Forecast: A year of $3-plus diesel

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Diesel prices won’t fall below $3 per gallon until November 2008, and even then the decrease will be slight, according to a U.S. Energy Information Administration specialist. “Oil will still stay well above $80 a barrel,” says Jonathan Cogan. “The big driver of prices now is high crude oil prices, and the price of everything made from it has gone up.”

Diesel is expected to average $3.18 per gallon in December 2007 and will continue to drop slightly through March 2008, when it will average $3.13 per gallon, Cogan says. Winter months increase demand for the distillate from which both diesel fuel and heating oil are made. When heating oil season ends, in February or March, a minor price drop for diesel will result.

In April, however, diesel will begin its climb to a predicted high in May of $3.18 per gallon, then descend in price from June through December 2008, Cogan says. Diesel is forecast to average $2.99 per gallon in November 2008, followed by a low for the year of $2.96 per gallon in December 2008, Cogan says.

“There will be some easing of crude oil prices because prices cannot be sustained at this level,” Cogan says. Contributing to a slight drop in oil prices will be a mild softening of the U.S. economy and slightly increased production by nations both inside and outside the Organization of Petroleum Exporting Countries, Cogan says.

Several factors contributed to crude oil’s dramatic price increase this year. West Texas Intermediate prices shot from an average of nearly $55 per barrel in January to more than $95 per barrel in early November. “Previous oil shocks were driven by disruption, such as the 1973 Arab oil embargo,” Cogan says. While there is still disruption in oil-producing countries, notably Iraq, fuel demand is much stronger worldwide, especially in Asia.

Besides strong worldwide economic growth, other causes of price shock include:

  • Only moderate supply growth among non-OPEC countries;
  • OPEC production decisions and low OPEC spare production capacity;
  • The tightness of global commercial inventories;
  • Worldwide refining bottlenecks; and
  • Ongoing geopolitical troubles.
  • As usual, when oil prices spike, some advocate drawing down the Strategic Petroleum Reserve, the emergency response a president can use when the United States is confronted with an economically threatening disruption of oil supplies. Instead, in November, the U.S. Department of Energy awarded contracts to oil companies to add to the reserve 70,000 barrels daily for six months, beginning in January.

    Several U.S. senators protested to U.S. Energy Secretary Samuel Bodman. For example, U.S. Sen. Hillary Clinton, D-N.Y., a presidential hopeful, urged a drawing down of the SPR and the less well known Northeast Heating Oil Reserve “to send a signal to the market and ease concerns about low crude oil stocks that are driving prices higher.”

    Crude oil has been withdrawn routinely from the reserve many times, but only twice for national energy emergencies: by the first President Bush in 1991, at the beginning of Operation Desert Storm; and by the current President Bush in 2005, after Hurricane Katrina devastated the oil industry in the Gulf of Mexico.

    Until recent years, retail diesel cost less than gasoline, except for some harsh winters when the demand for heating oil was unusually high. Since September 2004, however, the price of diesel has been higher than the price of gas year-round because of increased world demand and tight global refining capacity.

    In the United States, the transition to ultra-low-sulfur diesel fuel also has affected production and distribution costs – and the pump price.