Oregon Diesel Prices

On Saturday I popped up in the Oregonian talking about why diesel is more expensive than gasoline. In response to the article I got an email asking for more depth on it to which I have placed a copy below.


MY DISCLAIMER-----

First I will start with a disclaimer of my knowledge. I'm in the industry and have more knowledge of what is going on than the average person. I also read alot more than the average oil company person so I tend to have more information. Regardless though I have never worked at a refinery or farther upstream in the petroleum business.

In short I am reasonably educated in the subject but am not an expert. So I might be wrong but if I am it is because I was given inaccurate information and did not have the experience to know better.

I also think Ultra Low Sulfur Diesel is a great thing for the US and moves us to a whole new paradigm for energy opportunities.

This being said.

MY THOUGHTS ABOUT DIESEL PRICES COMPARED TO GASOLINE -------

Fifteen years ago petroleum refiners would handle the refining of petroleum differently. In the process of treating the crude oil with distillation, diesel rated products would come off earlier in the process than gasoline and would be much less costly to process into an on-road diesel fuel. Then came two changes in this refining process.

A sulfur standard for on road diesel (500 parts per million sulfur which recently dropped to under 15 parts per million) and hydrocracking of the crude in refining.

The hydrocracking of the fuel changed the way in which it is refined (http://en.wikipedia.org/wiki/Cracking_%28chemistry%29).

In moving to cracking the molecule refineries have more say in what they can get out of a barrel of crude. They also can get more of the higher value portion of the barrel. So instead of a barrel of oil giving out so much gasoline, so much diesel, so much naphtha, etc..... Now refiners can produce what they need and want by their expectations.

From my understanding refiners have moved to a just in time inventory for fuel. They sell based on market forces, their own needs, and of course what they expect the optimum quantities they would want for a specific refineries business model (where they position themselves in the market). This is done more as a framework of their existing refinery capacity, tanks down stream, and customers tanks as well. I don't see them really manipulating markets as handling their own expectations and limits to store the product they make.

In a nutshell though diesel and gasoline cost roughly the same amount to make and the quantities produced is controlled more than it was before. This differs greatly from 1980 where there was less flexibility in the quantity of diesel or gas a refiner could get out of the barrel's they recieved.

So today if the gasoline market gets tight, diesel will as well and vice versa. The elasticity of the products crosses over more now than it did fifteen years ago as the refiner can determine how much of each it will produce from the same barrel of crude oil. So at the refinery level diesel and gasoline should trend near each other in price (NOTE: from what I undertand).

Down stream from the refinery though market forces change this radically.

Enter Ultra Low Sulfur Diesel (commonly referred to as ULSD). Twenty years ago you could move fuels and petroleum products more easily. A little gas in the diesel, a little, motor oil in the diesel, etc.. no big deal. It didn't effect product specification. You could move tanks from one product to another. This went for trucks, trains, and other infrastructure pieces.

Prior to ULSD, if diesel was giving a better margin you could stash it or move it more readily than you can today. Especially at the refinery level. If you want to put diesel in a tank you need to prepare the tank, clean the tank, and then expect a timeframe for flushing product through it before you can assume its will stay within ULSD specifications.

Now with ULSD we can't mix products quite as regularly. If a transport truck held motor oil or jet fuel prior it needs to flush prior to getting ULSD. Why??? Because the small residual amount of sulfur (a few gallons of retain) in the truck could raise a 10,000 gallon load of diesel above the 15 ppm sulfur level required by law.

The same can be said of moving fuel by pipeline, barge or train. You can't risk mixing products so every step of the supply line must be cleaned and controlled. If a gallon of ULSD picks up to much sulfur it then must be downgraded to Off-Road diesel which sells for less (take a 25,000 gallon rail car x $0.05 in value difference and you just made an avoidable $1200 mistake).

The same can be said for the big terminals that handle off-road diesel, jet fuel, gasoline, and other liquid fuel products. They have way less flexibility in how they handle product for fear of throwing it off spec. This as well tightens the market for ULSD (or on-road diesel).

Six years ago the talk was "refinery capacity" was the issue for high fuel prices. This subject even made it into the presidential debates between George Bush and Al Gore. This reality faded away when Asia came on gangbusters with its own refineries which can sell refined product directly into the US (if they can find a terminal to place their product at).

Today we are hearing that terminal tank capacity and infrastructure is the issue. Our economy has grown, our capacity to supply diesel to it as gotten constrained at the same time, and therefore prices have gone up.

This in a nutshell is what the Oregonian reporter placed in a few hundred words. I think he did a good job given the complexity of the issue.