There is hope for lower prices … eventually

by John G. Smith

TORONTO, Ont. – The good news is that factors driving up the price of diesel are expected to ease. Thank everything from promises of warmer weather in the northeastern U.S., to indications that countries in the Middle East are going to produce more oil, and even word of ships loaded with crude oil that are en route from regions including Russia and the Carribbean.

Crude oil prices may have taken another jump to more than US $30 per barrel – shattering a post-Gulf-War record as Truck News went to press – but wholesale “rack” prices have been dropping.

The question of when truckers will see a drop in prices remains unanswered.

In fact, rack prices have been dropping since Feb. 8, when prices hit their peak, notes Ron Rosnak of En-Pro Associates, which tracks fuel prices from offices in Oshawa, Ont.

Between their high on Feb. 8 and Feb. 16, rack prices shifted from 44.7 to 36.0 cents per litre in Toronto, dropped from 46.8 to 34.8 in Montreal, and fell from 45.5 to 34.5 in Halifax.

Cardlock prices just haven’t followed suit. Owner/operators are paying as much as 45 cents or more per litre before taxes, he said. “And there are big ranges between the oil companies. Some oil companies, depending who they’re buying from, their best price is six cents higher than at another.

“It’s not normal, and that’s part of the issue … none of them are reacting quick enough.”

Rack prices are still higher than those in December, he admits, adding that still doesn’t explain the difference in cardlock prices.

“Cardlock prices with one supplier is 10.5 cents higher than what they were on Jan. 1. Another one is 10.2. Another one is 9.2. Why do you have cardlock prices out there over 10 cents higher than they were on Jan. 1? The commodity cash price is higher, but by less than four cents per litre.”

Ultimately, part of price increases throughout 1999 and into 2000 have been linked to the seemingly endless rise in crude prices. The Organization of Petroleum Exporting Countries (OPEC) threatened early last year that it would stem the flow of the black goo to force prices upward. And, while it often makes such threats, this time it followed through.

The group meets again in late March. And while Saudi Arabia seems ready to give in to U.S. calls to open the tap, countries like Kuwait and Iran say they’re ready to stand firm. Both the U.S. Congress and U.S. Energy Secretary Bill Richardson are expected to continue to apply pressure.

The Bank of Canada reports that a steady rise in fuel prices could push up inflation, meaning higher interest rates and a weakened economy.

But it’s an unexpected cold snap in the northeastern U.S. that drove price spikes in late January and early February, according to analysts and the refineries.

Part of the reason for the slow reaction to changing prices could be the competitive environment in Eastern Canada, where some cardlock prices had actually dropped below rack prices. (Rack prices don’t include taxes or the mark-ups by those who sell the fuel.)

Why does weather in the U.S. have anything to do with prices in Canada?

Weather in the U.S. has affected prices in Ontario, Quebec and the Maritimes because of the so-called “import-export alternative,” Rosnak explains. As prices push higher in the U.S., Canadian supplies are sent southward in search of greater profits. The subsequent supply-and-demand pressure on Canadian fuel pushes prices higher in Canada.

For the past five years, the petroleum industry has been leaning toward a Just-In-Time delivery system, but this year’s weather caught them by surprise, adds Tom Kloza of the Oil Price Information Service. And the American suppliers were simply caught with a shortage of fuel when the bad weather hit.

“Prices just exploded … this is the dark side of Just-In-Time inventory practices.”

“When we came into this year out of last year, there was less distillate (diesel and heating oil) being produced because it appeared it was going to be a warm winter again,” adds Bill Simpkins of the Canadian Petroleum Producers Institute (CPPI).

The import-export equation in Eastern Canada is largely controlled by the so-called New York Harbor commodity price of No. 2 fuel oil. Vancouver’s market is affected by Seattle prices, but there isn’t such an affect in the Prairie provinces, which see their increases linked solely to the price of crude oil. Their markets are simply located too far away from any major industrial centres in the U.S.

Where Ontario’s wholesale prices actually began to drop in the first 12 days of January, hitting 25.99 cents per litre compared to 26.12 cents in December, the prices took off once cold weather hit the Eastern Seaboard. “I’ve never seen anything like it,” Kloza says. “From the 19th to the 21st (of January), it went from 33.43 to 49.03 cents.”

Buyers in the northeastern U.S. saw prices at the pump rise even more dramatically on the heels of rising values in New York Harbor, says Petro Canada spokeswoman Donna Hildebrant. Buyers in Massachusetts saw prices reach as high as US $2.85 per U.S. gallon.

“In Buffalo it was so immediately tied into New York harbor, some of the guys must have had a heart attack when they pulled into the rack.

“It must be a very difficult time to run a trucking operation,” she acknowledged.

But while diesel prices were increasing in 1999, they were lagging behind those jumps made by gasoline, she said. “We’ve got to pass through these raw material increases that we’re suffering.”

The oil and gas index on the Toronto Stock Exchange is actually lower than it was in mid-September, but the stocks are rallying as prices increase.

Crude oil valued at US $11 per barrel in the first quarter of the year actually hit as high as $27 per barrel by the end of the year. And while it had begun to drop, it took another jump to just over $30 per barrel. (Prices of crude oil are generally quoted in U.S. dollars.)

As the world economy continued to surge forward, there was also a continuing demand for the oil.

It’s the whole issue of supply and demand.

The timing of any drop remains in question.

Mark Derks of T-Chek calls promises of imminent price cuts “liberal” at best. He doesn’t think the prices will drop until spring – especially if there’s another cold snap. Although he’s also expecting prices to drop, he’s still nervous about an impending OPEC meeting in March. “When you have a cartel like that, and the different interests, it’s almost a wait-and-see situation.

“If it gets colder, you might see (even) another increase, but probably not as substantial as the last one.”

Still, the laws of economics ensure that prices won’t rise much higher, he says.

“It’s the economic fundamental that it can only go so high. What goes up must come down.” n

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