Why is Diesel Fuel Higher Priced Than Gasoline?
Energy Independence & Affordable Diesel Fuel
By Jim Bigley
Updated July 17, 2008 11:00 am
This editorial is the result of a conversation we were having in our bulletin board forum about U.S. diesel fuel exports and how that might affect the pump price of diesel fuel. This discussion about petroleum exports, for a country that imports three times more crude oil than it produces, motivated me to dig deeper into our energy policies and help answer the bigger question about whether we have the resources and the will to become energy independent. The research was fascinating, but what I learned is that time is running out.
There is a reasonable solution to runaway diesel fuel prices as well as our long-term energy requirements, and that solution is within reach. I purposely made this as apolitical as I possibly could. Becoming energy independent is vital for every citizen of this country, and getting there will require support and effort from everyone. This editorial contains several resource links as well as facts and figures that help to illustrate the problem. Illustrating a problem is of little value unless we also present a solution, and you'll find that solution here as well.
One reason why diesel fuel today is higher priced than gasoline is because of the unintended consequences of the 2007 EPA mandated ULSD (Ultra Low Sulfur Diesel) fuel - and not necessarily because it costs more to produce...
Everything changed in October of 2006, when the new U.S. ULSD regulations were implemented. Current U.S. ULSD is regulated to contain no more than 15-parts per million sulfur. In actual practice, U.S. ULSD contains just 7 or 8-ppm, which perhaps not coincidentally allows our ULSD to meet the somewhat stricter 10-ppm sulfur regulations in Europe. So, ULSD produced here in the United States has, for the first time, become acceptable for use in Europe. According to a 2/08 article in Reuters, entitled "ANALYSIS-Exports keep U.S. diesel prices above gasoline", they reported that U.S. diesel fuel is currently being exported in quantity. As reported in a 7/08 article in Forbes online, entitled "ANALYSIS-US oil firms seek drilling access, but exports soar", "U.S exports of diesel fuel in April averaged 387,000 barrels per day, up almost seven-fold from 59,000 barrels a day in the same month a year earlier." The economics of "Supply & Demand" no longer apply to the U.S. diesel fuel market. American truckers could boycott diesel fuel, and it wouldn't necessarily produce lower diesel fuel prices.
According to a June 2008 article at MSN, entitled: Why is the U.S. exporting gasoline and diesel?, they report that U.S. oil companies were exporting more than 1.8 million barrels of crude oil, gasoline, diesel fuel, jet fuel and other refined products per day. The top five buyers of U.S. petroleum products were Mexico, Canada, the Netherlands, Chile and Singapore. This article also indicated that Venezuela owns three CITGO refineries in the United States, and that about 30,000 barrels of refined products per day are being shipped back to Venezuela, where government-subsidized gas/diesel is currently being sold for a whopping $0.19 per gallon. If we weren't exporting diesel fuel, there would be more of a surplus, which could result in parity between gas and diesel fuel prices. What can we do? What should we do?
Energy independence has perhaps become the single most significant factor in national security. We can continue to send up to $700+ billion (a portion of which) to unfriendly nations every year to buy their oil, continue to run up the national debt and trade deficit, crush our economy due to high energy prices, and reduce our standard of living - or we can become energy independent. Exporting oil and petroleum products push us farther away from that goal. Energy independence would also decouple world oil prices from those in the United States, creating a U.S. energy market. We have enough resources right here at home to fuel our needs for the next 100-200 years, depending on whose math you favor. I vote for energy independence...
What would it take for the United States to become energy independent? According to www.indexmundi.com, the U.S. produced 5.2 million barrels of crude per day and imported another 15 million barrels of foreign oil per day throughout 2005, for a total consumption of a little more than 20 million barrels per day. Becoming energy independent would require producing more domestic oil and consuming less imported oil. How do we become energy independent?
Step 1- Expanding exploration and development of domestic crude oil resources are important pieces of the puzzle. As reported on energytomorrow.org, the Department of the Interior estimates that there are 112 billion barrels of technically recoverable crude oil beneath U.S. federal lands and coastal waters. According to Energy Tomorrow, that is "enough oil to fuel 60 million cars for another 60 years". Actually, this works out to be about 15.3 years at a current U.S. consumption level of 20 million barrels per day, when including all uses of crude oil.
