Political unrest and tightening supply and demand dynamics are contributing to a run up in diesel prices, say petroleum analysts.
“There’s not a lot of good news,” said Michael Ervin, president of MJ Ervin & Associates, a Calgary-based consulting firm specializing in petroleum products.
Crude oil prices set record highs last week with prices surging above $75 US a barrel as suppliers scramble to keep up to soaring demand in China, India and North America.
“Everybody is producing as much crude oil as they can and just barely being able to keep up with demand right now,” said Ervin.
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The situation has been exacerbated by market speculators who are nervous about civil unrest in Nigeria and the threat of war in Iran, two important suppliers of crude oil, said Ted Stoner, vice-president of the Canadian Petroleum Products Institute.
“It’s the political instability that is driving the speculators to assume the supply is going to get tight.”
He believes that uncertainty is behind the current surge in prices. But Ervin insisted it all comes back to fundamental economics.
“If we didn’t have the tight supply and demand, these potential upsets wouldn’t have the effect on crude oil prices that they are having.”
Ten years ago there used to be a surplus capacity of crude that was regulated by the Organization of the Petroleum Exporting Countries.
“You don’t hear OPEC coming up very much in the news anymore because they’re almost irrelevant given where supply and demand is right now,” said Ervin.
But he added there is more behind surging diesel prices than record high crude prices.
An equally important dynamic is the squeeze in the North American market for refined oil, with demand butting up against total refinery capacity.
The tightening supply of both crude and refined oil does not bode well for big users of diesel like farmers.
According to Alberta Agriculture, the price for 100 litres of diesel fuel in March was $64.44 after provincial allowance deductions. That is 10 percent higher than it was the same time last year.
“It’s going to be a high-priced season but be thankful it’s not gasoline you’re burning,” said Ervin.
Gasoline demand is more volatile than diesel, leading to even more dramatic price increases. The price of gas has increased 20 cents per litre over the past eight weeks, which is double the increase in diesel costs over the same period.
Last week the wholesale price for gas in Saskatoon was 72 cents per litre compared to 62 cents per litre for diesel.
But it isn’t always that way.
Last fall, the wholesale price for diesel was higher than that of gasoline due to an economic boom in the trucking and mining sectors and the usual strong demand coming from agriculture, said Stoner.
“That was an anomaly. Usually it is the other way around.”
