Diesel prices on the upswing as USLD deadline looms

WASHINGTON—The phrase "things are looking up" usually refers to good news. But when it comes to oil and gas prices, the opposite is true.

With crude oil prices settling in at more than $70 per barrel last month and the average price of diesel gasoline at nearly $3 per gallon,

Adding to the current travails is the looming June 1 deadline, set by the Environmental Protection Agency, that 80 percent of refinery output of on-highway fuel consist of ultra-low-sulfur diesel (ULSD). That situation recently prompted American Trucking Associations (ATA) Senior Vice President Timothy Lynch to say in a recent conference call that fuel, fuel prices, and fuel availability are major concerns for the entire trucking industry.

After a brief respite late last year, diesel prices are on the upswing again. With little relief in sight, more companies may find themselves struggling under increasingly burdensome fuel costs, said Michael A. Regan, CEO of transportation-cost analysts TranzAct Technologies. "It is reasonable to expect that we will continue to have higher prices," he said. "I don't see anything positive that could lead to a reduction [in diesel prices]. The reality [for shippers and carriers] is that many organizations will have to operate differently. If they don't change, they will not make it."

Over the course of this year and beyond, there will be more questions than answers when it comes to oil and gas pricing. At the top of the list of concerns will be limited output from refineries, the pending ULSD mandate, and the effect of diesel prices on costs during the busy shipping season throughout the second half of the year.

At least one analyst doesn't believe that the cost of low-sulfur fuel will have a very significant impact. "There is a lot of talk about ULSD and what it might do to supply," said Tom Kloza, publisher and chief oil analyst of Oil Price Information Service, a petroleum pricing and news information service in Rockville, Md. "We don't believe that it will be a problem at the refinery level, since most major refineries can make it without any great difficulty."

Kloza added that it probably costs about two to four cents per gallon more to make ULSD compared to the type of fuel now in use. But, he cautioned, there could be pricing issues associated with supply problems in some areas of the country. That's because it can be tricky to ship diesel fuel that has virtually no sulfur content through a pipeline, he explained.

At press time, the average on-highway price for a gallon for diesel nationally was $2.897. Going forward, Kloza sees plenty of upward momentum in nationwide diesel prices. "I suspect we will get close to $3 per gallon in the next few weeks," he said.