Diesel regulations might help send fuel prices sky-high in '06

April 1, 2005
United States highways may or may not see an occasional $3-per-gallon fuel price sign in 2005, but it is becoming likely that $3/gallon numbers may be

United States highways may or may not see an occasional $3-per-gallon fuel price sign in 2005, but it is becoming likely that $3/gallon numbers may be relatively common about 15 months from now. Next summer, a new cleaner-burning diesel fuel will be required for on-road vehicles, and that blend could temporarily trade for 30-50 cents a gallon more than the current fuel of choice.

It's all about sulfur, and spring 2006 will see the removal of most sulfur molecules from on-road diesel. The new ultra-low-sulfur diesel (ULSD) blend will officially be the standard made by most refiners June 1, 2006; with distribution systems required to have the new fuel by July 15 and retailers scheduled for a September 1 roll-out. It could be the most challenging clean fuel to hit the US markets since the introduction of reformulated gasoline a decade ago, and questions have arisen about whether there's adequate production capacity, enough bulk storage, and an ability to keep the new ULSD properly segregated from higher sulfur products.

Diesel prices are already at record levels in many states. Prices are already up about 55 cents/gallon compared with 2004, and many fleets are paying double what they paid less than six years ago. Some individual states are seeing pump prices in the $2.50-$2.75/gallon range and the cost of filling up a single big rig at some truckstops has surpassed $800.

Huge disparities exist between what industry experts believe will be the price range for 2006 ultra-low-sulfur diesel blends. Some government regulators suggest the actual cost of producing the fuel will average 4-7 cents/gallon above current diesel blends. But private consultants note that there could be huge premiums attached to the fuel because of supply dislocations, downgrading of material that gets contaminated with sulfur from other fuels, a lack of foreign imports, and other factors. Some pundits estimate that the 2006 fuel could temporarily debut at prices 30-50 cents/gallon above the cost of traditional diesel. Based on futures prices for crude and refined products, that projects wholesale costs in the neighborhood of $2/gallon next year, with retail values of $2.50 to $3/gallon.

The new fuel also will present challenges for all elements of the supply change, from refiners and terminal operators, to truckstops and fleets. Potential complications loom in the form of waivers, quality considerations, recordkeeping, testing, and fines for non-compliance. The move to very-low-sulfur specifications will also have a huge impact on other fuels, including heating oil, jet fuel, kerosene, and even gasoline.

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