(Photo by Tudor Hampton for ENR)

The war in Iraq, combined with tight U.S. inventories in a rebounding economy, have pushed crude oil prices to levels that have not been seen in decades. While prices have eased somewhat recently, continuing jitters in global oil markets appear poised to have a dramatic impact on the derivative liquid asphalt market.

"Asphalt prices are moving up higher and faster than ever before," says Scott Rowe, vice president of Tulsa-based CITGO, one of the nation’s largest refiners of liquid asphalt. Prices also surged last year in the first quarter, but it was due to a short-term supply disruption caused by a strike in Venezuela. In contrast, current high oil prices are driven by broad-based geopolitical instability affecting many producing countries that shows no sign of letting up in the near future, market participants say.

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The effect of climbing asphalt prices on the highway construction market is likely to vary considerably by region, depending on refinery type, project and contract structure, and local demand.

Liquid asphalt is produced from two kinds of refineries. On the East Coast, "topping units" tend to dominate the market, according to Rowe. These facilities rely primarily on heavy oil as input. About 65% of every barrel of heavy oil refined ends up as liquid asphalt. On the Gulf Coast and in the West, light-oil refineries are more common. But these facilities produce only about 10% of asphalt per barrel of light oil.

At topping units, asphalt prices tend to go up immediately with increases in crude oil prices, but at refineries "where asphalt is not the main product, it does not have to carry the full cost of the barrel," says Rowe. Consequently, in these regions, asphalt prices may be less sensitive to oil price fluctuations.

Typically, the regional cost-differ-ential in production technology is dampened by the fact that heavy oil is less costly than lighter oil and doesn’t always rise when lighter oil prices jump. But in this latest cycle, heavy crude oil also is on a parallel upward price trajectory, says Rowe.

For some public works projects, contractors don’t always have to carry the risk of volatile asphalt prices because many municipalities and state transportation departments have price escalators. "The index takes the risk off the contractor," says Bob Sauber, supervising engineer in the Bureau of Pavement Management at the New Jersey Dept. of Transportation, which has had an asphalt escalator clause for...