Worldwide Supply and Demand Indicate Higher Fuel Prices for 2011

As the economy rebounds and worldwide and domestic demand for oil increases, truckstop operators in the U.S. are seeing diesel prices trend up once again. Analysts anticipate that concerns over U.S. production, new regulatory requirements and strong demand will keep prices ticking higher.

By the Numbers
The Department of Energy’s Energy Information Administration (EIA) expects the price of crude oil to average about $93 per barrel in 2011, $14 higher than the average price last year.

Tom Kloza, chief oil analyst for the Oil Price Information Service, anticipates a springtime peak of $100 to $110 dollars a barrel, which he estimates to translate to $3.75 to $4.10 a gallon for diesel.

“The markets typically are prone to overreactions in the spring and I think gasoline is going to drag crude oil higher, as will fears that worldwide demand is outstripping supply,” Kloza said.

Here in the U.S., demand continues to be strong. “Last year we had almost a 6 percent increase in the demand for total distillate. Demand for diesel with 500 ppm was up 5 percent and ultra-low sulfur diesel [ULSD] demand was up even more,” said John Felmy, chief economist for the American Petroleum Institute.

The strengthening economy has improved operations for fleets. For all of 2010, the American Trucking Associations (ATA) reported that truck tonnage was up 5.7 percent compared with 2009. “I think it will continue to grow this year, but not as fast as last year,” said Bob Costello, chief economist at ATA.

While trucking companies are embracing fuel saving technologies, Costello doesn’t think they will decrease overall demand. “There are small gains here and there and that is important for trucking companies because every little bit helps. But, I think that growth in freight in 2011 will be enough to more than make up what would be lost from fuel efficiency gains,” Costello said.

U.S. demand coupled with global demand is what is truly driving prices. “The world seems to be shrinking in so many ways,” said Brian Milne, energy editor for Telvent DTN. “The U.S. is a diesel net exporter now and that helps maintain higher diesel prices in the U.S.”

Kloza said, “That means the price of diesel you pay whether you’re in Virginia, North Dakota, Washington state or Texas is going to be very contingent on the price of diesel worldwide.”

Kloza told Stop Watch capitalism doesn’t take any prisoners, which means the price of diesel is set more by what happens in foreign countries than what happens on the highways and byways of the U.S. He estimates that in the fourth quarter of 2010, the U.S. was exporting one of every five barrels overseas. “It would look like a roster of the U.N. to go through all of the countries we are exporting to,” he said.

The burgeoning middle class in China and India is not new, but it continues to push consumption levels higher. China is the second largest consumer now of fuel after the U.S. “People have been waiting for years expecting the lightning fast growth in China to slow, but it just continues to grow,” Milne said. “It is a very real change to the overall structure of the market when you’re looking at where product is going and where it is coming from.”

Supply-side Economics
Felmy doesn’t anticipate large production increases anytime soon. “OPEC seems to like $90 oil and has been reluctant to increase their output,” he said. “They sometimes say they’re willing to increase supply as demand increases, but we haven’t seen it.”

OPEC (the Organization of the Petroleum Exporting Countries) is scheduled to meet again in June to discuss its production targets, and the EIA said it does expect OPEC members’ crude oil production to rise over the next two years. EIA said, “Should OPEC not increase production as global consumption recovers, oil prices could be significantly higher than the central forecast.”

Non-OPEC supplies are expected to show limited growth. “Most of the U.S., non-OPEC offshore capacity has been shut down,” Felmy said. “We have seen some positive signs in North Dakota where we’ve seen production increase.”

Prices are creeping higher, in part, due to concerns over U.S. supply. Late in 2010 the Obama Administration announced plans to scale back the federal offshore leasing program to limit domestic oil and gas exploration.

“The administration’s current policy creating hurdles to the development of offshore petroleum resource is inflating the price of crude oil, which results in an increase in the price of refined products like gasoline and diesel,” said Rich Moskowitz, regulatory affairs counsel for the American Trucking Associations. “It isn’t just the actual impact on today’s supply, it is the signal to the market that the U.S. is not prepared to develop this resource.”

