New sulfur rules, drought cause diesel price jumps: US FTC

New sulfur rules, drought cause diesel price jumps: US FTC

Washington (Platts)--17Aug2006

New federal diesel fuel environmental regulations, a drought that has
spurred demand for diesel-powered irrigation pumps, refinery problems and
back-ups at terminal sites have combined to cause the steep run-up of diesel
prices in the central United States, according to the US Federal Trade
Commission.

"For now, a combination of regulation, logistics, and drought appears to
have caused the diesel price increase in the Heartland and perhaps beyond,"
the FTC said in an August 15 column on its website, the western Mississippi
River Valley from Arkansas to Minnesota, and westward to the Dakotas and
Nebraska.

"Prices may decrease as the transition to ULSD is completed," the agency
said. "The FTC staff will continue to watch the situation carefully."

The FTC said its gasoline and diesel price monitoring project had
detected a "multistate area of sudden diesel price increases." On August 7,
the average retail price of diesel was $3.26/gal in South Dakota, $3.27/gal
in North Dakota, $3.28/gal in Kansas, and $3.30/gal in Nebraska, the FTC said.

"These prices put this part of the country in a virtual tie with the far
west for the highest diesel prices--an unwelcome development in the Heartland,
where prices usually rank in the middle," the FTC said. "A month ago, diesel
prices in the Heartland were just about the same as in the rest of the
Midwest. Now they are roughly 12 cts/gal higher."

One "important factor" for the increase is the US Environmental
Protection Agency phasing in a new 15 ppm sulfur standard for diesel fuel.
Refineries were required to produce this ULSD diesel by June 1, while
pipelines and terminals must deliver it by September 1, and service
stations must sell it by October 15. During a September 1-October 15
transition period, EPA will allow 22 ppm sulfur diesel to be marketed at the
pump as ULSD.

While the entire country is changing to new diesel sulfur standards, the
Heartland may have been particularly susceptible to price spikes and supply
shortfalls because "much of the region has few pipelines and little local
refining capacity," the FTC said. "It may be harder to alleviate a shortage in
the Heartland than in parts of the country with more infrastructure."

But the agency noted that the diesel supply tightness may be spreading
westward. On August 10, the Rocky Mountain News reported that Colorado has
permitted fuel truck drivers to work unlimited hours to ensure adequate diesel
supply. In addition, the US Energy Information Administration's weekly diesel
survey showed that prices in the Rocky Mountain region jumped 16 cts/gal this
past week.

Terminal operators are facing "significant challenges" in making the
conversion to the lower sulfur diesel because they are required to completely
empty older, higher-sulfur diesel from their tanks to avoid contaminating the
newer fuel, the FTC said. This draining and refilling of tanks reduces the
useful storage capacity of the terminal.

"With a smaller amount of fuel than usual in storage at terminals during
the transition to ULSD, a sudden increase in demand from causes like unusual
weather may cause a terminal to run out of diesel," the FTC said. "The
short-run solution to this problem would be to bring in diesel by truck from
more distant terminals, but the problem may be harder to solve if the demand
surge is widespread and if nearby terminals are also short of stored product
because they are making the same transition."

A shortage of diesel fuel led to backups and delays at terminal sites in
the Heartland, causing drivers to exceed allowable hours before they could
complete rural deliveries, FTC said. At the end of last month, Nebraska
Governor Dave Heineman issued an emergency executive order lifting the state?s
restrictions on how many consecutive hours fuel truck drivers could work.

At the same time, the Heartland is in the midst of a "severe and
extensive drought," the FTC said, lifting diesel fuel demand. Large diesel
engines used to power irrigation pumps and giant motor-driven can use 20
gallons or more per hour, the agency explained. "The drought in the Heartland
has forced farmers to irrigate more, and it doesn't take long for thousands of
farms pumping many hours per week to burn a lot more diesel than usual," the
FTC noted. "This raises the consumption of diesel in a system already limited
in its supply."

In addition, the FTC said a Kansas refinery was shutdown from mid-July to
August 15 for scheduled maintenance, aggravating the diesel shortage.

--Cathy Landry, cathy_landry@platts.com

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