Step 2- Surprisingly, most of the world's "unconventional" sources of oil exist right here in the United States. These unconventional sources include the vast oil shale deposits called the Green River Formation, which are found spanning an ancient 17,000 square mile lake bed beneath Colorado, Utah and Wyoming (80% on federal lands). Oil shale can produce anywhere from 22-40 gallons of oil per ton of oil shale. A barrel of crude oil contains 42 gallons. Based on current extraction technology, at least 100 billion barrels of "commercially viable" crude oil is thought to exist in all of the Green River Formation. (Note: the total amount of all oil shale within the U.S. is thought to contain a staggering 1.4 trillion barrels of crude oil, which is more than four times the estimated historic levels of oil found beneath Saudi Arabia.) With a current U.S. consumption rate of 20 million barrels per day, 100 billion barrels of crude oil derived from oil shale could meet all of the U.S. oil consumption needs for another 14 years - all by itself. See: www.fossil.energy.gov to learn more.
Shell scientists have created the technology required to economically extract large amounts of crude oil from oil shale without wrecking the environment. In fact, Shell's method is capable of extracting high quality light crude oil from oil shale deposits utilizing heated wells - not a rock mill operation, which does little damage to the environment. According to a November 2007 article in CNN Fortune - online magazine, a Department of Energy study was referenced that indicates the Green River deposits are predicted to produce 2 million barrels of oil per day by 2020 and as many as 5 million barrels per day by 2040 - assuming of course, that the environmental lobby and Washington could be convinced that the future of the U.S. depends on us becoming energy independent. Indeed, this level of production would rival that of the largest conventional oilfields in the world. 2007 estimates for cost per barrel came in at a low of $30/barrel, while cost estimates for a broader range of oil shale deposits range from a low $30 to as high as $90 per barrel. Shell's production methods are expected to yield more than one million barrels of oil per acre. Keep in mind that the Green River Formation encompasses 17,000 square miles. Everyone needs to know that the years or decades of lead time mentioned here between exploration and production are due to environmentalist lawsuits and the gridlock in Congress.
Step 3- The Republic of South Africa has attained energy independence even though it has no significant crude oil production. What's amazing is that South Africa also doesn't import crude oil or petroleum products. What they do have is coal, and lots of it. Using technology developed in the 1920's, SA is meeting all of their gasoline and diesel fuel needs by converting their own coal to oil. Following SA's lead, the U.S. must begin a serious coal to oil program. We cannot become energy independent without a coal to oil program. According to a May 2006 article in Money Week magazine, the U.S. contains the world's largest coal deposits of 268 billion tons. With a standard conversion rate of 2 barrels of oil per ton of coal, our nation's coal deposits contain nearly 5 times more coal-derived oil than all of the recoverable crude oil thought to exist beneath U.S. federal lands and coastal waters.
Montana Governor Brian Schweitzer has stated publicly that a coal to oil program could replace current levels of imported foreign oil for an optimistic 200 years. My own calculations indicate a coal to oil program could supply all domestic oil needs by itself for another 73.4 years at current consumption levels of 20 million barrels per day. When combined with the Department of the Interior's estimate of recoverable crude oil and oil shale, we're looking at a total of approximately 104 years at current consumption levels - all without a single drop of foreign oil. Current cost estimates for synthetic crude oil range from $40-55 per barrel. Since crude accounts for 72% of gas/diesel pump prices, dropping oil prices from $130 per barrel to $55 should result in $2.70-$2.90 per gallon diesel. Want to learn more about "coal to oil"? Visit: www.ultracleanfuels.com
Step 4- We must end all petroleum and coal exports. The U.S. can become energy independent and maintain that independence only as long as we don't export crude oil, refined petroleum products and coal. Price of gasoline, diesel fuel and coal should be based on our own U.S. market, not a world market.
Regulating petroleum exports is not a new concept. According to an April 2005 article in the Seattle Times, entitled "Where would ANWR oil go?", I learned that Congress did pass laws in the 1970's that prevented exports of crude oil from the North Slope of Alaska until 1995 when the laws were changed, then just a trickle was exported till 2000, then just one tanker load since then. West Coast refineries could take almost all of it. Opening ANWR would put another million barrels a day into the market, and make exporting a more likely possibility. Under current law, ANWR oil could be exported to Asia.
According to the Seattle Times article, the oil companies in the 1970's and 80's were concerned about whether refineries on the West Coast could handle all of Alaska's North Slope oil field production. If the U.S. refineries couldn't handle it all, they argued, and if it couldn't be exported, that fact would reduce the price of that oil... Isn't that the idea?... Oversupply reducing costs... It would seem reasonable to keep the oil fields in production for as long as possible, feeding only domestic demand, and not suck the region dry as quickly as possible. Like a retirement fund, I would hope the supply of oil lasted long enough to bridge the gap to a future non-petroleum energy source.
