Posted in: Opinion,
by Patrick DeHaan on Jan 14, 2011 03:09 PM
I was recently asked:
"What is up with the price of diesel? I saw $3.63 this week I don’t know of any change in season formula or CA only requirements that could be used as an excuse."
"Here is a technical question. I understand that oil companies refine a barrel of oil into different products based on hydrocarbons with propane at the top, then gasoline, then diesel and kerosene then gear oil or grease near the bottom. Do the refiners have a choice as to how much of each product they can produce? Can they for example make more gas and less diesel from a barrel of oil?"
Here's my answer:
In terms of diesel prices, yes- they used to be cheaper than gasoline. As of the last few years (going back to 2008), diesel has seen more global demand- whether it has been for construction in China, vehicles in Europe (many of which run diesel), or trucking companies, we've seen better demand growth in diesel and heavy fuels. However, diesel prices are also always higher than gasoline during the winter as the heavy oil used to produce diesel is also used to produce heating oil. Since the Northeast U.S. uses heating oil (vs. natural gas) this is why diesel prices are higher in winter- because demand is higher for heating fuel, which is made from the same heavy oil as diesel.
Also, diesel, as noted has been switched to ULSD (Ultra Low Sulfur Diesel). To produce this type of diesel, while cleaner burning, costs refiners more to make as they must make the fuel cleaner. The additional steps add cost, which is passed on to motorists and truckers.
While refiners can tweak their plants to produce more or less of a product, they have a limited ability to do so. For example, of one barrel of oil (42 gallons) (depending on season) can be made into 18-21 gallons of gasoline, 9-10 gallons of distillate fuel (heating oil, diesel fuel, marine fuel), 4-4.5 gallons of jet fuel, 2 gallons of residual fuel, 1 gallon of asphalt, and other products. Come Spring, refiners will tweak plants to produce more gasoline (perhaps 21 gallons per barrel) and less heavy fuel (perhaps 9 gallons per barrel). Come fall, they can reverse that and produce less gasoline (say 19 gallons per barrel) and more distillates (perhaps 10 gallons per barrel). Keep in mind, while refiners can slightly tweak output, they are limited in their ability to do so.