Report on Diesel, Aspects of Bangladesh

        ASPECTS OF BANGLADESH

WHAT ARE THE COMPONENTS OF THE RETAIL PRICE OF DIESEL FUEL?

The cost to produce and deliver diesel fuel to customers includes the costs of crude oil, refinery processing, marketing and distribution, and retail station operation. The retail pump price reflects these costs and the profits (and sometimes losses) of the refiners, marketers, distributors, and retail station owners. The relative share of these cost components to the retail price varies over time and among regions of the country. Figure 2 illustrates the percentage share for each major cost element of the national average retail price as of May 2008.

The price at the pump also includes Federal, State, and local taxes. In 2008, Federal excise taxes were 24.4 cents per gallon and State excise taxes averaged about 22.0 cents per gallon.² Some States and county and city governments levy additional taxes. The retail price also reflects local market conditions and factors such as the location and the marketing strategy of the owner. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase diesel fuel for resale to the public.

Why are diesel fuel prices higher than gasoline prices?

Historically, the average price of diesel fuel has been lower than the average price of gasoline. However, this is not always the case. In some winters where the demand for distillate heating oil is high, the price of diesel fuel has risen above the gasoline price. Since September 2004, the price of diesel fuel has been generally higher than the price of regular gasoline all year round for several reasons. Worldwide demand for diesel fuel and other distillate fuel oils has been increasing steadily, with strong demand in China, Europe, and the United States, putting more pressure on the tight global refining capacity. In the United States, the transition to ultra-low-sulfur diesel fuel has affected diesel fuel production and distribution costs. Also, the Federal excise tax on diesel fuel is 6 cents higher per gallon (24.4 cents per gallon) than the tax on gasoline.

Retail Diesel Outlook For 2008 AND 2009

OUTLOOK FOR 2008 AND 2009

Retail diesel fuel prices are likely to remain elevated as long as crude oil prices and world demand for distillate fuels remain high. According to EIA’s June 2008 Short-Term Energy Outlook, national average retail diesel fuel prices will peak in the third quarter of 2008 at $4.75 before falling to $4.11 per gallon by the fourth quarter of 2009, primarily due to the forecast for the price of West Texas Intermediate crude oil to average between $121 and $133 per barrel during this same period. However, the recent volatility seen in crude oil and petroleum product prices, if continued, may significantly alter these price projections.

The phase-in of the U.S. Environmental Protection Agency’s (EPA) sulfur standards for diesel fuels has the potential to continue to influence diesel fuel prices. The logistics of delivery of ULSD to retail service stations can be a challenge. Most ULSD travels through pipelines on the way to bulk terminals for final transfer by tanker truck to retail stations. Other diesel fuels and petroleum products with a higher-sulfur content in the pipeline, storage, and local distribution systems might contaminate ULSD (jet fuel, for example, can have 3,000 ppm of sulfur). If contaminated, it may not be possible to correct a ULSD fuel batch by blending with additional low-sulfur product, and contaminated batches have to be returned to a refinery for reprocessing, a difficult and expensive problem. Even without potential delivery problems, it costs relatively more to produce ULSD fuel.

Why are West Coast diesel fuel prices higher and more variable than others?

Diesel prices on the West Coast, especially in California (CA), are relatively higher than other regions of the country, partly because of taxes, but mainly because of supply issues. The State of California assesses a combined State and local sales and use tax of 7.25 percent on top of the 24.4 cents/gallon Federal excise tax and an 18.0 cents/gallon State tax. Washington’s tax of 34 cents/gallon is one of the highest in the country. Besides taxes, West Coast retail prices are more variable than others because there are relatively few supply sources: 21 of the 36 refineries located in West Coast states are in CA. California refineries need to be running at near full capacity just to meet in-state demand. If more than one refinery in the region experiences operating difficulties at the same time, the diesel supply may become very tight and prices may spike. The West Coast’s substantial distance from Gulf coast and foreign refineries is such that any unusual increase in demand or reduction in supply results in a large price response in the market before relief supplies can be delivered. The farther away the necessary relief supplies are, the higher and longer the price spike will be.

MAIN FACTORS THAT AFFECT DIESEL PRICES

WHAT ARE THE MAIN FACTORS THAT AFFECT DIESEL PRICES?

Besides excise taxes, the following are the main factors that affect diesel fuel prices:

Cost and supply of crude oil: Crude oil prices are determined by worldwide supply and demand, and over the past few years increasing demand has put intense pressure on available supplies. The Organization of Petroleum Exporting Countries (OPEC) exerts significant influence on prices by setting an upper production limit on its members who produce about 40 percent of the world’s crude oil. OPEC countries have essentially all of the spare production capacity, and possess about two-thirds of the world’s estimated crude oil reserves. Prices spike in response to disruptions in the international and domestic supply of crude oil, such as the Arab oil embargo in 1973, the Iran/Iraq war in 1980, the current war in Iraq, unrest in the Niger River delta region of Nigeria, and the hurricanes in the Gulf of Mexico in 2005.

Tight refining capacity and international diesel fuel demand: U.S. refineries have been operating at around 90-percent capacity over the last 10 years. Most other countries rely even more heavily on distillates and diesel fuel than does the United States, and refining capacity is tight worldwide. U.S. diesel fuel prices are more and more affected by competing international demand for refined distillates.

Figure 3. Diesel Fuel Prices Follow Crude Oil

Product supply/demand imbalances: Prices of transportation fuels are generally more volatile than prices of other commodities because the U.S. vehicle fleet is so heavily dependent on petroleum and few alternative fuels are available. If supply declines unexpectedly due to refinery problems or lagging imports, diesel inventories (stocks) may decline rapidly. When stocks are low and falling, some wholesalers and marketers may bid higher for available product. If the diesel fuel transportation system cannot support the flow of surplus supplies from one region to another quickly, prices will remain comparatively high. These are normal price fluctuations experienced in all commodity markets.

Seasonality in the demand for diesel fuel and distillates: While U.S. diesel fuel demand is fairly consistent and generally reflects the overall health of the economy, prices tend to gradually rise during the fall, decline in the late winter, rise through the early spring, and then drop a bit in the summer. Seasonal upward pressure on diesel prices also results from demand by farmers in the summer, cold weather in the winter, and stores building up inventories during the winter holiday season.

Transportation Costs: Transportation costs generally increase with increasing distance between the retail location and distribution terminals and refineries. Areas farthest from the Gulf Coast (the source of nearly half of the diesel fuel produced in the United States) tend to have higher prices.

Regional operating costs and local competition: The cost of doing business by individual dealers can vary greatly depending on where the dealer is located. These costs include wages and salaries, benefits, equipment, lease/rent, insurance, overhead, and State and local fees. Even retail stations next to each other can have different traffic patterns, rents, and sources of supply that affect their prices. The number and location of local competitors can also affect prices.