Feature Article: Drilling for diesel

Todd Dills | March 01, 2010

Pipeline common carriers file transport rates with the Federal Energy Regulatory Commission in the same manner pre-deregulation trucking companies filed rates with Interstate Commerce Commission. “A representative rate from Houston to Nashville is $1.16 per barrel,” says Baker, or almost 3 cents a gallon. “These rates are stable and don’t change with short-term market fluctuations. In other words, if the price of diesel jumps 10 cents, Colonial’s rates do not change.”

With retail diesel hovering just below $3 a gallon in most Nashville locations as of late January, pipeline transport accounted for at least 1 percentage point of the distribution and marketing piece of the fuel pie.

From the Marathon terminal downtown diesel is trucked out to stations. According to carriers serving that terminal, pricing of diesel loads can vary from 1 cent a gallon for cross-town 7,500-gallon loads to about 5 cents a gallon for a 100-mile trip, or $3.75 per mile. Though there are many exceptions to the rule, including summer 2009 supply disruptions in Nashville, the majority of diesel in the region is unlikely to travel overland much farther than that.

Using Hedrick’s Gordonsville, Tenn., stop, 50 miles outside of Nashville proper, as an example, $3.75 per mile would equate to 2.5 cents per distributed gallon, or just less than 1 percent of the price per gallon.

The Oil Price Information Service, which estimates margins for particular truckstops based on wholesale prices at and distance from the nearest supply source, put Hedrick’s stop’s estimated fuel margin at just 9 cents a gallon, as fuel was priced at $2.62 per gallon, quite low for the region (Hedrick’s station was just a few weeks old at that point). After subtracting 2.5 cents for transport, the 6.5 cents per gallon estimated markup, just more than 2 percent of the total price per gallon, may have left little profit for the station after taking personnel, land, franchise and other fees into account.

“Being at the end of the distribution chain, [truckstop operators] have no control over the price they pay” for fuel, says Holly Alfano, vice president of government affairs for the National Association of Truckstop Operators. “They want to be able to recover their costs and make some kind of reasonable margin on the fuel that will allow them to stay in business. They also need to consider the prices their competitors are posting. They realize customers are very cost conscious when it comes to fuel prices. Customers will go elsewhere to save a penny a gallon.”

More typical of Tennessee truckstops in OPIS’ Jan. 18 spread report was an estimated margin of around 20-25 cents per gallon, more in line with the profit of “5.4 cents on every dollar of sales,” or 16.2 cents per gallon at $3 diesel, says the API’s Dougher, that is the oil/fuels industry’s average profit.

CoverStoryGraph2A Crowded Piece of the Pie

Based on our analysis of this segment, for a diesel gallon traveling to the Nashville, Tenn., area from Houston, the snapshot here represents the pieces of the 30 cents a gallon the EIA estimates distribution and marketing costs and profits contributed to the price per gallon in the final quarter of 2009.

Compared to crude’s share of the price, it’s a small one, but within it, as within every piece of the fuel pie, there are a myriad of parties.

Barge transport of diesel, sources say, is a reality in movements to wholesale locations not near a pipeline. And in the “distributors” category, more than one entity might be involved in some situations. “In Cookeville,” says James Hedrick, manager of the Wilco-Hess stop in Gordonsville, Tenn., “Lamb Oil is the BP distributor [or jobber] for middle Tennessee.” Lamb might buy diesel from the manufacturer directly or, if in short supply, from another maker or distributor.

Taxes are the most static part of diesel prices.


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