U.S. Gas and Diesel Prices: The Latin American Connection

by David Fessler, Investment U’s Energy and Infrastructure Specialist
Thursday, January 19, 2012

Pull into any gas station in the United States, and you’ll find diesel fuel more expensive than regular gasoline. About $0.46 a gallon more.

In the United States, diesel and heating oil (known collectively as distillate fuels) have been higher than gas since 2004. Before that, it was the other way around. So what’s changed?

In a word, demand. Prior to six or seven years ago, the demand here for gasoline was higher than for distillates. The only time diesel and heating oil jumped above the price for gasoline was during colder-than-usual winters, when demand for heating oil soared.

Very little U.S. distillate production was exported, so prices fluctuated primarily based on the supply and demand equation here.

Today, it’s whole different ballgame. Diesel’s much higher than gasoline because, on a worldwide basis, the demand for it is greater than it’s ever been. Oil refineries, ever the opportunists, are producing and exporting as much of it as they possibly can.

It’s the exporting that upsets the supply demand equation in the United States. With more of U.S. distillate production headed for foreign shores, the dearth of supply makes it more expensive here.

When I travel to Latin America, diesel is the number one transportation fuel. Nearly every car, bus and truck you see runs on the stuff.

Consequently, gasoline is more expensive there than diesel. In some places, it’s the equivalent of $1.00 a gallon more. Once again, it’s all about supply and demand, and now it depends on where you live.

There’s another factor at work here, as well. The United States has imposed stricter limits on the sulfur content of diesel, whereas many other countries haven’t. The low-sulfur variety is more expensive to produce, and most of it stays here.

With a few key East Coast refineries shutting down over the next year, things could get even worse for diesel prices here. But there’s a light at the end of the proverbial tunnel.

Strict new government standards on emissions, as well as a pending 54.5 miles-per-gallon standard that’s supposed to be in place by 2015, could spell the beginning of a diesel-powered renaissance in the United States.

If demand for diesel here exceeds that of gasoline on a permanent basis, more refineries will start producing it. Those that already do will begin to export less, since the margins will be greater here. Distribution costs will be lower since there won’t be a ship involved.

As more and more manufacturers begin to offer diesel-powered vehicles here, it’s difficult to imagine that U.S. consumers will turn their noses up at them.

Volkswagen has offered diesel version of its most popular models here for decades, and has done very well with them. But now GM, Honda and Toyota are all planning to introduce diesel variants by 2014.

Even at $0.46 cents a gallon premium over gasoline, diesel will certainly make economic sense to a lot of cost-conscious consumers.

Will that bring prices down here? We’ll have to wait and see, but my bet is prices will stay elevated due to the global demand for crude.

The bottom line is that oil, in just about any form, is going to be a good investment for some time to come.

Good Investing,

Dave Fessler