So just why is diesel so much more expensive than gasoline now?
That's a question that defies a simple answer right now. In large part that's because oil companies are so opaque about the realities of their business. Detroit News columnist John McCormick ponders the question of the recent run-up in diesel prices just months ahead of the launch of a slew of new diesel-powered vehicles. Typically, diesel fuel in the U.S. has been at parity or slightly more expensive than gasoline. But in the past couple of months it has shot up to be about thirty percent more expensive. Interestingly, that's just about the efficiency advantage that diesel engines have over gasoline varieties. Is there a connection? Who knows? I certainly don't. But when oil companies are making tens of billions of dollars in profits every quarter, it becomes increasingly difficult to cut them any slack when it comes to the subject of paying for expanded refinery capacity or adjusting the mix of gasoline to diesel fuel. I'm not saying there is any big conspiracy by the oil companies. Because we all know they wouldn't do that, would they?
[Source: Detroit News]
Reader Comments (Page 1 of 3)
Cervus 8:59PM (4/16/2008)
So, what you're actually saying that it is an oil company conspiracy?
You do know that Valero, the nation's largest refiner, does not actually pump any oil out of the ground? Back in March we had the highest levels of gasoline supplies in 14 years. Oil prices continued to rise, gasoline demand dropped, so that the "crack spread" profit margins went negative, which means that Valero was losing money. So what happens when you start losing money? You cut back, let supplies drop and prices rise far enough so that it's no longer the case.
Refiners are in a huge bind right now. Demand is only rising a little, or contracting. But oil prices continue to rise due to the falling dollar and higher demand in China. If the crack spread goes negative and stays there long enough... they go out of business.
And that $40 billion Exxon earned last year? They had to spend ten times that amount to earn that profit. In raw numbers, it's the highest profit ever. In terms of profit margins, not so much.
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why not the LS2LS7? 9:00PM (4/16/2008)
Diesel fuel contains 15% more oil per gallon than gas does. And Diesel is (around here) 15% more expensive per gallon than regular gas.
It's pretty simple.
And it's not even new. Around here, Diesel has cost more than regular gas for about 2 years now.
Conspiracy nutjobs.
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JL 11:07AM (10/30/2008)
Diesel does not contain more oil than gasoline. The inverse is true. It is more expensive, and requires more energy to produce gasoline than diesel; thus, while refining oil, diesel is produce with less energy than gasoline. As oil is being refined, the heavier oils, diesel and heating oil come out first. Then as more energy is applied, gasoline and the lighter products come out. No matter what the oil companies say about demand, filtering or regulations, it will always be cheaper to produce diesel than gasoline. Look at thier profits.
SHAME ON THEM !!
Birddog 1:17PM (12/14/2008)
One thing everyone has forgotten here is that diesel fuel has been and always be the lowest grade of fuel that we have. To me it is obvious that we are getting the shaft here. Everyone keeps mentioning that the oil companies are making record profits but no one wants to see the coalition here.
IT'S A NO BRAINER ! But our panty waisted politicians that WE elect keep giving us excuses or as I like to say
"they are pissing in our hands and making us believe it's raining" and until we actually get some ( meaning more than one ) politicians in office that are common people. People that have struggled and remember what it was like. We will be at the idiots that we elects mercy.
why not the LS2LS7? 9:07PM (4/16/2008)
Cervus:
Profit margins are what you sell something for, versus what you paid to get it to sell. They do not take account capital expenditures, which I guess is what you are referring to. Measured in terms of profit margin, the oil company profits are astounding.
Additionally, the "crack spread" is only related to how much a refiner pays for a barrel of oil, spends to convert it, and how much they sell the products for. It is strictly per barrel. When you start taking into account the amount of barrels refined, you're starting to talk about operating margins. This is different from the "crack spread".
Would you like to make a bet on whether Valero makes money this quarter? You speak of them teetering on the brink of going out of business. I would bet heavily they turn an operating profit this quarter, probably a substantial one.
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Kevin Nugent 3:13PM (4/17/2008)
Oh yes they would lower production to keep prices high . I give oil companies NO slack when it comes to give them tax breaks or pay more for them to run and set up more refineries. They are the ones making billions a year so they should use there own fucking money and build those shits. Excuse my language but it pisses me off to the next level when these monopolistic tyrants ask for more tax brakes all in the sake of boosting profit.
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Owen 9:40PM (4/16/2008)
why not the LS2LS7?, The point I see that he's trying to make is that Valero is a middle man. Their profit margin is calculated by ((sale price - cost)/sale price), so as sale price goes down or cost goes up, the margin worsens. They are buying the oil from companies that are getting (notice I didnt' say asking) more for the raw material (So the cost increases). Simultaneously, the market is not allowing them to charge more (increase sale price) because A) competitors that are both producing crude AND refining are holding prices low and B) the consumers are starting to buy less as we've seen in the last two months which have both shown a decrease in demand.
