Head shaking over the price of diesel fuel may soon turn into fist shaking.
“If today’s price (for oil) holds, on average, from now to the end of the summer, I think we’ll see prices around $1.45 per litre (for diesel),” said Jerry Angevine, senior economist for the Fraser Institute’s Centre for Energy Policy Studies.
Even if oil prices drop slightly from the recent high of $125 US per barrel, Angevine expects diesel prices to rise because they are lagging behind the recent surge in crude oil prices.
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“A rough estimate of the average price for crude oil in April was $117 per barrel,” Angevine said.
“If it settles out (at that level), that implies prices of $1.38 Cdn per litre (for diesel).”
Canadian diesel prices have jumped 21 percent since early February. The average price at the pump has increased to $1.32 per litre on May 6 from $1.09 per litre on Feb. 5, according to statistics collected by MJ Ervin and Associates, a Calgary based consulting firm for the petroleum industry.
Although prices may seem sky high on the farm, they are lower on the Prairies than in other parts of the country. The average diesel price in Red Deer was $1.26 per litre on May 6, while drivers in Halifax and Vancouver were paying $1.36.
The surge in diesel prices has mirrored the historic run-up in oil prices, which have increased 25 percent since the beginning of 2008.
After reaching $100 US per barrel in January, the price of oil rose past $125 per barrel in early May. If futures markets are any indication, more increases can be expected.
According to Reuters News Agency, call options to buy oil at $200 per barrel on the New York Mercantile Exchange have tripled this year, going from 5,533 contracts on Jan. 1 to 16,774 contracts as of May 5, which can be compared to taking out an option to buy canola at $22 Cdn per bushel.
“Now people are talking about $200 US per barrel crude by the end of the year,” said Spencer Knipping, a petroleum analyst with the Ontario energy ministry. “That’s pretty mind boggling.”
For diesel to reach $1.50 Cdn per litre, oil would have to continue its surge, Knipping said. Or, there would have to be a substantial increase in the wholesale price of diesel.
Michael Ervin, a petroleum industry analyst in Calgary and owner of MJ Ervin and Associates, thinks it will be the latter.
“Crude price is not necessarily the most important driver of what the diesel price is,” Ervin said.
“The markup from the crude price to the diesel price … referred to in the industry as the ‘crack spread’ … has been considerable, because of the tightness of supply.”
Ervin gave the example of the crack spread in Calgary, which rose to 26 cents per litre in March from 18 cents per litre in January and 15 cents last July.
He said the run-up in margins may look like gouging, but it’s not that simple because refineries must maintain their supplies.
“If a refiner were to lower their crack spread, they would, within a matter of days, not have any diesel to sell,” he said.
Knipping said new refineries are under construction in the Middle East and India, but they will not be on-line soon enough to ease price pressure.
“In the short-term, diesel production capacity is limited,” he said.
