The national average price for on-highway diesel fuel topped $3/gal. on August 7, according to the Energy Information Administration. At $3.055, the price was 7.5¢ higher than a week before and 65¢, or 27%, higher than a year ago.
The biggest increase was in the Rocky Mountain states, where the price rocketed more than 15¢ in one week to an average of $3.21.
Suncor Energy's refinery in Commerce City, just north of Denver, is the only one in Colorado and the largest in the Rocky Mountain region, supplying 35% of Colorado's ultra-low-sulfur diesel (ULSD). Suncor attributed tight supplies in the state to “the combination of strong seasonal demand, extremely hot weather (which limits operating levels on some refinery units) and the expected growing pains associated with the commissioning and start-up of new equipment and processes to produce and distribute ULSD.”
The problems in Colorado may be a harbinger of more hard times ahead. Since June 1, 80% of the highway diesel fuel that refiners produce must be ULSD. ULSD is limited to 15-ppm sulfur, 97% less than the 500-ppm highway fuel they previously refined. Many refineries are only now achieving full production levels with the additional equipment needed to remove sulfur.
ULSD is not only hard to produce, but hard to keep at specified sulfur levels. As it moves through storage tanks and pipelines, it can easily pick up sulfur left from earlier batches. It takes only a little leftover 500-ppm fuel to raise the sulfur content of ULSD above 15 ppm.
Now the challenge has reached the distributor stage. As of September 1, any terminal that handles ULSD must ensure that the fuel is actually 15 ppm. By October 15, retailers also will have to make sure their ULSD has no more than 15 ppm of sulfur.
New trucks with '07-compliant engines must use ULSD beginning January 1, 2007. However, some '07 medium- and heavy-duty trucks are allowed to be equipped with 2006 engines and emissions systems. Outside of California, where all fuel is presumably now ULSD, these trucks, along with pre-2007 model trucks, can use the previously standard low-sulfur diesel fuel — in theory.
The reality is that once refiners start shipping ULSD, they may choose to stop supplying any other type of diesel fuel, so as to avoid contaminating ULSD in storage tanks, pipelines or delivery trucks. Fuel that exceeds the 15-ppm level must be reprocessed, reblended, sold to off-road users or sent to retailers that still carry 500-ppm diesel. All of those alternatives entail expenses and inconvenience that may make businesses reluctant to stock anything other than ULSD.
Another deterrent is that all highway diesel must be ULSD as of December 1, 2010. That gives distributors and retailers only four years to recoup the cost of any equipment they install to handle a second grade of fuel.
The announcement by BP on August 6 that it was abruptly shutting down the Trans-Alaska Pipeline to replace corroded sections of pipe sent crude oil prices up another $2.22 per barrel, or more than 5¢/gal., in one day. Although Alaskan crude is delivered only to West Coast ports, those ports will now pull in crude from elsewhere, affecting supplies — and, most likely, diesel prices — in the entire nation. The incident is yet one more illustration of how events in any part of the globe can affect diesel prices everywhere.
The bottom line: Expect continued volatility in both prices and supplies of diesel fuel. As long as world demand is growing and supplies are vulnerable to any number of disruptions, truckers are at risk of price spikes and temporary or localized shortages.