel-efficient diesel choices than ever before. In addition to a superior driving performance and now low-emissions, clean diesel is a technology that provides proven real-world fuel economy benefits under any mix of vehicle operation, along with higher resale values. Higher diesel fuel prices in the short term tend to lengthen the payback periods for all diesel owners to get a return on their investment. New clean diesel cars coming out in 2008-2010 will likely be eligible for a federal fuel tax credit of $300 to $3400 dollars, depending on fuel economy ratings. For more info, click here. New federal fuel economy mandates of 35 mpg average by 2020 and renewable fuel requirements will have a significant impact on product mix and will drive a reduction in gasoline consumption and production.
According to the Energy Information Administration (EIA), gasoline and diesel fuel prices have traditionally followed set seasonal patterns from year to year. In spring and summer, the peak driving season, gasoline sells at a premium to diesel fuel. In the autumn, demand for distillate fuels (heating oil and diesel) picks up ahead of the winter at the same time that gasoline demand begins to soften. Refineries begin to build inventories of high sulfur distillate fuel (heating oil) late in the summer, while diesel fuel consumption increases in the fall due to farm use and trucking of goods ahead of the holidays. Heating oil prices put a floor under diesel prices through the winter, since if diesel were selling at a discount to heating oil, diesel could be used for home heating.
This year, like several others this decade, the traditional seasonal pattern does not appear to be holding. At winter?s end, we normally expect gasoline and diesel fuel prices to be converging, with gasoline prices then rising above diesel for the remainder of the summer. However, diesel fuel prices have continued to rise at a quicker pace than gasoline through the late winter/early spring period, and the diesel fuel premium over gasoline is now in the 70 cent per gallon range. In fact, the Energy Information Administration?s Short-Term Energy Outlook is projecting that diesel fuel will continue to sell at a higher price than gasoline through the summer, although the price differential between the two fuels is expected to narrow.
Factors in both gasoline and distillate are contributing to the current and projected pricing pattern. Weakness in the U.S. economy has led to softening gasoline demand. While gasoline prices have increased this winter due to surging crude oil prices, they have not risen as high as they would have if year-on-year gasoline demand growth was unfolding at normal rates.
On the other hand, demand for distillates in Europe, Asia, and the Middle East has continued to grow at a fast pace. In Europe, financial incentives continue to promote the transition from gasoline-powered to diesel-powered cars and light trucks, while a growing economy has lifted transportation sector consumption overall. Additionally, emissions standards for diesel fuel continue to tighten across Europe, adding to supply tightness as European refineries catch up to new specifications, according to EIA.
Furthermore, distillate inventories in the U.S. and Europe remain tight while U.S. gasoline stocks are well above the average range for this time of year. Distillate stock draws in the U.S. have been partially driven by East Coast heating oil demand. However, overall tightness in U.S. distillate markets is due more to slumping imports than to domestic demand strength. While U.S. trucking has felt the effects of our economic slowdown, strong European demand has had ripple effects across the Atlantic with European supply constrained by refinery maintenance, unplanned outages, tighter emissions standards that restrict import sources, and economic disincentives stemming from low gasoline margins. European refiners appear to have trimmed crude runs because of low gasoline margins and diminished export markets. The transition of the European light duty vehicle fleet to high diesel dependency has reduced the value of gasoline produced by European refineries in their home market. And now, weakness in U.S. gasoline markets has deprived European refiners of an economic outlet to dispose of surplus gasoline output. This contributes to tightness in distillate markets on both sides of the Atlantic.
The gasoline-distillate spread may be self-perpetuating to some extent, as the lack of markets for gasoline helps constrain Atlantic Basin distillate supply, boosting distillate prices on both sides of the Atlantic. Any short-term relief appears most likely to come from the demand side as winter ends in the Northern Hemisphere. The wind down in heating fuel use may expose U.S. distillate markets to the slowing economy and decreasing trucking activity. Read the full EIA report along with graphics at tonto.eia.doe.gov/oog/info/twip/twip.asp.
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