Low fuel prices are temporary: Stay the course

Low fuel prices are temporary

Fuel prices in the United States are extremely low and out of balance lately for at least two reasons. Let’s discuss these reasons so you fleet operators can better plan future vehicle engine and fuel purchases.

First, gasoline prices are so low relative to diesel that the diesel vs. gasoline cost-effectiveness financial justification is upside down. You can no longer justify the additional premium for a diesel engine based on the difference in gasoline and diesel fuel prices at the pump. In my area gasoline is selling for over 30% less than diesel fuel. Fuel experts always estimate that diesel fuel provides 25 to 30% better fuel economy under equivalent engine and operating conditions. Under the current pricing differentials, diesel engines would have to sell for less than their gasoline equivalents in order to make economic sense.

Why is this happening? I’ve mentioned before that refineries are like huge water spigots that cannot easily be adjusted. U.S. refineries were all optimized for the production of gasoline many years ago. But diesel fuel demand keeps increasing while gasoline demand keeps decreasing; so, most refineries need expensive and time consuming reconfiguration to increase the production of diesel fuel. Currently, at least 12 U.S. refineries have proposed such reconfiguration projects, but some environmentalists fight anything Big Oil wants to do. As a result only two of these projects have been approved. Even after approval, reconfiguration construction often takes years.

You might wonder why U.S. oil producers don’t simply export our excess gasoline to countries who would be willing to pay dearly for it. It’s because our federal government passed legislation outlawing the export of refined oil products during the energy crisis of the ’70s.

This legislation could be rescinded easily, but we all know how effective our legislators are at passing laws in a timely fashion. By the way, ethanol can be exported.

Corn-based ethanol was also responsible for a decrease in gasoline demand due to tax credits for its incorporation into gasoline. However, corn-based ethanol has created so many problems that I estimate its usage will level off and even decrease over time as cellulosic ethanol becomes more cost-effective. Beef prices were up 23% in the last year. Consumers are becoming disenchanted with the interference of corn-based ethanol and our nation’s food supply.

So when is the price differential between diesel and gasoline going to get back to normal? I suggest that two things will have to occur. First, refinery upgrades must be expeditiously approved in order to quickly straighten out current in-balances. Second, we need to switch from utilizing corn-based ethanol, which gives poorer fuel economy, to second generation biofuels which might provide increased fuel economy. This will take several years to accomplish.

I’ve heard that many fleet operator have put their alternate fuels plans on hold because the prices of both diesel and gasoline are currently so low. Don’t do this—stay the course! These currently very low prices are easy to understand, and they will be only temporary in nature.

The Middle East doesn’t have a variety of products to market like other countries. They only have crude oil. Their total economies hinge on the export of crude oil to other countries. They must either export crude oil or their economies can’t prosper.

The U.S. has been importing less Middle Eastern crude for years since fracking technology became widespread and Canadian crude became less expensive. Europe, France in particular, has been purchasing more crude from Russia. The Middle East was faced with either raising prices to sustain their economies (which didn’t work) or lowering prices below world market levels. So they lowered prices, but they can’t sustain this move for long, so stay the course with your current fuel sourcing plans.

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