Feature Article: Drilling for diesel

Todd Dills | March 01, 2010

Some economists see in current woes in developed economies the world’s powerhouses adjusting to new high levels of energy, or crude oil, prices; other analysts also note that U.S. diesel prices themselves are also dependent on the world diesel market insofar as demand for the distillate has grown exponentially in developing countries like China and India and in South America as their commercial engines rev up, and in Europe where more and more of the automobile population is composed of diesel-powered vehicles.

“Often in the summer months,” says Dougher, when distillate is in lesser demand in the northern hemisphere, “a lot of time we’ll be exporting to countries in the southern hemisphere,” or to Europe, where demand will be stronger in the U.S.

U.S. refiners traditionally produced more gasoline than diesel.


7 percent/$0.19

Generally, refiners buy crude and distill it down into a variety of products. Traditionally, U.S. refiners have produced a great deal more gasoline than they have the two products known as distillate — diesel and heating oil.

“If you’re a refiner,” says Dougher of the API, “there’s all kinds of crude. West Texas Intermediate is a light, sweet crude — meaning it’s a premium crude. It’s nice, and you can refine it readily into gasoline — it doesn’t take as much work as some of the more sour crudes.”

As in other industries, Dougher adds, individual refiners have different profiles. If you’re a refiner and can deal with more sour crudes, for instance, you might have a leg up in terms of what you can produce.

In winter 2008-09, when diesel retail prices fell hard with the price of crude, refiners were hit hard. “Refiner margins were really squeezed, and refiners were losing money,” Dougher says. They were awash in diesel after ramping up production for both use in the U.S. and for export.

“The product, whether it’s being imported or exported, will go where the money is,” says Cogan.

With so much diesel supply readily available in the U.S. in recent months, in the EIA’s analysis, refineries’ share of the retail diesel price had fallen to 7.9 percent, or about 22 cents, in December 2009, from as much as 21 percent, or 81 cents, in May 2008, at the height of the price spike as refiners hustled to keep up with ­demand.

The distribution part of the pricing picture is made up of a host of middlemen.

Distribution and Marketing:

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The long “downstream” of diesel from the refinery to the retail station is represented in this category of the EIA’s monthly price-per-gallon analysis. It’s probably the most familiar of the categories to consumers but remains at once opaque in its complexity. The diesel distribution business is made of a host of buyers, sellers and transporters of varying types, including independent and branded distributors, diesel jobbers (reps with the rights to distribute to a collection of retail stations in a given area), pipeline operators, trucking companies, truckstop operators and more.

James Hedrick, with 16 years in the truckstop/travel center business, today manages a relatively new Wilco-Hess truckstop in Gordonsville, Tenn., about 50 miles from the primary sources for his diesel, several diesel terminals in Nashville, Tenn. One such terminal is located mere blocks from the downtown TravelCenters of America location off James Robertson Parkway with several “300,000-gallon storage tanks,” Hedrick says, operated by Marathon Oil company. “You may see an Eagle, Pilot, Flying J and a Love’s tanker filling up there all at once,” says Hedrick. “It just depends on how the buyer for each individual station approaches it.”

The Marathon terminal, says company rep Linda Casey, is supplied by the Colonial Pipeline, typically. The Colonial system’s westernmost origin point is in the Houston area, says pipeline Media and Marketing Manager Steve Baker. “There are a number of other origin points in Texas, Louisiana and Mississippi (and one in Alabama) before the Colonial Pipeline crosses Atlanta on its way up the East Coast to Linden, N.J.,” or New York Harbor. Houston-to-Nashville-bound diesel splits off the main pipeline to tank farms in the Atlanta area before rejoining a branch of the pipeline that runs through Chattanooga, Tenn., to Music City.

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