Diesel deliberations

June 13, 2005
With the requirement for ultralow-sulfur diesel (ULSD) almost exactly a year away, an alarming trend in recent diesel markets has emerged in the US.

With the requirement for ultralow-sulfur diesel (ULSD) almost exactly a year away, an alarming trend in recent diesel markets has emerged in the US. Prices have risen significantly and have consistently been above year-ago levels, while inventories are lower.

For the week ending May 30, 2005, US on-highway diesel prices-as reported by the US Department of Energy’s Energy Information Administration-averaged $2.16/gal. The year-ago average price was $1.75/gal. In the past 8 months, this price differential has been as high as 70¢/gal.

Inventories of 15-ppm sulfur diesel were 1 million bbl on May 27, 2005, a drop from 2.5 million bbl on May 28, 2004. Inventories of 15-500 ppm sulfur diesel also decreased to 66.4 million bbl from 67.4 million bbl in the same time frame. Inventories of 500+ ppm sulfur diesel remained relatively constant.

In June 2006, US refiners will begin producing ULSD for on-highway use. This is expected to place a strain on the diesel transportation infrastructure due to concerns about commingling with higher-sulfur products. This is assuming that US refiners will be able to make enough ULSD to satisfy demand.

Any disruption, either at the refinery or in the transportation system, could result in even higher prices and possibly shortages. The diesel system will be further strained with the enactment of reduced sulfur levels for off-road use.

In the longer term, demand for diesel in the US is expected to increase. According to a DOE report, the demand for light-duty diesel vehicles will increase 4-7% by 2012 (OGJ, Sept. 13, 2004, p. 7).

Recent announcements of increased biodiesel capacity make one wonder what effect, if any, this will have on the US diesel situation.


Although the production of biodiesel in the US is a figurative drop in the bucket compared to conventional diesel production, it is interesting to consider the very long-term prospects for the fuel.

A past Journally Speaking highlighted the advantages of biodiesel over other alternative fuels (OGJ, Nov. 18, 2002, p. 15). To summarize, the advantages are that biodiesel can use existing infrastructure for distribution and that it is completely compatible with existing engines. Another advantage in light of recent price increases for conventional diesel is that the price of biodiesel is much less influenced by crude prices.

In May, AGE Refining Inc. announced that it would become the first petroleum distributor to offer B20, a 20% biodiesel blend. The company will purchase its biodiesel from Gulf Hydrocarbon Inc. One reason for the offering is a recent reduction in Texas of the fuel excise tax on B20 to 16¢/gal from 20¢/gal.

Long-term prospects

With all alternative fuels, some perspective is required to evaluate the real impact on petroleum markets. In a May 16 speech, US President George W. Bush stated that biodiesel sales in 2004 were about 30 million gal, or about 2,000 b/d. Total US demand for diesel is about 2.4 million b/d.

The National Biodiesel Board estimates that current dedicated production capacity is 110 million gal/year.

On June 8, Cargill Inc. announced plans to construct a 37.5 million gal/year biodiesel plant at its Iowa Falls, Iowa, soybean crush facility. Initially, the plant will produce biodiesel exclusively from soybean oil, but Cargill expects to have the capability for using animal fat or waste grease for biodiesel production in the future.

According to the company, construction will begin this summer pending regulatory permitting approvals, with biodiesel production commencing in April 2006-just in time to satisfy the ULSD standard.

While biodiesel may not have a significant impact on a possible diesel shortage in the next few years, it has the potential of carving out a unique market niche in the long term.