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Interview with Jane Savage: Part 2 – Diesel Pricing and ULSD
This is the second part of a conversation I had with Jane Savage, President and CEO of CIPMA, the Canadian Independent Petroleum Marketers Association. You can read the first part here.
Diesel Pricing
A: So, are you suggesting that as demand for diesel fuel and gasoline decreases due to economic conditions the price at the pump will also fall? I now see gasoline increasing in price even with a $40 barrel of crude.
J: Yes, confusing, isn’t it. The reality is that up until a couple of months ago, gasoline was a losing proposition for the refiners. That is, the world price of gasoline was lower than the price of crude oil.
A: You’re telling me gas was being sold at a loss? You can’t be serious.
J: Uh huh. Tough one to accept, but that was the situation for the refining industry through most of 2008.
A: So the price increase we see today reflects a more “normal” gasoline market, while the price of diesel is coming down?
J: Well, falling demand for diesel will impact its price relative to gasoline.
A: Explain to me again the difference in refining diesel as opposed to gasoline.
J: Remember, it’s the market that sets the price for crude, gasoline and diesel, which in turn is rooted in supply and demand factors, geopolitical factors and just plain emotion. Differences in the refining of gasoline and diesel are a function of the specific refinery and what pots and pans it has, or hasn’t.
A: So if this pricing issue is truly a supply and demand game, what incentive is there for refiners to increase the volume of gasoline and diesel produced in Canada? Demand with limited supply is a recipe for premium pricing.
J: Refiners can reduce the amount produced, sure, so from a supply restriction perspective, yes, supply could theoretically be reduced to impact pricing. However, market conditions in Canada would not permit this.
A: What do you mean? There are regulations around this issue?
J: No, refiners do not operate under regulated production volumes. They are producing all they can. The challenge here in Canada is that we do not have the capacity to meet Canadian demand even with the tough economic times of today impacting fuel demand.
A: We don’t have enough oil in the country to feed our energy needs?
J: Right – kind of. We have enormous raw energy supply. Look at the tar sands project as one example. The central issue is the fact that we lack the refining infrastructure to convert this raw Canadian crude into enough diesel and gasoline.
A: Are you saying we import oil?
J: Absolutely. We import refined products from other countries – the US, Europe, South America.
A: Who are the Canadian refiners? I know of Shell and Imperial Oil refining operations. Who are the others?
J: There are actually 10 companies operating 16 refineries in Canada: Shell, Imperial, Petro Canada, Ultramar, Irving, Sunoco, Husky, Federated Co-op North Atlantic and Chevron. Shell, Esso and Petro Canada operate more than one refinery.
ULSD
A: Which of these ten refiners produce the new clean diesel, the ultra low sulfur diesel (ULSD) standard here in Canada? I assume some refiners produce gasoline while others produce diesel?
J: Today, all diesel at the pump in Canada is ULSD.
A: So all refiners produce diesel?
J: Yes, but now we’re getting into how refining installations are structured. Some deliver more of a particular finished product than others. It really depends on the desired outcome for a particular installation.
A: Is the oil industry responding with infrastructure investment in new refining capacity? Will we see greater refined diesel volumes in Canada?
J: Yes, they are. Refiners will respond to their demand forecasts like any other business. It’s also an energy security issue, and one in which the federal government plays a role along with issues like fuel quality specifications.
A: Fuel quality specifications?
J: Sorry. I mean regulations to remove lead from gasoline which we did in the late 70s, or the removal of sulphur from diesel, which has resulted in the clean ULSD product.
To read the third part of the interview, please click here.
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