The diesel squeeze: prices tell the story

But recent numbers for diesel relative to gasoline have been astounding. We took a look at Platts' history of low sulfur diesel prices versus gasoline in the US Gulf Coast. Low sulfur moved to a premium over conventional gasoline in September, and hasn't been below it since. Since the beginning of 2004, LS diesel has not been at a higher price than conventional gasoline for a period longer than five months; now it's at six months with no end in sight. The spread has been as much as 44 cents/gal, and it's near 40 cents now. The average spread since September is more than 25 cts. For the period from the start of 2004 through August of last year, it's 2.7 cents.

And that's just for LS diesel. Platts' history of ULSD does not go back as far, because its wide use as a product only began in recent years due to changing regulations. It currently is 3.5 to 4 cts above LSD in the Gulf Coast.

Oil market consultant Andrew Lipow, who always sees something in the numbers that others miss, agrees with many of the long-term arguments cited above for stronger diesel. But he is seeing other factors as well. "It all starts with Bolivia," he said.

Andy's view is that the nationalization of the Bolivian oil and gas industry, particularly the latter, has led to a decline
in Bolivian natural gas production. It can't fulfill its gas delivery contracts with some of its neighboring states, such as Brazil and Argentina.

At the beginning of this year, Bolivian hydrocarbons minister Carlos Villegas said his country would not meet rising demand for natural gas exports this year because production was expected to only rise 5% in 2008. The substitute fuel for generating electricity when natural gas isn't available more often than not becomes diesel. "So you see steady exports off the Gulf Coast to Argentina, and Brazil as well," Lipow said. "Chile has been buying for quite some time as well, and you can add in the usual stuff going to Peru and Ecuador."

European sulfur in much of the continent dropped to a 0.1% sulfur maximum on January 1, adding to the tightness. Lipow said remaining high sulfur diesel in the market is being blended with ULSD to create material that meets new European specifications.

Some of this is great news for US gasoline consumers. Recent gasoline imports have been at "summer-like" levels, Lipow said, as Europe becomes more diesel-dependent and long gasoline.

What's notable about these shifting differentials is that if they are not transitory, and reflect the trends that some analysts have been forecasting for years, the price advantage that diesel has over gasoline becomes harder to maintain.

Diesel mileage is better than that of gasoline-powered cars. One of the arguments for switching to diesel is that while it comes with environmental issues greater than that of gasoline, such as higher particulates, it has a positive impact on emissions of CO2, because each gallon of diesel fuel propels a car further than a gallon of gasoline.

Lipow estimates this advantage as about 30%. But the other argument is that it cuts the car owner's fuel bill.
Using the 30% standard, if the price of diesel gets to be more than 30% above gasoline, the benefits to the environment may stay the same, but the pocketbook benefits disappear.

The most recent Energy Information Administration weekly averages, for the week ended February 25, put conventional gasoline at 89% of the average retail diesel price, $3.18 to $3.55/gal. That's a long way from 30%. But clearly, the price/mileage ratio for diesel is losing its advantage over gasoline.