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Crude Oil versus Diesel Prices


  • What Drives Oil Pricing?
  • Who Makes The Most Money When Fuel Prices Are High?
  • When crude prices change, how much should we see at the pump?
HEADLINE – CRUDE PRICES HAD SPIKED AGAIN BUT NOW HAVE FALLEN!!!
    This is similar to what happened during the mid-90′s during the Asian market expansion. With financial markets, personal finances and demand having problems, prices have adjusted back to more of an inflation-adjusted level (plus terrorism premium).This last cycle was driven by a number of factors including:–Economic growth and related demand in the US, China and India.

    –Politically motivated supply concerns in Iran, Nigeria, Ecuador and Venezuela, strikes in South Korea and Norway – and other issues around the world.

    –Investor Speculators and Funds had more than doubled their position in the marketplace over the last 20 years, making up to one-fifth of the commodity marketplace. Some believe that this contributed up to $100 per barrel in prices.

    The concern expressed by economists had been that continued high crude (fuel) prices would result in slower economic growth or even a recession – which we are seeing globally. Four of the five past US recessions were in part driven by crude oil price spikes. History is repeating itself.

    Increased fuel prices acts like a tax, in that it cuts into consumer spending. A rule of thumb is that $1 change in the price of crude oil affects the consumer spending by $5 Billion. More is paid to fill up gas tanks, for airline tickets, for production of goods, for transportation, for services, etc. – all resulting in higher prices. We see it in our industry as necessary fuel surcharges added on to freight rates.

    There are other issues within the US including the effect of production capacities here on the pump prices (lack of new refineries and all the different blends). Also, oil analysts tell us that disruptions in supply (such as damaged pipelines) can contribute from $10-$15 per barrel in spikes for crude and additional regional spikes involving transmission of finished products.

    Traditionally, OPEC members have cheated on their quotas and others break from the rest, which results in more supply / lower crude prices. This is happening again. Some in OPEC are opening their production capacity up, so many do believe that crude prices will stay at more historical levels for a number of years.

    It is believed that market issues will drive crude prices more than OPEC price setting. For the longer term, this is driving oil field production productivity, new field development, new technologies, alternative fuels (ethanol), bio / renewable diesel and other things, in addition to marketplace innovation and changing consumer habits resulting in conservation.

    Global diesel demand and trading is resulting in diesel prices at an additional 10-15% premium over crude. At any rate, we should see prices down for a while, but crude will continue its inflation adjusted trend in price.

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BACKGROUND

  • When fuel spikes as it has recently and over the last number of years, many blame the oil companies. There is more to the story.
  • In trucking businesses, we not only need to know when it is going to happen, but more importantly how to plan around it.
  • Some of the major oil companies who supply our industry were more than happy to explain the overall cost and price structure.
  • We then combined it with information from other industry sources to give us some tools to help plan around the spikes

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A review of the history of crude oil reveals the following:

  • US domestic oil industry is heavily taxed while the international industry is primarily government owned
  • The price of crude oil swings widely with oversupply and shortage
  • OPEC controls about 25% of daily world oil production
  • World oil consumption is approaching 85 million barrels per day
  • US consumes about 1/4 of that (around 20 million barrels per day)
  • US produces about 8 million and imports about 12 million barrels per day
  • Inflation adjusted crude price is approximately $35 per barrel today
  • It has stayed pretty constant (with swings) since the 1850′s.

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BREAKDOWN OF A GALLON OF FUEL

  • The two largest costs in diesel fuel (70-90%) are controlled by governments (crude price & taxes)
  • Crude oil prices vary with supply and demand – in the last 20 years from a low in 1998 of $10+ to $150 per barrel recently. Inflation-adjusted crude is about $25 per barrel
  • We approximate that the part of the diesel fuel price that comes from crude is “crude price divided by 42 gallons per barrel plus about $0.04 per gallon”
  • Federal Taxes on diesel fuel are currently $0.24 per gallon (including $0.04 from the 1993 tax increase)
  • State Taxes vary by state from $0.10 to $0.30 per gallon for diesel fuel
  • Transportation, jobbers and dealers vary by distribution network from $0.05 to $0.15 per gallon diesel fuelNote: You notice this effect as you increase the distance from refineries.
  • Refining & profits varies by oil company and product mix from $0.01 to $0.13 per gallonNote: You notice this by comparing prices of different brands in the same town.
  • US Department of Transportation Gasoline and Diesel Fuel Update

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THE BOTTOM LINE

  • We first take the federal taxes at their value of $0.24 per gallon.
  • If we target the middle of the range of the values for state taxes, transportation, jobbers, dealers, refining and profits and add them up, it comes out about $0.36 per gallon.
  • Adding these two together gives us a fixed cost of about $0.60 per gallon diesel fuel (without crude).
  • Take this $0.60 per gallon and add in the crude oil variable and we get some general planning numbers:

Crude Oil to Diesel Price Rule of Thumb

  • $10 crude = $0.88 per gallon diesel pump price
  • $15 crude = $1.02 per gallon diesel pump price
  • $20 crude = $1.12 per gallon diesel pump price
  • $25 crude = $1.24 per gallon diesel pump price
  • $30 crude = $1.35 per gallon diesel pump price
  • $35 crude = $1.47 per gallon diesel pump price
  • $40 crude = $1.59 per gallon diesel pump price
  • $45 crude = $1.71 per gallon diesel pump price
  • $50 crude = $1.83 per gallon diesel pump price
  • $55 crude = $1.95 per gallon diesel pump price
  • $60 crude = $2.06 per gallon diesel pump price
  • $65 crude = $2.19 per gallon diesel pump price
  • $70 crude = $2.31 per gallon diesel pump price
  • $75 crude = $2.43 per gallon diesel pump price
  • $80 crude = $2.54 per gallon diesel pump price
  • $85 crude = $2.66 per gallon diesel pump price
  • $90 crude = $2.78 per gallon diesel pump price
  • $95 crude = $2.90 per gallon diesel pump price
  • $100 crude = $3.02 per gallon diesel pump price
  • $105 crude = $3.14 per gallon diesel pump price
  • $110 crude = $3.26 per gallon diesel pump price
  • $115 crude = $3.38 per gallon diesel pump price
  • $120 crude = $3.50 per gallon diesel pump price
  • $125 crude = $3.62 per gallon diesel pump price
  • $130 crude = $3.74 per gallon diesel pump price
  • $135 crude = $3.85 per gallon diesel pump price
  • $140 crude = $3.97 per gallon diesel pump price
  • $145 crude = $4.09 per gallon diesel pump price
  • $150 crude = $4.21 per gallon diesel pump price

NOTE: These numbers are a base floor costs and are also affected by regional problems, seasons, weather, supply problems, refining / refinery problems, transmission / pipeline issues, etc. Winter prices can be 15% higher than these norms.

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What one should do is keep an eye on crude prices and use this thought process to plan your fuel costs in your operations. You should never plan for costs below these.

Click Here to see how to address Surcharge – to review how to help offset fuel costs when they exceed that cost covered in the base freight rate.

BY THE WAY: The answer to our HEADLINE question “Who Makes The Most Money When Fuel Prices Are So High?” is:

“The one who owns the crude oil being pumped from the ground AND is the HUNDREDS OF BILLIONS dollars we are sending out of the country to others.”

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