The highest diesel prices since the Gulf War are pummeling the industry's thin profit margins and have made for an inauspicious start to the new milennium. But take heart. The worst may be over.Diesel...
The highest diesel prices since the Gulf War are pummeling the industry’s thin profit margins and have made for an inauspicious start to the new milennium. But take heart. The worst may be over.
Diesel prices have risen 176 per cent in certain parts of the country over the past year but many analysts believe the factors fueling the steep increase are beginning to ease and prices at the pump will start to drop.
Unlike the price spikes throughout 1999, which were linked to a deliberate effort by oil producers to raise the price of crude oil by reducing its supply around the world, the latest diesel price increase is the result of Mother Nature exposing the dark side of Just-in-Time (JIT) delivery and the import/export alternatives available to petroleum refiners. According to Tom Kloza, of the Oil Price Information Service, for the past five years the petroleum industry has been leaning toward a JIT-delivery system. All expectations were for a mild winter this year, so fuel supplies were kept low. Then the unexpected cold snap in the northeastern U.S. hit, catching refineries by surprise. Prices exploded in the U.S. as the demand for fuel outpaced supply. Canadian fuel supplies were sent southward in search of the greater profits made available by the price spike. Until then diesel prices had actually been dropping in eastern Canada — Ontario wholesale prices had begun to drop in the first 12 days of January –but the downward trend couldn’t withstand the new pressure on fuel supplies.
However, warmer weather has returned and, provided Mother Nature cooperates, there is no market-based reason for this latest upward price trend to continue. Don’t expect the oil companies to be as quick to drop their prices as they were to raise them, but the prices will come down.
The more serious obstacle to low diesel prices is the unprecedented solidarity being shown by the oil producing nations to cut back on crude oil production. The resulting shortage in base stock supplies has driven prices from $10.80 per barrel to just shy of $30 (all prices in U.S. dollars.) and lined the pockets of the oil producers. So it’s no surprise that the OPEC states are already hinting that when they meet on March 27 they will vote to extend the cuts in crude oil supplies.
But there are factors working against them. The initial cuts in crude oil production helped boost crude oil prices to about $21 per barrel last summer and culminated in pump prices for diesel rising to about 51 cents per litre. Yet the oil producing nations could defend their actions as an economically necessary strategy. The glut of crude on the world market in 1998 had dropped prices to a 12-year low and the economies of oil-producing countries such as Venezuela and Saudi Arabia were taking it on the chin.
However, extending the cuts in crude oil production in the face of today’s prices (diesel retail prices were approaching 70 cents per litre at press time) seems to have a lot more to do with greed than necessary economic strategy. As the World Bank has warned, continued high fuel prices will stimulate competing supplies making it more difficult for OPEC to raise production in the future. In the U.S., the American Trucking Associations has asked president Bill Clinton to release oil from the Strategic Petroleum Reserve to relieve the crisis. In fact, the World Bank expects OPEC will raise its crude oil production, causing the price of crude oil to fall to less than $20 a barrel.
Even if that doesn’t happen, there is always the possibility that some nation won’t be able to resist the temptation of an instant windfall and break ranks to crank up its oil production. Afterall, as OPEC well knows, greed can be a very powerful motivator.