This is a post from Jim Haughey's blog that covers the US construction industry.

Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.

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Construction Industry Forecasts

Notes from Jim Haughey - Mar 12, 2008

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Why are diesel fuel prices rising so fast?
Jim Haughey, RCD Chief Economist

US and Caribbean refineries are optimized to produce the maximum amount of gasoline from each barrel of crude oil. They have to do this because gasoline is their highest volume product and the availability of imported gasoline that meets US environmental rules continues to shrink.  The standard gasoline blend used elsewhere in the world does not meet US requirements.  So many foreign refineries are no longer able to supply periodic extra volume needs for US gasoline.

European and Asian refineries are optimizing to produce the maximum amount of diesel from each barrel of crude oil to supply the rapid switch of automobiles from gasoline to diesel engines. Continued strong economic growth elsewhere in the world is absorbing foreign supplies of diesel so very little if available to meet periodic extra needs for the US market. The rapid economic growth in Asia is very diesel intensive because capital investment is the key driver of diesel demand for factory, construction and transportation use.

When it is available, the price of imported diesel is very high because we pay for it with a depreciated dollar. The $US dollar has fallen 15% against the Euro in the past year.  This raised the import price of European diesel supplies by more than $0.50/gal.

 

Environmental actions have also raised the price of diesel fuel.  The switch to low sulfur diesel added substantially to refinery production costs.  But more importantly, it added to diesel distribution costs.  The new low sulfur fuel can not be moved in the same pipelines or tankers that move the older higher sulfur fuel still also being used.  This would contaminate the new clean fuel.

What is the outlook for diesel prices?  The Energy Department expects a $0.20/gal. price drop by summer then smaller declines through next year.  This seems optimistic with spot oil prices at $110 today. The decline is entirely based on expectations of a fall in crude oil prices rather than a fall in diesel prices relative to other petroleum products. Diesel prices rose above gasoline prices in 2004 and the spread has continued to widen. There is little prospect that the spread will narrow in the next year.

 


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Member Comments

Posted by malton44
03/15/2008
As much as Jim Haughey wants to believe that environmentalists have raised the price of diesel fuel, the facts do not support it. The switch to low-sulfur fuel occurred at the end of 2006 and added about 5 cent to the cost of a gallon of diesel. Refining and distribution costs have not risen recently to account in any way for the price increases. The only thing that has gone up substantially is the cost of crude, from around half the cost of a gallon a year ago to over 62% now. Refining and distribution as a percent of the cost are lower than they were a year ago. Mr. Haughey might consider the role of foreign speculators in driving up the cost of fuel. Crude oil futures offer a hedge against the falling dollar. Sudden drops in the price of oil in the past were the result of speculators taking their profits. The drop in the demand for crude from a U.S. recession would be a good reason for them to start to bail.
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Read Other Recent Jim Haughey Posts

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