Demand Crowns Diesel, Not Gasoline, Cost King
Timothy Taule / ENR

“It is shocking to us,” says Arne Ruud, corporate equipment manager for Broomfield, Colo.-based Guy F. Atkinson Construction LLC. As the cost of diesel fuel in regions like the West Coast has surpassed gasoline by nearly $1, the lucky fleet owners who switched to gasoline pickups now look like geniuses.

Ruud says his employer was one of the fleets that took a hard look at its pickup- truck costs and realized “we were wearing them out fast enough” to entertain using more gasoline models. As the average price of diesel closes in on $5 per gallon, Ruud calls having the lighter-duty workhorses “an added advantage.”

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  • A strong global demand for distillate fuel, coupled with high prices for crude oil, has sent the national average price of on-road diesel moving up 68% higher than the beginning of June last year, according to the Energy Information Administration. The Dept. of Energy’s spot-price service has tracked diesel spiking above the $5-per-gallon mark in California for more than one week so far this summer. In late May, diesel prices moved up as much as 29¢ per gallon in just one week, to $5.02 per gallon in California, while gasoline was just $4.09 per gallon.

    The world is thirsty for diesel. Demand has been chugging along at a robust 3% a year over the past five years while gasoline remains growing at a moderate 1% annual rate, says Ron Planting, economist for the Washington, D.C.-based American Petroleum Institute. Touted for their fuel efficiency and power, diesel cars have gained favor among Europeans. Diesels accounted for 22% of the market in 1995 but now are more than 50%. This change has sent demand for gasoline plummeting. More diesel vehicles are coming to the States, too, in an effort to capitalize on diesel’s efficiency over gasoline, diversify the oil supply and help push newer types of alternative fuels into production, such as biodiesel.

    But some are questioning automakers’ promotion of diesel for light cars and pickups in a time of such price volatility. Dean Smith, vice president of global asset management for Greenville, S.C.-based AMECO, the equipment rental arm of Fluor Corp., asks, “Why would somebody pay for a six-cylinder diesel when the price of diesel is a dollar more than regular unleaded?”

    + click to enlarge
    Gasoline and Diesel Fuel Prices

    Passengers cars are just one part of the cost equation, though. Developing regions like Asia, Africa and South America are revving up their economies by mining and building more infrastructure, which requires the fuel to power highway trucks and heavy equipment. “Everybody in the world wants diesel,” says Planting.

    The amount of available imports has declined under the global pressure. Diesel imports from January through April have dropped to 133,000 bbl/day from 390,000 bbl/day in the same period last year, while U.S. diesel production capacity has increased to 3 million bbl/day from 2.6 million bbl/day over the same period, Planting says.

    While diesel capacity is increasing, the cost to make it has also shot up. Domestic refiners have dropped more than $8 billion over the last several years to upgrade refineries with scrubbers to remove sulfur from diesel fuel, which is now sold as an ultra-low-sulfur over-the- road grade. Off-road diesel will switch to the new grade in 2010.

    The high prices also are being pushed by a lack of options. Unlike gasoline, whose prices are under pressure from the motoring public, diesel is an important industrial fuel that has few alternatives. “In the case of gasoline, when the prices go up as they have, there is at least some discretionary spending that consumers do,” says Planting. “With diesel…you aren’t going to leave your boxes of cereal gathering dust in the warehouse just because of the increasing price.”

    The construction industry’s transition to higher fuel efficiency will not be seamless or immediate, experts say. Some manufacturers, such as Caterpillar, Volvo and Komatsu, are playing around with hybrid-electric powertrains to help save fuel, but many of them will not be available for another year or more. Komatsu says it is building the first production hybrid excavator, a 25-ton machine that will deliver an average 25% savings in fuel. It plans to build 30 units through next March, but they will only be available in Japan, costing about 10% to 12% more than their diesel counterparts.

    “If we had a job in Japan, that would be wonderful news,” says Ruud. Equipment owners are interested, yet skeptical, of alternatives. “As long as you don’t lose...

    wo to three years ago, some contractors began retiring diesel pickup trucks and replacing them with gasoline units in anticipation of the rising cost of cleaner diesel fuel and lower-emission engines. But many never expected diesel to lose its longtime price stability.