INDUSTRY PULSE: OPIS says new diesel regulations could bust 2006 budgets

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WALL, N.J.– Three dollars for a gallon of diesel could be relatively common in the U.S. within 15 months, according fuel price benchmark expert OPIS (Oil Price Information Service).

Diesel prices are already at record levels in many states, and many fleets are paying double what they paid less than six years ago, says an OPIS statement.

Next summer, a new cleaner burning diesel fuel will be required for on-road vehicles, and that blend could temporarily trade for 30-50cts gal more than the current fuel of choice.

Spring 2006 will see the removal of most sulfur molecules from on-road diesel. The new ultra low sulfur diesel (ULSD) blend will officially be the standard made by most refiners on June 1, 2006; with distribution systems required to have the new fuel by July 15 and retailers scheduled for a September 1 roll-out.

It could be the most challenging clean fuel to hit the U.S. markets since the introduction of reformulated gasoline a decade ago, said OPIS, and there are considerable questions about whether there’s adequate production capacity, enough bulk storage, and an ability to keep the new ULSD properly segregated from higher sulfur products.

Oil Price Information Service says it is hosting an Emergency Ultra-Low Sulfur Diesel Summit, held April 21-22, 2005 at the Westin Grand Hotel, Washington, D.C. to help tackle the complex logistics for the changing ULSD regulations.

But there are huge disparities between what various industry experts believe will be the price range for 2006 Ultra Low Sulfur Diesel blends. Some government regulators suggest the actual cost of producing the fuel will average 4-7cts gal above the current diesel blends. But private consultants note that there could be huge premiums attached to the fuel because of supply dislocations, downgrading of material that gets contaminated with sulfur from other fuels, a lack of foreign imports, and other factors.

Some estimate that the 2006 fuel could temporarily debut at prices 30-50cts gal above the cost of traditional diesel. Based on presstime futures prices for crude and refined products, that projects wholesale costs in the neighborhood of $2.00 gal next year, with retail values of $2.50- $3.00 gal.

In addition to all the budget considerations, the new fuel will present challenges for all elements of the supply chains, says OPIS, from refiners and terminal operators, to truckstops and fleets. Potential complications loom in the form of waivers, quality considerations, recordkeeping, testing, and fines for non-compliance. The move to very low sulfur specifications will also have a huge impact on other fuels, including heating oil, jet fuel, kerosene, and even gasoline.

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