Diesel - Higher Prices are the risk

Submitted: Monday, Apr 28, 2008 at 09:11
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The following news item and article by US Economist, Dr Philip Verleger, is sobering especially for those looking for a relief in the price of diesel. In 2004 when oil was trading around $45 per barrel Verleger, who specialises in the study of energy markets, predicted it would eventually surpass $70 per barrel and was well ahead of ‘the pack’ in his prediction.

Last Friday, he commented that Crude oil may rise to $200 a barrel by the end of the year as refiners increase purchases of low sulphur oil to make diesel fuel. Ultra low sulphur diesel powers most U.S. trucks and diesel burning cars. To make the fuel, refiners are buying more-costly low sulphur oils such as the West Texas Intermediate. It's conceivable oil could rise to $200 a barrel by the end of the year, he said, if economic growth in the US resumes as we are short diesel and no way we are going to fill the gap.

I must say that I am not convinced that we will see oil at $200 a barrel this year, or anytine soon, however there are clear indicators that the price of diesel is not going to fall relative to other petroleum products anytime soon.

Made in the US: The Causes of High Oil Prices
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Reply By: troopyman - Monday, Apr 28, 2008 at 09:24

Monday, Apr 28, 2008 at 09:24
The price of fuel is like a ticking bomb(hesitently types that in ) . The average family cannot sustain this for ever . I notice fun parks are half full . Shops are closing down and camping parks are empty a lot of the time .
AnswerID: 300905

Reply By: obee - Monday, Apr 28, 2008 at 09:54

Monday, Apr 28, 2008 at 09:54
I tell people that the car i own is the last car I will ever drive. If I am lucky I will be able to afford to drive another ten years and any way I am tired of driving. Public transport will fit my life style before long.

Fuel prices will level out when the pain gets too much to bear. Six and a half billion people want to drive their own car but it will never be possible for all of them. High fuel costs means a lot of people wont be eating. Revolution, they say, is only three meals away. Yep the real tragedy will be famine and war into the future.

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Reply By: DIO - Monday, Apr 28, 2008 at 10:04

Monday, Apr 28, 2008 at 10:04
The Federal Govt.'s 'initiative' to compell fuel resellers to declare intended pump prices for the next 24 hrs will not result in cheaper fuel prices. If the govt was serious it would have implemented a 'strategy' tat would have commenced immediately. The community (people, we, us) are hurting NOW. This they didn't do. Now if you are seriously looking for leadership from them, amongst things to watch for will be when we see a reduction if fuel excise and GST then we will know that they are worried about their political future and to sweeten up the electorate they offer peanuts. TOO LITTLE - TOO LATE.
AnswerID: 300911

Follow Up By: mfewster - Monday, Apr 28, 2008 at 10:37

Monday, Apr 28, 2008 at 10:37
When Australia first became self sufficient in oil, back in the 60's-70's, it was realized that we only had small reserves that we knew about. We could have sold fuel much cheaper but both Liberal and Labor governments thought it wise to keep Australian fuel prices at about the same level as international prices because they thought that when our oil ran out, the huge jump as we adjusted to international prices would be devastating to the economy, so they brought in a tax based on international prices. Until we run out of our own oil, it is still smart to keep our prices at international levels. What we shoould have done is use the tax windfall to set up alternative fuel industries and networks. The Howard government in particular used the windfall to give tax breaks to the rich.
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Reply By: mfewster - Monday, Apr 28, 2008 at 10:27

Monday, Apr 28, 2008 at 10:27
Have a read of this from this mornings news in USA
It will happen here very soon.
I keep saying in this forum, depreciation is our biggest cost, If we want to keep our hobby going for a few more years, and we aren't super rich, get an old model, diesel 4wd so depreciation is no longer a problem.
Diesel will become cheaper than petrol because diesel can be made from natural gas and we have plenty of that. It is petrol, diesel made from mineral oil and lpg (which is a spinoff from the petrol cracking process) that are in short supply. We aren't making diesel from natural gas yet in this country, but we will. It wont be cheap, but it will become cheaper than petrol.
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Follow Up By: Member - Oldbaz. NSW. - Monday, Apr 28, 2008 at 10:49

Monday, Apr 28, 2008 at 10:49
Pleased to see I am not alone in suggesting depreciation is the
major cost of motoring. This seems to get lost in the rush to get into a new LC200 or other overpriced bit of gear. But I suppose
if the cost of one of these isnt a problem, neither is the depreciation, but owners should be the last to whine about the cost of fuel. My 2000 model Jack isnt diesel, but the low initial cost, means I can run two other cars as daily drivers at a fraction of the cost of one new 4WD. The other point I make is that we can cut our fuel usage by about 30% if we go back to 90kph. Its
that easy, but will we do it ? Unlikely, certainly not many will. I have cut 20% off my fuel cost by staying under 100kph, just got
to drop another 10. Probably be abused as a mobile road block
by those rushing past in a hurry to get to the next servo..:)).
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Follow Up By: mfewster - Monday, Apr 28, 2008 at 10:59

