The price of diesel, a major variable cost as pool builders assemble their balance sheets, has been softening over the past year, and its recent $4.44-per-gallon level is now well below the eye-popping $5.49 last seen in the summer of 2022 on the heels of the Russian invasion of Ukraine. But the good news comes with a significant caveat: The price tag for the fuel is expected to remain historically high, with Moody's Analytics projecting a gradual rise to $4.50 by mid-2024. That's well above pre-pandemic times when they stayed below $3.50 for a five-year stretch.
Given that fuel costs can account for a significant proportion of a pool builder's operational expenses, any shift in the price tag can have a real effect on the bottom line. So, what's keeping prices high? A major contributing factor is the cost of oil, which is passed right along to the diesel distillate. "Today's crude oil price of about $95 a barrel is being supported by the agreement on the part of Saudi Arabia and OPEC to maintain production at a level less than consumption," says Allen R Schaeffer, executive director of the Diesel Technology Forum. "So prices are projected to remain at their current level through 2024."
Tight diesel supplies are not helping matters. "Like other commodities, long- and short-term diesel price expectations are driven by supply levels," says Trey Cowan, oil and gas analyst at the Institute for Energy Economics and Financial Analysis (IEEFA). "And right now, figures from the Energy Information Agency (EIA) show that we are tracking toward five-year lows."
Given the popularity of diesel, one would expect refineries to pump out as much product as possible. But that's not the case. As noted above, it behooves some countries to reduce output to bolster the price tag of an important export. Furthermore, there is a cost problem to consider: If pump prices drop too low, making the fuel is just not feasible.
"Over the years, refiners in the United States have reduced capacity due to poor margins and increased environmental costs, as well as to the expense required to maintain facilities in a world where United States demand has peaked," says Andrew M. Lipow, president of Houston-based Lipow Oil Associates. "Refineries are shutting down as they look ahead to how much money they will have to spend to maintain safe and environmentally compliant facilities."
Inflation, too, increases building costs. It can cost several hundred million dollars to bring a new refinery online, at a time when oil demand in the United States is going down. (USEIA, the United States Energy Information Agency, projects diesel consumption to be flat in 2024.) The prudent decision may well be to shut down, and Lipow noted that two more U.S. refineries on the West Coast and Gulf Coast are planning to do just that.
Russia produces some 10% of the oil from which the world refines diesel, and its ability to move its product through alternative channels has helped mitigate the global diesel shortage. "The sanctions imposed by the European Union and the United States and other countries on the purchase of Russian crude oil and refined products has forced Russia to find new customers," says Lipow. "While the majority of their oil is sold into China and India, they have found alternative markets in North Africa and Brazil."
Too, there is a bit of supply relief from some new refineries in parts of the world where diesel demand is growing. "Over the past year, new refineries have come on stream in Kuwait, Oman and China," says Lipow. "There is one in Nigeria that has yet to come online, and another in Mexico which may be producing fuel in 2024." While the additional supply is welcome, it is meager: "These new refineries will only represent an increase of some 1.5% to 2.0% of world capacity."
On the demand side, U.S. consumption is a mixed bag. Upward pricing pressure is coming from the travel sector, where the post-pandemic consumer continues to buy airline tickets in great numbers. "There's no doubt that increased jet fuel demand has reduced, somewhat, the availability of diesel fuel," says Lipow. Fuel for the nation's aircraft is pulled from the same oil pool required for diesel.
At the same time, downward pricing pressure has come from the shipping industry. "Freight activity is a big driver of demand for diesel, and thus of prices," says Schaeffer. "We have been experiencing a drop-off in freight demand, which is a result of supply chain issues finally being resolved. We've seen a number of trucking companies go out of business as a result."
Current fuel prices are affected by consumer and business confidence. Here, again, there is an expectation for reduced diesel demand. "Right now, prices are not necessarily responding to the lower supply situation," says Cowan. "That's because people are focused on what the economies are going to look like both in the U.S. and abroad over the coming year. And right now, it's a kind of subdued outlook for demand globally."