10-11-07 by dugan/insider
I’d been wondering why diesel was up, even while gasoline was (sort of) down. So of course I checked with Insider. His answer tells us why the oil industry should thank you not just for driving, but for eating,
paying your school taxes and buying almost any item that came in on a
truck.
From Insider:
If you own a tractor, truck, or other vehicle that uses diesel, the oil
companies are loving you for it. Once again, the price of diesel has
climbed on the corner pole at the local service station or truck stop
from below regular unleaded to often 35 cents per gallon above premium
gasoline.People often ask why this is since it all comes out of the same barrel
of oil. It’s simply the ability of the companies to charge. While hard
for many to realize, the price of either type of motor fuel is not
connected to what it actually costs to produce the
product we use in our vehicles.When the oil companies began to raise the price of motor fuels this spring, the price of gasoline was typically higher than diesel.
Gasoline consumers reacted to the high price by cutting back on their discretionary driving. Gasoline consumption actually fell this summer, reversing the historical pattern. (Though gasoline prices are still about 50 cents higher than they were last year, when we saw a huge pre-election price drop)
As a result, gasoline inventories held by the companies started to grow as truck loading terminals started to fill with the gasoline that didn’t flow into the tanks of SUVs and other light duty passenger vehicles. In response to this increase in supplies held in storage tanks, the oil companies cut back the price of gasoline. Down came the price on the pole for at the local station.
Diesel users, unfortunately, don’t have the same ability to cut back on use.
The key economic term in play here is "price elasticity" or simply put, how high must the price go before one stops buying it.
Now, the typical diesel consumers, led by farmers, truckers and railroads, have a different level of price elasticity than the typical gasoline consumer. When the price goes up, the only significant way to cut back dieselconsumption is to park the trucks, not plant the crops, lay off employees, etc. The economic hardship created for small businesses, farmers, loggers, etc. that must cut back their businesses to cut consumption creates a far greater price tolerance for diesel than for gasoline.
Hopelessly reliant on diesel, these users couldn’t cut back very much when the price went up earlier this year and as a result, consumption continued on and, the oil companies weren’t forced to cut the price of diesel as they did
gasoline.With the price of diesel remaining constant and high, gasoline slid down and diesel, as happened last year, once again became the most expensive motor fuel to buy even though it is cheaper to produce.
With the approach of Halloween, the local farmer, trucker, logger, school district with buses, etc. have replaced the average citizen as the reigning "cash cows of the oil industry". Of course, this all means higher prices for food, school levies, etc. for those that drive the gasoline vehicles and even those in the gas-sipping hybrids. Fuel prices affect consumers far beyond what they personally drive.
Oil companies have cut back production in refineries to a mere 87 percent of potential and the surplus in storage tanks is drying up fast. This sets the stage for early next spring when gasoline will
likely exceed the the $3.00 to $3.30-plus that truckers are paying for diesel.