Monday, Apr 28, 2008 at 10:59
Old Baz, I couldn't agree more. I'd take bets on all highway speed limits being reduced in the next 10 years by which time the fuel prices are going to be hurting so much that no-one will be complaining about the reductions.
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 11:13

Monday, Apr 28, 2008 at 11:13

There are some very practical measures that we can take to reduce the fuel costs. Unfortunately most of the debate centres on the actual price and the inaction of the government to do something (I’m not sure what) to reduce the price.

The reality is that low-sulphur content requirements in diesel have pushed the production costs higher, and we all know what a higher oil price is doing to the cost at the bowsers. Small mercies have come from the current strength of the Australian dollar as it has at least provided some buffer to the rising oil price.

Many exercise fuel saving measures and this includes your suggestion about reduced speed. 'The Landy' & 'Red Rover' both shake and rattle above 90klm so I exercise this as a matter of course, but weight reduction, not carrying unnecessary items, removing roof racks and even oversized tyres when not required are all potential areas that can improve fuel economy.

Buying fuel during the discount cycle is another way to reduce your ‘average’ annual fuel bill. I have argued that the FuelWatch scheme will actually increase the average fuel cost of many savvy motorists and is not necessarily a great development (my blog refers).

It would be good to hear more along the lines of practical measures to save fuel, as these are the things that we can control – a rising oil price is outside the scope of things we (or the government) can control.

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Follow Up By: chisel - Monday, Apr 28, 2008 at 11:14

Monday, Apr 28, 2008 at 11:14
Depreciation on a new or recent model is still higher than fuel - but not by much. If you look at a 2 or 3 year old vehicle that has already lost about 30% of its value, and drive it 20000kms per year, fuel is probably about the same as depreciation. Of course, fuel prices going up may also result in higher depreciation for larger vehicles.
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Follow Up By: Member - Oldbaz. NSW. - Monday, Apr 28, 2008 at 11:37

Monday, Apr 28, 2008 at 11:37
Chisel, I dont dispute your figures re depreciation verses fuel, but the fuel cost is pretty much fixed relative to the amount of ks driven. Depreciation is high initially , then reduces dramatically in dollar terms if you drive something sub $15k. As Landy points out,
we are much more in control of fuel usage than we are of prices
& by opting to apply certain practices we can reduce fuel costs
significantly. Drivers of new cars can do the same of course but the
depreciation slug means they cannot match the cost savings achieved by driving an older car. One assumes the buyer assesses
this cost as part of the overall cost of ownership....oldbaz
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Follow Up By: Member - Porl - Monday, Apr 28, 2008 at 11:51

Monday, Apr 28, 2008 at 11:51
Hey Mfewster

I bought LNC shares last year - the company is applying 1950's Russian technology to produce sulphur free diesel from LNG from at risk coal deposits - ie coal no-one wants to dig up. Based on my assumption that 1950's technology can only improve, I took a punt on the 62c shares. Well funny how they hit $1.69 this morning.

So yes, 100% sulphur free diesel from gas, and no mining, just a pipe down the ground to get it out.

Dare I say we'll never not that stuff for a while though, will go straight to airlines and mines I reckon due to it's amazing zero sulphur content.
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Follow Up By: mfewster - Monday, Apr 28, 2008 at 12:37

Monday, Apr 28, 2008 at 12:37
Porl. Right on. That's the technology I was talking about. For similar reasons I've been buying shares in companies with the biggest LNG reserves I could find. The process you are talking about uses cobalt. Australia has lots of LNG and cobalt. I'd look at buying shares in companies with either. Sooner or later we will start to manufacture diesel using this process in a big way. Exon in USA has been moving towards the same process.
Chisel, Re depreciation, I was talking about vehicles 20 years old after which depreciation isn't an issue. I don't see any logic in buying big new vehicles at this point of time.
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Follow Up By: PajeroTD - Monday, Apr 28, 2008 at 12:50

Monday, Apr 28, 2008 at 12:50
Porl, even if GTL diesel went straight to the airlines, it would rapidly reduce dependence on current diesel, which would lower it's prices. I think GTL is a much better alternative for current diesel engines than biodiesel. Ultimately though, I think the focus should be on electric and hydrogen / h2 fuel cell. But mid-term, GTL sounds positive
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Follow Up By: mfewster - Monday, Apr 28, 2008 at 12:55

Monday, Apr 28, 2008 at 12:55
Can jets run on diesel? I don't know. Heard a report on an ABC radio program last week that said there was a big move back to turboprop aircraft as they are much more fuel efficient than jets
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 14:27

Monday, Apr 28, 2008 at 14:27
The interesting thing about alternative technology that produces fuel, and in this case diesel, is that the cost of production and what they sell it for will be two vastly different things. I doubt LINC will sell its product for any less than the cost of the oil based product.

