From Ground to Pump

By on September 1, 2009
RoadKing Mag

It’s a crude reality: the price of diesel can change dramatically from one week to the next. Between June 1 and July 6 this year, the average diesel price began at $2.352 per gallon and skyrocketed to $2.616 per gallon, before leveling off somewhat at the $2.60 mark. Just over one year ago, diesel prices hit their peak at $4.76 per gallon, after increasing steadily for 14 straight months.

That makes long-term business planning a bit tricky for the trucking business. But why are irregular price spikes and dips an unchangeable fact of diesel-dependent life?

The process

Pumped out of the ground, crude oil is composed of a mixture of hydrocarbon compounds. Petroleum diesel is produced at a refinery through fractional distillation. When heated between 392˚ and 662˚F at atmospheric pressure, several fractions of the crude oil compound evaporates, resulting in a mixture of carbon chains that contain between eight and 21 carbon atoms per molecule.

The lightest molecules are lifted first: butane, ethane and propane, followed by naphtha, which is used to manufacture gasoline. The next heaviest molecules are the ones that comprise petroleum diesel, which contains larger hydrocarbon molecules and more carbon atoms than gasoline.

Composed of about 75 percent paraffinic hydrocarbons and 25 percent aromatic hydrocarbons, petroleum diesel then goes through the process of cracking  to produce higher volumes of diesel, since distillation alone yields a lower amount of diesel. Sulfur levels are reduced for Ultra Low Sulfur Diesel (ULSD) through hydrotreatment. This process adds hydrogen to crude oil at high temperature and pressure in order to remove sulfur and improve fuel quality. Additives are then introduced and blended to meet diesel fuel specifications.

So what affects the price at the pumps? These days, it’s the economy, says American Petroleum Institute (API)  senior economic advisor Rayola Dougher.

“If you want a measure of how well the U.S. economy is doing, just look at diesel demand,” says Dougher, who notes that average diesel prices between June 2008 and June 2009 were down 5.7 percent. “That’s very significant, because we had been accustomed to seeing 3.5 percent growth. That’s a direct reflection of the economy.”

The costs

Normally, price shifts in diesel, gas and “all refining products” move in lockstep with the crude oil market, but other factors are also at work. “Global demand for diesel fuel can put a lot of pressure on the price, and we saw that about a year or two ago,” says Dougher.

Then there are taxes. Traditionally, diesel taxes are higher than gasoline taxes, averaging 24.4 cents per gallon at the federal level with state and local taxes typically gobbling up 50.8 cents per gallon. Comparatively, gasoline-by-the-gallon tax rates are 18.4 cents federally and 45.6 cents for state and local.

Add in the costs for refining the crude oil into diesel, a process that has become more expensive with the introduction of ultra low sulfur diesel. And don’t forget distribution and marketing, which add even more cost per gallon before it gets to the pump.

Inclement weather — notably hurricanes that threaten the Texas Gulf Coast, home to 23 percent of U.S. oil-processing capacity — has been known to adversely affect prices. If refineries are preemptively shut down to minimize damage, they may take four or five days to restart production. In 2005, Hurricane Katrina halted 10 to 15 percent of the total U.S. gasoline production, which temporarily skyrocketed prices at the pump.

Unusual weather anywhere has an impact. “Last year in Chile, they had very dry weather and didn’t have their normal hydropower,” says Dougher. “So there was added demand for diesel fuel on the world’s market to ship it to Chile, because they didn’t get enough rain. Things you wouldn’t imagine can influence the price of diesel fuel.”

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