The price of diesel, a major variable cost as pool
builders assemble their
balance sheets, has been
softening over the past year, and its
recent $4.44-per-gallon level is now
well below the eye-popping $5.49
last seen in the summer of 2022 on
the heels of the Russian invasion of
Ukraine. But the good news comes
with a significant caveat: The price
tag for the fuel is expected to remain
historically high, with Moody’s
Analytics projecting a gradual rise to
$4.50 by mid-2024. That’s well above
pre-pandemic times when they stayed
below $3.50 for a five-year stretch.
Given that fuel costs can account
for a significant proportion of a
pool builder’s operational expenses,
any shift in the price tag can have
a real effect on the bottom line. So,
what’s keeping prices high? A major
contributing factor is the cost of oil,
which is passed right along to the
diesel distillate. “Today’s crude oil
price of about $95 a barrel is being
supported by the agreement on the
part of Saudi Arabia and OPEC to
maintain production at a level less than consumption,” says Allen R
Schaeffer, executive director of the
Diesel Technology Forum. “So prices
are projected to remain at their current
level through 2024.”
Tight diesel supplies are not
helping matters. “Like other
commodities, long- and short-term
diesel price expectations are driven by
supply levels,” says Trey Cowan, oil and
gas analyst at the Institute for Energy
Economics and Financial Analysis
(IEEFA). “And right now, figures from
the Energy Information Agency (EIA)
show that we are tracking toward five-year
lows.”
Even mobile, wheeled mini-excavators use diesel engines because they are efficient, produce more torque, and have a longer lifespan.
CAPPING PRODUCTION
Given the popularity of diesel, one
would expect refineries to pump out
as much product as possible. But
that’s not the case. As noted above, it
behooves some countries to reduce
output to bolster the price tag of an
important export. Furthermore, there
is a cost problem to consider: If pump
prices drop too low, making the fuel is
just not feasible.
“Over the years, refiners in the
United States have reduced capacity
due to poor margins and increased
environmental costs, as well as to the
expense required to maintain facilities
in a world where United States
demand has peaked,” says Andrew M.
Lipow, president of Houston-based
Lipow Oil Associates. “Refineries
are shutting down as they look
ahead to how much money they will
have to spend to maintain safe and
environmentally compliant facilities.”
Inflation, too, increases building
costs. It can cost several hundred
million dollars to bring a new refinery
online, at a time when oil demand
in the United States is going down.
(USEIA, the United States Energy
Information Agency, projects diesel
consumption to be flat in 2024.) The
prudent decision may well be to shut
down, and Lipow noted that two more
U.S. refineries on the West Coast and
Gulf Coast are planning to do just that.
SUPPLY RELIEF
Russia produces some 10% of the oil
from which the world refines diesel,
and its ability to move its product
through alternative channels has
helped mitigate the global diesel
shortage. “The sanctions imposed by
the European Union and the United
States and other countries on the
purchase of Russian crude oil and
refined products has forced Russia
to find new customers,” says Lipow.
“While the majority of their oil is sold
into China and India, they have found
alternative markets in North Africa and
Brazil.”
Too, there is a bit of supply relief
from some new refineries in parts
of the world where diesel demand
is growing. “Over the past year, new
refineries have come on stream in
Kuwait, Oman and China,” says Lipow.
“There is one in Nigeria that has
yet to come online, and another in
Mexico which may be producing fuel
in 2024.” While the additional supply
is welcome, it is meager: “These
new refineries will only represent an increase of some 1.5% to 2.0% of
world capacity.”
On the demand side, U.S.
consumption is a mixed bag. Upward
pricing pressure is coming from the
travel sector, where the post-pandemic
consumer continues to buy airline
tickets in great numbers. “There’s no
doubt that increased jet fuel demand
has reduced, somewhat, the availability
of diesel fuel,” says Lipow. Fuel for
the nation’s aircraft is pulled from the
same oil pool required for diesel.
At the same time, downward
pricing pressure has come from the
shipping industry. “Freight activity is
a big driver of demand for diesel, and
thus of prices,” says Schaeffer. “We
have been experiencing a drop-off
in freight demand, which is a result
of supply chain issues finally being
resolved. We’ve seen a number of
trucking companies go out of business
as a result.”
Current fuel prices are affected by
consumer and business confidence.
Here, again, there is an expectation for
reduced diesel demand. “Right now,
prices are not necessarily responding
to the lower supply situation,” says
Cowan. “That’s because people are
focused on what the economies are
going to look like both in the U.S. and
abroad over the coming year. And right
now, it’s a kind of subdued outlook for
demand globally.”