If oil was sold for its production costs plus a margin it wouldn’t be US$120 per barrel as it is today. Alternative technologies are good if they are produced in sufficient quantities to change the demand / supply imbalance that we currently have. However despite Underground Coal Gasification and Coal to Liquids technology being around for a long time it hasn’t had an impact on the price of a barrel of oil or the diesel we put in our cars.

The other issue about this type of technology and probably one of the main reasons why it has never taken off is because it is an expensive process (3 to 4 times more expensive than conventional). This is before we start debating the effect on global warming from the carbon dioxide that is released into the atmosphere during the process. Even if 90% of the emissions from liquid coal plants are captured emissions will still be above levels above those from current petroleum refining. In a world that is obsessed with global warming this will be a large hurdle to get over. Under Kyoto, these types of plants will be paying more in carbon taxes to offset the higher emissions.

This technology will play at the fringes, but will never make a huge in-road to current production methods. That isn’t to say we shouldn’t be looking to alternatives nor should we expect they will be any cheaper to buy than the alternative.
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Follow Up By: Member - Mike F (SA) - Monday, Apr 28, 2008 at 14:51

Monday, Apr 28, 2008 at 14:51
There is nothing different about the pricing of alternative fuel to any other pricing. It is just the good old capitalist, free market system at work. It's merely a question of supply and demand. Supply reducing and demand increasing = higher prices. Therefore anything that increases supply will reduce prices. This doesn't mean the prices will get lower, unless we get more supply than demand, just that the prices wont be as high as they would have been if there had been less supply. I don't think the cost of the LNG to diesel process is as high as you think. It used to be, but as mineral oil prices have skyrocketed, I understand it now comparable. And everytime mineral oil goes up, it favours the lng/diesel process.
check this site
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 15:14

Monday, Apr 28, 2008 at 15:14
The cost of producing UCT & CTT runs at about 3 to 4 times more expensive than conventional processes; given the higher oil price it has now made the technology more viable and therefore it is attracting some capital investment. But therein lies the problem for this technology, OPEC and other oil producing nations can ‘turn the taps on’ and increase supply at anytime, making long-term investment in this technology a high risk proposition given the higher production costs and the lead-in time for building plant and equipment.

The technology didn’t make any serious in-roads during the oil price shock in the 1970s, and as you correctly point out it won’t be any cheaper than alternatives, only a reduction in demand or increase in supply, that keeps pace with increasing demand will achieve this.

This is before factoring in the environmental cost which is already a big issue especially when you start talking about coal.
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Reply By: Michael ( Moss Vale NSW) - Monday, Apr 28, 2008 at 10:37

Monday, Apr 28, 2008 at 10:37
Panic buying in England today,, something about a 40% reduction in fuel production in the short term, I did not get the full story. What next?
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 10:47

Monday, Apr 28, 2008 at 10:47
London Times story...

Refinery strike
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 10:49

Monday, Apr 28, 2008 at 10:49
OIL] barrels towards $120/bbl amidst rpts that a pipeline carrying
nearly half of Britain's oil was closed on Sunday as well as news of fresh
weekend militant attacks in Nigeria. The closure of the entire BP operated
network, arose after a 2 day strike over pensions began at the
neighbouring Grangemouth refinery in Scotland. The news has spurred panic
buying at the pump, by motorists in Scotland and the UK, despite govt
reassurances there is enough in the reserve to go around.
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Follow Up By: Michael ( Moss Vale NSW) - Monday, Apr 28, 2008 at 17:13

Monday, Apr 28, 2008 at 17:13
I was in England last year and the price of petrol would stop most people from panic buying!! Michael
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Follow Up By: The Landy - Monday, Apr 28, 2008 at 17:19

Monday, Apr 28, 2008 at 17:19
00:07 25Apr08 -PLATTS: UK retail prices for gasoline, diesel hit record high
London (Platts)--24Apr2008/1007 am EDT/1407 GMT
The average retail pump price for gasoline in the UK climbed to an all-time high of 109.1 pence/liter ($8.14/gallon) Wednesday, said a source at the motoring services group the AA.
"Today is yet another record high and the strength within the past two days is very apparent," said the source.
"Prices used to rise only marginally from day to day but yesterday we saw prices move by 2 p which is considerable."
Pump prices for diesel are also at a record high of 119 p/liter, with the AA confirming that the spread between gasoline and diesel continues to widen.
Diesel is currently on average 9.9 p/liter more expensive than gasoline according to the AA, up from an average of 4.9 p/liter in January.

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