The Implications Of Soaring Diesel Prices

Refineries are producing excessive amounts of gasoline in a bid to cope with strong demand for diesel, Reuters’ John Kemp wrote in a recent column. As a result, gasoline prices have been on the decline while diesel prices are climbing, widening the gap between the two fuels and spurring demand for alternatives to costly diesel, which should be welcome news for the environmentally conscious.

While this state of affairs is likely temporary, with seasonally lower demand for gasoline also weighing on prices, it might become lengthier than the usual seasonal discrepancies between gasoline and diesel demand, and hence prices, at least in the Untied States, where the consistent growth in crude oil production, most of it light crude, has pushed gasoline output and stockpiles higher.

On the other hand, high diesel prices mean good news for the proponents of alternative energy. Most of diesel demand comes from industries such as mining, logistics, and shipping, and following the universal rule that if a commodity becomes too expensive, you start looking for alternatives, chances are these industries would make more of an effort to go in a different direction such as electric vehicles. All the more so in light of the new International Maritime Organization’s upcoming rule change in emissions that would give a major spur to diesel demand.

Besides electric vehicles, however, the biggest users of diesel fuel will also take other steps to curb consumption. Kemp lists the most popular of these, including load consolidation and journey frequency adjustments and generally betting on fuel efficiency over speed of delivery. In this, at least in Europe, they will be helped by new, higher taxes on diesel fuel. These, by the way, have unleashed massive protests in France, highlighting the importance of the fuel that climate-conscious activists and government leaders so love to hate. Related: How To Play A Recovery In Oil Prices?

In the meantime, however, the latest price trends will also spur more gasoline demand: if gasoline is cheaper, why buy a diesel car? What’s more, why buy a diesel car if EVs are cheaper overall? This is what’s likely to happen in China, the world’s biggest car market, whose government plans to stimulate the rise in EV adoption as well as other initiatives generally aimed at curbing pollution and oil demand.

Since so much of the oil China consumes is imported, this drive to reduce consumption is perfectly logical. No wonder, then, that two months ago CNPC, the state energy giant, said that diesel demand in China had already peaked, and gasoline will follow in seven years.

So why not just make more diesel and less gasoline? Because the space for distillate production adjustments is limited, Kemp notes. There is only so much that refiners can do to up their diesel output while reducing gasoline production, so for the time being hey are basically stuck with a lot of gasoline. Yet there is always another driving season, so all they would need is sufficient storage capacity and patience. And, of course, enough cash to justify the storing of millions of barrels of fuel until the market conditions improve enough to sell it.

By Irina Slav for Oilprice.com

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