According to a March 2008 article published in the New York Times, entitled: "An Export in Solid Supply", U.S. corporations exported 49 million tons of coal in 2006, nearly 59 million tons in 2007, and coal executives say they expect exports to reach 80 million tons in 2008. The bottleneck to increasing coal exports even further are the overloaded railroad networks and sea ports. With improvements to these infrastructures, they could increase exports to as much as 120 million tons in the coming years. Japan and Europe are the primary importers of American coal. According to this NYT article, the U.S. contains 27% of the world's known supply of coal.
Coal-fired electric generating plants are the primary users of coal here in the United States. This burgeoning world-wide demand for coal will eventually impact electricity consumers right there at home - just as world market-based petroleum has at the pump. Most domestic utilities buy coal through long-term contracts, which are said to be expiring in 2009-2010. Electric rates are expected to surge once the higher priced coal becomes a reality. Like petroleum, coal is a finite resource that will eventually be gone. Great Britain's 19th century industrial revolution consumed most of their coal, requiring the UK to import more than 2/3 of the coal they currently consume. Just as we should not be exporting crude oil and refined petroleum products, we cannot export a finite resource like coal if there is any hope of becoming energy independent. As an illustration of hypocrisy, the environmental lobby and some in Washington believe we shouldn't use coal to produce electricity because of the related carbon emissions, but they have no problem shipping tens of millions of tons of U.S. coal to foreign countries where, guess what, it's being used to fire electric generating plants. We are exporting our ability to become energy independent.
Yes, we have a global economy, but nearly all of the domestic crude oil, oil shale and coal are found on and extracted from U.S. public lands and coastal waters. The U.S. public should have more say in our energy policy and the future of our country. As mentioned earlier, this conversation about diesel fuel prices began in our bulletin board forum. There are those who currently believe in the "World Market" energy model formulated in the 1980's by President Ronald Reagan, where he de-regulated oil prices and removed price controls as a way to grow world supplies of oil and to improve our "energy security" - while postponing "energy independence". He believed in allowing world markets to determine domestic oil prices, which directly affect the pump price of diesel fuel. President Reagan's plan worked, and he is largely credited for the economic recovery of the mid to late 1980's, thus making me a huge fan of Ronald Reagan. That said, we face a much different situation today. The biggest differences are that the concept of "peak oil" is of more immediate concern, both for the world and the U.S., and the emerging economies of China and India (among others) have produced an exponential growth in their demand for energy.
Currently, there is no question about whether world-market energy will become increasingly more expensive and harder to find as time passes. The excess capacity of world oil production that existed in the 1980's is no longer available - except for the United States. We've seen production decline every year since 1985, largely because of the environmental lobby and the environmentally oriented lawmakers in Washington.
Energy independence would profoundly improve national security, and we would not be subject to the whims of OPEC and soaring world oil prices. We must either protect the oil flowing from the Middle East (i.e. have the military there, and pay the costs of doing that) OR we can become energy independent. We must do one or the other. Being militarily involved in the Middle East hasn't worked out all that well. Likewise, if we expand domestic energy production, we cannot then export it, or what's the point?
Step 5- We must develop a more energy efficient use of the resources we have and continue to develop alternative energy. U.S. oil consumption growth has been mostly flat since 2000, which indicates that we're doing a good job with conservation and with efficiency improvements. But, we can do more. Current natural gas and coal-fired electric generating plants should be replaced with wind, solar and nuclear. Coal and natural gas would better serve the U.S. as transportation fuels. At current demand, America has between 100 and 200 years of liquid fuel resources. These domestic energy resources can bridge the gap to a non-fossil fuel future, without ruining the economic health of our country in the meantime.
What happens if we don't become energy independent? According to the Energy Information Administration (EIA/DOE), total world oil consumption in 2008 is expected reach 86.6 million barrels per day. The U.S. is using less than 1/4 of that amount or about 20 million barrels per day. Being subject to world oil prices means we pay what OPEC declares, and a falling dollar means we will pay more - even for oil pumped from U.S. public lands. How many years can the U.S. continue to pay nearly $2 billion dollars every single day (@ $130/bbl) to import 15 million barrels of crude? Imported crude oil is costing us nearly $711 billion dollars annually - not counting the billions/trillions spent having our military protect the world's oil resources. With the current rate of wealth transfer, we'll run out of money long before we run out of our own sources of energy.
As has been illustrated here, the United States is rich in long-term energy sources. Energy independence would improve national security, ensure our economic future, and produce lower and more stable diesel fuel prices. The money we pay for petroleum would remain in our own economy and our trade deficit would all but disappear. Because of energy exports, our window of opportunity to become energy independent is closing. We must act now to become energy independent. As always, let me know what you think. TDP
If you believe as I do that energy independence is vital to the future of our country, make your voice heard. Please visit the U.S. Senate web site to send your Senators a message, and visit the U.S. House of Representatives web site to send your Representative a message.
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