Today 5/31/2006 3:00:00 PM
US Truckers Greet New Diesel Fuel With Eye On Costs
NEW YORK (Dow Jones)--The June 1 introduction of a new grade of diesel fuel means cleaner air for everyone but has U.S. truckers concerned about supply dislocations and price spikes.
Refiners' and marketers' move to ultra-low sulfur diesel, or ULSD, will be more gradual than the U.S.' bumpy transition to ethanol-laced gasoline and affects a different group of motorists. While changes to gasoline over the past few months pushed up prices at the pump, the new diesel standard may have a more widespread economic impact.
"While gasoline moves people around, diesel moves the economy," said Rich Moskowitz, regulatory affairs counsel for the American Trucking Association, or ATA, in Alexandria, Va. "If there are increases in the cost of diesel fuel, we would expect over time that the price of moving freight would lead to increased costs, which the consumer bears eventually."
Last week, the U.S. government revised sharply higher March demand data for distillates, which comprise heating oil and diesel. Distillate demand, 7.4% higher than earlier indicated, was the strongest for any month since February 1979.
A breakdown of the data shows that most of the demand growth was in diesel, not heating oil. And combined with strong economic growth, these higher-than-expected levels of diesel consumption could pressure prices. U.S. gross national product grew an a 5.3% annualized rate in the first quarter. While the economy is expected to cool in the second half, growth is expected to continue at a healthy pace.
Good-Bye, Sulfur
ULSD has 15 parts of sulfur per million, compared with low-sulfur diesel's 500 parts per million, and is used in cleaner-burning engines. Owners of 2007 and later model-year diesel vehicles must refuel with ULSD or risk serious engine damage, but owners of older vehicles have the choice between ULSD and low-sulfur diesel. The transition will happen over the next four years, with ULSD set to become the dominant highway diesel fuel.
According to Environmental Protection Agency estimates, the changeover will eliminate 90% of the pollution from trucks and buses by 2030, when the current heavy-duty fleet is replaced with vehicles that can only run on ULSD.
For years, the refining industry has been preparing to manufacture ULSD, spending millions of dollars on the high-temperature, high-pressure units necessary to remove almost all the sulfur from the fuel.
The U.S. government is taking steps to smooth the transition to ULSD. Regulations stipulate that at least 80% of the output from refiners who produce ULSD must be 15 ppm or less until May 2010, when the share of ULSD in diesel output rises to 100%. However, refiners who have already shifted all of their diesel production to ULSD can sell credits for that additional output to those who are struggling to meet the 80% threshold.
Outside of California, marketers have more time to gear up for the changes. Terminals are to be ready by Sept. 1, while retailers have until Oct. 15 to prepare their facilities. California facilities are sticking to earlier deadlines of July 15 for terminals and Sept. 1 for retail.
In addition, the EPA has left ULSD marketing decisions to the industry. Service stations and truck stops aren't required to sell ULSD. For those that can't easily add tanks and pumps for the new fuel and whose clientele are likely to prefer whatever is cheaper, the move to replace the old fuel may not happen quickly.
Distribution A Big Concerns
Concerns about the availability of ULSD have more to do with distribution logistics than refinery modifications.
"We know refiners know how to make it," said ATA's Moskowitz. "We're less confident of the ability of the distribution system to convey it to all parts of the country without risk of contamination."
U.S. petroleum pipelines currently transport refined products with sulfur levels higher than ULSD, including some heating oil that can contain sulfur in excess of 5,000 ppm. ULSD entering the pipeline runs the risk of sulfur contamination in a complex system that connects refineries, spur lines, main lines and terminals.
Regions at the greatest risk for periodic shortages are those at the end of pipelines - upstate New York, North Dakota, Washington state, Moskowitz said.
Refiners have protected themselves somewhat by producing ULSD that leaves the refinery with sulfur levels anywhere from 3 ppm to 8 ppm, instead of the mandated 15 ppm. But the Colonial Pipeline that runs from Houston to New York is still taking precautions, refusing to ship ULSD north of Virginia. Railcars and seafaring vessels will be needed to get ULSD to the Northeast.
And between the terminal and the retail stations, there's the question of the "last mile." Will tanker trucks have to be dedicated solely to ULSD transportation? That comes with a cost.
These logistical pressures could push the added cost of ULSD beyond the 5 cents a gallon the EPA has estimated.
"If supply is plentiful, you can assume market forces would act to produce a price that matches the increased cost," said Moskowitz. "If there are localized shortages, you would anticipate price spikes."
Source: Beth Heinsohn; Dow Jones Newswires; 201-938-4435;
[email protected]