Unwanted Christmas gift: Diesel at $2 a gallon

| 10/25/2002

Analysts and federal officials are warning that heating oil, motor fuels and natural gas will cost more this winter - with a possible rise in diesel fuel to $2 a gallon. The main reason: The anticipated invasion of Iraq would limit oil supplies and the production of natural gas.

A key factor is inventory. Refineries are deliberately running at just over 84 percent of capacity, down from 93 percent at this time last year, according to The Kiplinger Letter. It's "just-in-time delivery of crude," which cuts a refiner's exposure to sudden price spikes, says Ed Silliere, vice president, Energy Merchant, an energy marketing firm. Silliere spoke to Kiplinger earlier this month.

"What the refiners are doing now with inventory is enough to spike the price of diesel fuel to $2 a gallon," said Todd Spencer, executive vice president, the Owner-Operator Independent Drivers Association. "We think there's a good chance we'll see diesel jump to $2 a gallon or even higher in January and February. We also think it would be irresponsible for legislators not to pass fuel surcharge legislation before they adjourn for the year."

The surcharge bill (S1914) requires all shippers to pay carriers a fair fuel surcharge. Specifically, it mandates a surcharge if the price of diesel rises 5 cents above $1.10 a gallon. Carriers must pass the required amounts collected to their owner-operators.

This week, the national average price of diesel fuel per gallon rose to $1.469. It's the 10th consecutive week the cost of diesel fuel has risen.

Adding to the concern is the Energy Information Administration's October Short-Term Energy Outlook, which said natural-gas prices nationwide would be 19 percent higher than last winter and heating-oil consumers can expect a 45-percent price increase.

These government forecasts are based on the assumption the weather will be normal this winter, compared to the warmer winter weather of 2001-02.

However, Kiplinger says this year's winter will be colder than a year ago, meaning heating oil prices would rise to $1.40 a gallon, before reaching $1.50 a gallon in January and February. That's 50 percent over last year, which translates into $2 per gallon for diesel fuel.

Moreover, people are driving more to avoid flying, which contributes to higher prices.

Meanwhile, traders fear an attack on Iraq might disrupt crude exports from other Middle East producers, which together supply about a third of world oil. Crude oil, which has been kept close to $30 a barrel, may rise to $37 a barrel by December and spike to $50 a barrel when war begins, analysts warn.

To help, the Bush administration said it will work with allies to keep oil supplies in line with demand. Saudi Arabia said it would increase exports to offset any drop in Middle East production stemming from war. Russia and Venezuela also aim to step up production and oil shipments.
--Dick Larsen, senior writer