Submitted: Wednesday, Nov 12, 2008 at 12:29

Is ULP too cheap?

At the risk of sounding controversial in a forum dedicated to driving – is ULP too cheap?

Before I’m lead off to a ritual stoning there are a few things that should be taken into account in my defence for uttering something so sacrilegious.

Often the argument is put forward that diesel was always cheaper than ULP and that it is cheaper to make out of crude oil; so what has changed? Transition to low-sulphur diesel fuel has affected diesel fuel production costs and a significant increase in global demand for this fuel has changed the demand / supply equation.

Global demand for the mid-distillates, which includes heating oil and diesel fuel, has increased dramatically with strong demand from China, India, Europe and the United States. This has come at a time when global refining capacity is stretched to the limits.

In India diesel accounts for around 30% of new vehicle sales and this is increasing and expected to push towards 50% over the next few years. Diesel cars in Europe accounted for just over 50% of all new vehicle sales in 2007. In the early 1990’s this number was around 14%. That’s a few million more diesel vehicles every year.

China is in a class of its own, sucking up diesel at a rate of knots as it emerges as an economic powerhouse; and this isn’t going to change.

In Australia, industrial and commercial interests are by far the largest consumer of diesel. Retail diesel sales accounts for a very small percentage of actual sales and does not attract the same level of discounting that ULP does. Whilst that creates some angst, less face it this isn’t unique to fuel. Anything that is in demand that has a small consumer base with little purchasing power will usually face a similar issue. That isn’t to suggest we are ‘being screwed’ it is just that we pay the ‘full’ price. Try booking accommodation in Broome during the Grey Nomad migration; not surprisingly the price is much higher than off peak for much the same reason.

But back to the point; diesel is an essential commodity that is entrenched in industry and our economic structure. Mining companies need it, transport companies need it, rail companies need it, why, because we still need goods transported around the country and we continue to dig resources out of the ground. What this has meant is demand for diesel has proven to be relatively ‘inelastic’ regardless of price.

By comparison, demand for ULP, both in Australia and abroad has proven to be ‘elastic’. As the price has risen consumers have cut back on consumption and consequently demand has fallen. If this wasn’t the case we would most likely be paying more for it.

There are a number of ways the spread between diesel and ULP could narrow. Two stand-out. Firstly, the price of diesel could fall relative to ULP, or conversely, the price of ULP could rise relative to the price of diesel.

Given the global demand for diesel I doubt price pressures will see any substantial change in its price structure, other than influences such as more refining capacity, which is unlikely in the near term, or falls in the price of oil.

Perhaps we should be careful what we wish for, otherwise the fuel retailers might just take the hint and close the gap by reducing the discounts on ULP and we end up paying more for it than we currently need to……..

Tags: 2WD, 4WD, Fuel
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