Regulatory Impact
New and proposed regulatory requirements also have the potential to increase prices. Several states are reviewing low-carbon fuel standards that set the baseline of how much carbon is associated with a gallon of diesel and gasoline, from wells to wheels. “It is the carbon associated with pulling it out of the ground, transporting it to the refinery, refining it and then transporting it to truckstops,” Moskowitz said.

California has already adopted a low-carbon fuel standard (LCFS) that calls for a reduction of at least 10 percent in the carbon intensity of California’s transportation fuels by 2020. In the Northeast, NESCAUM(Northeast States for Coordinated Air Use Management), a nonprofit association of air quality agencies, is working toward a draft program framework for a regional LCFS slated to be released early this year that states could enact individually.

The problem is that there currently is not a low-carbon fuel, gasoline or diesel that can meet the requirement, Felmy explained. “If they’re going to mandate this, I simply don’t know how they are going to achieve this objective. It is a huge challenge.”

One option to reach an LCFS would be to fuel trucks with natural gas, which is costly. “You would have to invest in production and infrastructure, and a truck using natural gas costs about $70,000more than a diesel truck,” Felmy said.

Ethanol and biodiesel blends are another solution, but they create challenges as well. “To get a 10 percent carbon reduction, you’d have to have a 20 percent biodiesel blend,” Moskowitz said. “Original equipment manufacturers won’t warrant a 20 percent blend. The more biodiesel you blend in, the more concern you have over cold weather performance. Perhaps the biggest problem is price. Biodiesel is a good $1.50more per gallon than ULSD.”

Ethanol is more expensive than gasoline as well, running about 40 cents per gallon higher. “It is a cost issue and it is a constraint,” Felmy said. Ethanol requirements mandated in the renewable fuels standard that calls for annual increases in the amount of renewable fuels used is already affecting supply. “For gasoline you have to have 12.6 billion gallons of ethanol in the gasoline supply and that is a challenge. The maximum you could put in was 10 percent and you’re blending it with roughly 138 billion gallons of gasoline used last year. You’re running out of gasoline to put it in,” he said.

A low-carbon fuel standard may further constrict supply by removing oil derived from the Canadian oil sands from the U.S. market place due to its higher carbon rating. “That isn’t because you get more carbon out of the tailpipe, it is because it requires a considerable amount of energy to get that fuel out of the ground,” Moskowitz said.

The U.S. gets approximately 9 percent of its oil from Canadian oil sands. If an LCFS is implemented, it is likely Canada would export its oil to China instead of the U.S. “The U.S. can’t afford to turn its back on 9 percent of what is a secure supply of petroleum,” Moskowitz said.

Felmy said states need to examine the reality LCFSs would bring. “The last thing any state wants to do is impose a mandate that could drive away business from their states,” he said.

At the Refineries
In addition, several states in the Northeast are looking to transition to ULSD for home heating oil. More than 80 percent of the home heating oil consumed in the U.S. is in the Northeast. In 2012 New York will require ULSD home heating oil.

“Our concern is that the refining industry puts out a limited amount of ULSD, and as more customers demand that fuel, it will put pressure on the price,” Moskowitz said, adding that ATA would like to see the home heating oil industry embrace a 50 ppm sulfur standard. “It doesn’t put additional pressure on the on-road diesel supply and high-efficiency furnaces are capable of running on 50 ppm.”

Refineries in the U.S. have been built to maximize gasoline production, and shifts in technology that would allow for greater diesel output can take years to complete. ”If you’re constructing or reconstructing refining these days, you’re going to tilt it to make more diesel, but the fact is that refiners only have a few percentage points to play with,” Kloza said.

Those investments can cost billions of dollars and take time. According to Felmy, lower refinery profits over the past few years mean that refiners have less to invest in new technology.

Despite current challenges, Felmy is hopeful that the new Congress will address energy policy. “All of the conversation for the past few years has been on solar and wind. That is nice for the future, but right now 94 percent of the fuel for transportation comes from oil. We need to be realistic that we will be using oil for the next several decades,” Felmy said.

This article originally ran in Stop Watch magazine. Stop Watch provides in-depth content to assist NATSO members in improving their travel plaza business operations and provides context on trends and news affecting the industry. The magazine is mailed to NATSO members bimonthly. If you are a member and not receiving Stop Watch, submit a request to be added to the mailing list. Not a member? Join today or submit a request to receive additional information.