That being said, Diesel fuel requires LESS refining than Gasoline, however thats the first I've heard as to it requiring more crude.
All that said, higher Diesel fuel costs wont keep me from buying one as I will certainly be creating my own biodiesel blend for the summer months.
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Throwback 9:34PM (4/16/2008)
I think the answer is fairly obvious. Refinery capacity in the USA is limited. More gas than diesel is refined hence lower supply.
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Cervus 9:38PM (4/16/2008)
#3:
A profit margin of 10% is "astounding"? I found a reference in the NY Times that third quarter revenue in 2007 was $102 billion, and profit $9.41 billion that quarter.
Keep in mind that Exxon and most other oil companies aren't even replacing their reserves each year, and they've been thrown out of Venezuela and Russia to boot. 75% of the remaining reserves are under control of state oil companies, not Big Oil.
The cost of other commodities used to invest in more oil development are also rising. Copper is back to record levels, steel prices are going up. What oil remains is in very deep water, or requires expensive horizontal wells (like the Bakken formation).
Prices like this will undermine them in the medium to long term. People will find alternatives and conserve. Witness the proliferation of EVs lately. The continued research into next-gen biomass feedstocks, and more.
I did not say that Valero would go out of business right now. I said that if the margins were negative for an extended period of time they would run into big trouble. Remember all those oil companies merging in the late 90s? The crack spread has now returned to positive levels because the refiners have cut back so much. They're running at 81.2% capacity instead of the normal 90% at this time of year.
I'm going by what I read daily on Bloomberg. The crack spread seems to correlate with profit margins, at least. Last year at this time the crack spread was $25. Now, it's $7.80, which indicates lower profit margins to me.
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stevefazek 9:54PM (4/16/2008)
10% margin is pretty damn good, Especially when prebush they were running at 5% profit. So yeah they are cashing in. My grandparents got me 500 shares of exxon when i was born in the 80s. I now have something like 1500 shares or 2000 i don't remember nor i keep track of them since they split a bunch of times. Those big profits arnt helping me i still struggle month to month working full time and going to school.
This is what happens with "free market economies" the top 10% well actually the top 1% makes 90%
Its not refining capacity we are running at around only 80% in europe they are running at pretty much 100% year round. Again prebush profits 25 per barrel now its over 75 cents per gallon.
Oil companies also are buying up the gas stations which increases their profits even more. They want you to think that they only make like 3-5cents gallon of profit. In reality the profit from the pumps is around 7% not enough to run a business but it gets people in.
Also many states charge a % per gallon in tax not a fix rate. So as the price goes up the state makes more money here in ct its 7% gross service tax.
If you ever got a anual report from oil company they pretty much outright state they want a fix per mile profit from customers
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macmanic 10:12PM (4/16/2008)
I've been a fan of diesels but the premium at the dealer and the pump is killing my fondness fast. Diesels look good financially only if there is a source of cheap biodiesel - which could happen. Algae is looking very promising but it's vapordiesel at this point...
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meme 11:34PM (4/16/2008)
Cervus, what are you doing here? Everyone knows that you're not allowed to be a Green unless you believe in at least 5 conspiracy theories, at least two of which have to do with oil companies.
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Mort 11:48PM (4/16/2008)
It is partially the prevailing 3:2:1 crack ratio in the face of slightly lower gasoline consumption over the last few months. It is also due to higher heating oil demand in the winter. I expect prices will be more in line later this spring and summer, what with RBOB going higher and the summer "driving" season almost upon us. Unfortunately that may mean higher gasoline prices, not cheaper diesel.
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Snowdog 11:48PM (4/16/2008)
I have to chuckle when I see big oil apologists on a green blog.
Exxon operating profit margin for the year was about 11% which is very high for a commodity operation of massive scale. Walmart (widely regarded as ultra successful)had an operating profit margin less than 3% on similar revenues. About a quarter Exxons.
I wonder how much of Exxons operating expense is capital expenditure vs ridiculous compensation packages (like the $400 million retirement package for the chairman).
The only way we can fight ridiculous oil prices is to reduce demand drastically. I am looking for a new apartment right now and my first priority is walking distance to work.
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DC 11:51PM (4/16/2008)
Consider that yearly motor gasoline imports are triple distillate fuel imports.
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why not the LS2LS7? 11:57PM (4/16/2008)
10% net (not gross!) margins isn't bad at all. For a commodity business, it is rather large.
Owen:
The amount of oil in a gallon of fuel isn't related to how much refining it requires to make it. Let's address the two separately.
Diesel has more energy per gallon than gas (147,000BTU vs 125,000BTU). http://auto.howstuffworks.com/diesel.htm/printable
The energy in petroleum is contained in the bonds between two hydrogen atoms and a carbon atom. These are H=C=H groups. Each of these groups contains a certain amount of energy. The more of these you have in a gallon, the more energy you have. This is also reflected pretty well in the weight of the two, as the H=C=H groups have a fixed weight. Diesel is about 15% heavier than gas.
