A late-March protest by US truckers fizzled. Hoping to call attention to crushing increases in diesel prices, independent truckers at the end of March drove slowly to disrupt traffic in several areas and talked about a strike. For the most part, traffic and business proceeded normally. And the national average diesel price loitered just below $4/gal. Do beleaguered truckers know diesel doesn’t have to be this pricey yet may become even more so?
Crude prices above $100/bbl largely explain recent spurts in prices of diesel and other oil products, of course. But they don’t explain why diesel has come to sell at a stout premium to gasoline most of the time instead of the discount that once was more common. The new diesel-gasoline price relationship reflects increases in the cost of making diesel and in demand for the fuel—increases aggravated by governmental excess.
Sulfur cuts
The US government at the end of 2000 had good reason to lower the sulfur content of diesel fuel, beginning in 2006. Sulfur fouls the exhaust-treatment equipment that new diesel vehicles must have to lower emissions of compounds associated with ozone and particle pollution. Whether the Environmental Protection Agency had good reason to cut sulfur as much as it did, however, deserves question.
Because trade associations challenged the mandate in an unsuccessful lawsuit, the oil industry receives criticism for having resisted cuts in diesel’s sulfur content. In fact, the industry supported a reduction to 50 ppm sulfur by weight from the 500 ppm limit that had prevailed for highway diesel since 1993. EPA insisted on the 15 ppm limit.
The industry argued that the difference in environmental performance between 15 ppm and 50 ppm sulfur in diesel was negligible. EPA disagreed. The industry also pointed out that the difference between costs of meeting the standards was huge. Sulfur is especially hard to remove from diesel, and the last traces of the material are the hardest of all. Refiners could have met a 50 ppm sulfur limit mostly with processing changes. The lower limit required more new or retrofitted equipment and much greater investment. Making 15 ppm sulfur diesel requires greater inputs of hydrogen and more crude per barrel of product than would have been required by the 50 ppm alternative. According to industry estimates made before EPA issued its rule, setting the limit at 15 ppm instead of 50 ppm at least doubled the cost of the 2000 sulfur cut. EPA mandated the costlier option anyway.
Now, therefore, highway vehicles burn a fuel that’s much more sophisticated and expensive to make than what they used before mid-2006. It’s a fuel with physical limits on supply because of the costly equipment needed for its manufacture and the relatively low volumes available in international trade. And, if industry groups were right about an environmental position they were willing to defend in court as they unsuccessfully challenged EPA’s jurisdiction, it’s a fuel more costly and less plentiful than it should be.
More strains are in prospect. The requirement for ultralow-sulfur diesel will expand to off-road uses in the next few years, and exemptions for small refiners will expire. Meanwhile, the requirement for ethanol in gasoline is boosting demand for diesel because ethanol and its ingredients must move about in trucks and rail cars. This new call on diesel supply will grow as the ethanol mandate expands and when the ultralow-sulfur requirement extends to railroad transport in 2012.
Price effects?
There’s no way to isolate the price effects of all this, especially with crude oil prices setting records. But reversal of diesel’s price relationship against gasoline, which has undergone costly changes of its own, indicates the extent of the transformation and associated loading of cost.
Diesel consumers can’t say they received no warning about the cost effects of a regulation challenged before its imposition as unnecessarily aggressive. They can only pay up and hope crude prices recede. The next time dead-sure regulators want to change fuel chemistry, though, they should remember the lesson and demand assurance that benefits warrant the cost.
