Provided by the National Association
of Convenience Stores

Diesel fuel news is bad in 2005, and could be worse in 2006
By John Eichberger

Ever since September 2004, diesel fuel prices have taken off, sparked by a rise in crude oil prices, limited supplies and record demand for diesel. By late October, diesel fuel prices peaked at $2.21, which was 18 cents per gallon more than the price of gasoline. But by early March 2005, they were again nearing record highs, with the national average topping $2.10 per gallon, and prices in California reaching nearly $2.40.

Higher diesel fuel prices are of concern to more than those who drive diesel-powered vehicles. The United States economy runs on the backs of diesel-powered trucks. Higher fuel prices add to the cost of shipping food, clothes and other goods, and that expense eventually shows up in the retail prices everyone pays.

And, of course, convenience stores feel the effect of higher prices since they sell a considerable amount of diesel fuel. In 2003, diesel fuel accounted for 9.4 percent of all motor fuels sales at c-stores. Retailers’ diesel fuel margins, which typically are about 2.5 cents per gallon less than those for gasoline, got further squeezed as prices climbed.

Certainly, today’s diesel prices — nearly 50 cents per gallon higher than at the same time last year — are of tremendous concern. And there are other issues looming on the horizon for retailers. With the automobile industry increasingly pressured to produce vehicles that are more fuel efficient, diesel power has become more popular as an option. However concerns over its emissions have resulted in regulations that will impact retailers in 2006 and beyond.

Next summer, a rule enacted by the U.S. Environmental Protection Agency takes effect, requiring refiners to reduce the sulfur content in on-road diesel fuel by 97 percent to no more than 15 parts per million. The reduction will be phased in between 2006 and 2010, during which time the market will provide two diesel fuels — the new ultra-low sulfur diesel and the current low sulfur diesel fuel.

There is no question that refiners will be able to produce compliant diesel fuel in 2006. The larger question centers around the contamination of that product after it leaves the refinery. While testing is underway throughout the production and distribution system, each segment is looking further downstream for further guidance. For example, refiners are relying upon the pipelines to provide product specifications that will ensure the product delivered at the end of the pipeline meets the specifications set by terminals. Meanwhile terminals are looking to their customers, distributors and retailers, to determine both what sulfur levels they will require to ensure product integrity and how much ULSD they will demand. Meanwhile, retailers are focusing on business today and tomorrow, and few have looked to summer 2006 to determine what diesel fuel they intend to carry.

The retail decision will be very important to the rest of the system. It seems likely that most retailers will not elect to install a second diesel storage tank that will become obsolete in 2010. Rather, they likely will decide to carry either ULSD or low sulfur diesel depending upon their analysis of supplies and demand. Given that demand for USLD in the initial years is likely to be very light, supply availability may have more influence on a retailer’s decision. Therefore, retailers should begin communicating with their suppliers soon to determine the market conditions that are likely to affect their decisions next year. The sooner retailers can provide their suppliers with an indication of what their intentions are for the diesel market, the sooner the distribution system can begin making adjustments to ensure compliant product will be available to them.

Summer 2006 is not as far away as it may seem. Talk to your suppliers and make sure you are prepared for the changing diesel market before it is too late.