The number of H=C=H groups in a barrel of oil is relatively constant. So if you turn that barrel of oil into Diesel you will only get 87% as many gallons of Diesel as you would if you turned it all into gas. This, you have to charge 15% more for the Diesel in order to cover the price of the barrel of oil.
Now, in reality, it's impractical to turn an entire barrel of oil into 100% gas or 100% Diesel. It could be done, but the amount of energy you'd have to put in to crack or reform the various weights of petroleum in that barrel into what you want would be rather high. But either way, you lose about 1.15 gallon of gas output if you make one more gallon of Diesel output from that barrel.
Now, as to which has to be refined more. Well, gasoline has typically required a lot more refining. But this is changing. Diesel isn't just light bunker fuel (fuel oil) anymore. It has to to be filtered and refined a lot more than it used to, and it has to have the sulfur removed. Diesel now is a lot more refined product than it used to be. It has to be that way, in order to get emissions down.
The period where you could just skim Diesel out of crude is behind us now.
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Mort 12:06AM (4/17/2008)
Diesel now is a lot more refined product than it used to be. It has to be that way, in order to get emissions down...
Good point, and a lot of the heavy crude nowadays is also high sulfur, adding to the refining cost. If there is any conspiracy it is to keep the crack spread low in order to keep fuel prices inordinately low v. oil prices.
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Paul 12:08AM (4/17/2008)
Okay, my understanding of refining seems a bit different than many here. A barrel of oil contains many different hydrocarbons (fractions) which are separated using a distillation process. Diesel and gasoline are two among others. According to the EIA, on average a 42 gallon barrel of crude oil produces 7.8 gallons of diesel and 19.4 gallons of gasoline (and a lot of other stuff).
Knowing this, you can't just say to a refinery "hey, gimme all diesel from this barrel" or to the oil companies "come on, make more diesel refineries." It doesn't work that way. To produce more diesel you must refine more barrels of oil and thus also produce more gasoline. So the supply of diesel RELATIVE to the supply of gasoline is constant.
Today, relatively speaking diesel is seeing a higher increase in demand when compared to gasoline. Europe especially is consuming more diesel than ever. RELATIVELY speaking, gasoline demand is declining (increasing at a rate lower than that of diesel). So given a barrel of crude produces 40% gasoline and 15% diesel while demand for the 40% is declining and demand for the 15% is increasing, the relative price of diesel with regard to gasoline is increasing. BOTH are increasing together with the speculative rise in crude prices, but diesel is increasing at a higher rate. Somewhat complex economics with two interrelated commodities, but basic supply and demand at its root.
It sucks, but it isn't a conspiracy theory. Diesel is simply a victim of its own success. I don't see diesel demand declining anytime soon unless tractor trailers become WAY more efficient, so likely this price differential will remain, and if anything, grow as gasoline-based engines become more efficient and relative consumption continues to decline. That is unless federal and state governments change the tax structure to favor diesel as is the case in Europe.
Oh, and I'm not sure where that "diesel contains 15% more oil than gasoline" comment came from. Perhaps confusion as to how much diesel was contained in a specific volume of crude?
Anyway, two very good resources for this are:
http://science.howstuffworks.com/oil-refining4.htm
http://www.eia.doe.gov/bookshelf/brochures/diesel/index.html
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Paul 12:33AM (4/17/2008)
Ah, as I was writing I see that "why not the LS2LS7?" posted a pretty similar response to mine but explained where the 15% came from (makes sense weight wise though it doesn't explain the economic differential) and spoke of cracking (fractional conversion which theoretically could convert diesel to gasoline but not vice-versa). Unification is the opposite of cracking and (again theoretically) could be used to turn the smaller-chain gasoline/kerosene into the larger-chain diesel.
The problem is I'm not a chemist or an economist professionally nor do I work for a refinery, so I don't have any idea of the internal economics involved or of the limits of cracking/unification. I assume the 15% production of diesel and the 40% of gasoline are optimal economic levels. IS it feasible economically to increase the production per barrel of diesel? At what relative differential might it be feasible? At what point would such conversion require more energy than it could possibly save?
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texmln 12:42AM (4/17/2008)
Why don't you rocket scientists out there just go ahead and tell us exactly how much Exxon should be 'allowed' to earn. While you're at it, please also let us know exactly how much an individual should be 'allowed' to earn. That way, I'll know just when to quit working and start laying about.
Let's be clear. Those of us who aren't permanent students, bloggers, union bums, or public employees make more money because we work longer and harder than anybody else. Feeling underpaid? I know exactly who you are. You spent a couple hours today surfing the Net at your desk. You made sure you took every minute and then some of your 'break'. You left the office at 4:59. You frequently say the phrase "that's not my job".
The reason that 1% make 90%? Because 99% of you are total f-ing idiots. As little as 100 years ago you would have starved and died on your father's 40 acres. You're currently overpaid. Trust me.
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