TORONTO, Ont. - Canada faces the threat of another massive spike in fuel prices next winter because of diesel inventories that are as much as 80 per cent lower than those that led to record price hike...
TORONTO, Ont. – Canada faces the threat of another massive spike in fuel prices next winter because of diesel inventories that are as much as 80 per cent lower than those that led to record price hikes last February.
The price of diesel fuel has been quietly creeping back up in recent weeks, and at press time was sitting near 65 cents per litre in Eastern Canada and about eight or nine cents cheaper than that in the West.
Although those prices are certainly high, they are still lower than the breathtaking levels achieved this past February, when a cold snap in the Northeastern U.S. helped push average prices at the pump to more than 75 cents a litre in Quebec and the Maritimes and 71 cents a litre in Ontario. During the worst week of the month, the price spiked as high as 89 cents litre in Quebec and 88 cents in Ontario, pushing many owner/operators off the road and sparking protests across the country.
Relative to the February costs, 65 cents per litre may seem like a pretty good deal. But according to Tom Kloza, a petroleum industry analyst with New Jersey-based Oil Price Information Service, anyone involved in the trucking business should start planning for a “winter of discontent” right now.
“It is not a good situation,” Kloza says. “You can probably expect to get a break on diesel price hikes for a few months, but once the leaves start changing, it could be `here we go again.'”
Kloza says people involved in the trucking industry still have some time to plan for potential fuel price hikes next winter. He suggests it would be “prudent” to talk to lenders, suppliers and customers about a plan with such things as fuel surcharges.
The problem is with diesel fuel inventories, and dates all the way back to February 1999, says Kloza. That was the month the price of a barrel of crude oil reached a 10-year low of about $11. At that time, the Organization of Petroleum Exporting Countries (OPEC) agreed to scale back its production of crude to push the price to what it deemed a more reasonable level. As a result, the price of crude rose steadily throughout the remainder of 1999.
That rise was mirrored, in turn, by a steady increase in the rack price (or the price before taxes) of diesel fuel. According to figures compiled by En-Pro International Inc. – an Oshawa, Ont.-based consulting company that tracks petroluem prices – the rack price of diesel rose from a low of between 15 and 18 cents per litre across the country in February 1999 to between 29 and 32 cents per litre by December.
The oil companies started courting disaster, though, when they cut down on their crude purchases, anticipating a drop in the price.
“One oil company was trying to out-guess the other on when to buy,” says Ron Rosnak, an oil industry analyst with En-Pro. “They thought that OPEC would open the taps and crude would fall, so they allowed inventory levels to fall.”
But OPEC didn’t open the taps, and the sad state of inventory levels was exposed when a cold snap hit the Northeast U.S. in January and February of this year. The cold weather jacked up the demand for heating oil, which is refined from the same middle distillate as diesel fuel. More demand for heating oil meant less production of diesel, and, well, any truck driver east of Winnipeg could tell you the rest.
Although both the oil and trucking industries got through the fuel crisis last winter with few disruptions, the seeds of a future crisis were planted in the spring. That’s when the refineries made their seasonal switch from heating oil (and therefore diesel fuel) production to gasoline production for the summer driving season. Plus, OPEC appeared determined to keep the price of crude in the $25-to-$30-a-barrel range, so recovering from the crisis would not be cheap.
“The inventory levels of middle distillates were not built up to historic levels as of May,” Roznak says. “In my view, if these levels don’t get back up, we will have the same problems we had last year. In fact, last year’s increases could appear mild.”
Currently, says Roznak, the inventory level of middle distillates in the U.S. is almost 25 per cent lower than it was at this time last year. In the Northeast U.S., the level is about 80 per cent below normal. That is significant to the Canadian market in that the price of diesel fuel here will be driven by the price in neighboring U.S. markets where the demand is greater.
Bob Clapp, vice-president of the Ontario division of the Canadian Petroleum Products Institute, a petroleum industry think tank and lobby group, acknowledges that North American inventory levels of middle distillates are currently well below normal. But he does not feel a potential crisis is brewing for next fall or winter.
“Obviously, the objective of the petroleum industry is to go into next winter with inventory to meet customer demand,” Clapp says. “I don’t think it (the reduced inventory levels of middle distillate) is causing a problem right now and speculating about shortages at this point is not in the cards.”
Clapp points out that the total volume of fuel oil (for both heating and diesel fuel) produced annually by refineries amounts to only about one third of the volume of gasoline produced, so making up the shortfall doesn’t take nearly as long.
The problem is finding the time to make the switch.
“The industry came out of last January and February with low inventories of everything,” Clapp says. “We are still about 10 per cent below last year on gas, despite running hard to make it up. But the prime demand now is gas… once they get ahead they can start working on diesel.”
But “getting ahead” could prove difficult for the oil companies, if not undesirable. North American highways are now clogged with gas-guzzling SUVs and minivans, and summer vacations lie ahead. Besides, argues Kloza, “tight supplies make for good profits.” Given the fact the average price of gasoline in Canada stood at a record high of about 75 cents a litre in mid-June, there could be more incentive for the oil companies to take a Just-In-Time approach to inventory levels.
But if the demand for gasoline remains strong well past Labor Day, and the first cold snap of the year comes in November instead of January, the refineries may simply not have enough time to build up the inventories they need to avoid a diesel fuel problem next winter.
Says Roznak: “If the inventory situation is not rectified, prices could be higher this fall and winter than they were last year. OPEC is shipping crude; the shortage is not crude. But the product has to be refined. The question is, can the refineries make up the shortfall?
Adds Kloza: “The scary thing is, last winter was one of the mildest on record. We are really talking about just a few days that caused the spike in demand.
“Imagine if we had a month like December 1989, when it stayed at 10 or 15 below zero for a month.” n