Diesel Relief

Much consternation pervades the sectors of the economy that are impacted by fuel supplies and prices—which is to say, all sectors.

The concrete construction industry is responding by trying to conserve fuel use wherever possible, but that is often a difficult proposition in an industry where the nature of equipment use is often to run engines at very high levels in order to perform the task for which the equipment was designed. Consequently, many in the industry find themselves watching fuel prices regularly and—at least lately—sweating the news.

But with respect to diesel supplies—the factor most directly impacting the concrete construction industry—at least one economist who closely follows the fuel sector urges a sense of perspective.

“We’re seeing historically high prices,” says Jason Schenker, an economist with Wachovia Securities who covers the fuel sector. “But they’re lower than the prices we’ve seen in the not-too-distant past for diesel, and they’re lower than gasoline.”

Most important, Schenker says diesel supplies are plentiful, with healthy inventories and no looming factors likely to change that in the near future.

“You’re looking at a pretty well-supplied market,” Schenker says. “There aren’t any shortages. There were some concerns last year given refinery conversion from low to ultralow sulfur diesel.”

Those conversions were spurred by new U.S. Environmental Protection Agency standards requiring a major reduction in the sulfur content of diesel fuels and emission levels from diesel engines and vehicles.

Ultralow Sulfur Diesel (ULSD), which contains just 15 parts per million sulfur, is now mandated for use as at least 80 percent of highway diesel produced or imported into the United States. The previous standard, Low Sulfur Diesel (LSD) had sulfur content of 500 parts per million, whereas older conventional diesel had 3,000 parts per million sulfur.

Civil penalties of up to $32,500 per violation per day can be assessed for non-compliance with EPA’s ULSD fuel standards, or for misrepresentation of the sulfur level of diesel fuel.

Similar regulations apply to the use of kerosene as an additive—something many operators do in an effort to improve the performance of diesel fuel. Kerosene may still be added to ULSD, but it must be just as low in sulfur content—15 parts per million—in order to comply with regulations.

Kenneth Simonson, chief economist with the American General Contractors of America, agrees that the transition from LSD to ULSD has been smoother than some feared.

“Just this month, the process has begun to supply off-highway users with low-sulfur diesel instead of high-sulfur,” Simonson says. “We know that off-road users can use much higher-sulfur diesel than even trucks on highways, but the 2007 and later trucks have to use ultralow. Older trucks can still use the 500 parts per million.”

At present, ULSD costs more to refine and distribute than LSD. According to Simonson, the price of USLD in early June reflected a premium of anywhere from four cents to 10 cents per gallon over LSD.

“That’s what was predicted when the rule was adopted several years ago,” Simonson says. “Availability has not been an issue. I was concerned that there might be availability problems.”

Schenker echoes the sentiment.“These concerns were part of the reason that retail diesel prices had been trading above retail gasoline prices at various points over the past two years,” Schenker says. “Now, with distillate inventories at a solid level and gasoline inventories posing supply concerns, diesel is again selling at a discount to retail gasoline pump prices.”

Indeed, Schenker is very bullish on diesel’s long-term prospects. In his estimation, diesel remains the most likely alternative to gasoline, even as much is said and written about hydrogen fuel cells, ethanol and other options.

“In the longer-run, hybrid and hydrogen fuel cell vehicles will not be the solution to our personal energy consumption needs,” Schenker wrote in a report recently issued by Wachovia. “Diesel, which is more fuel efficient than gasoline and much more efficient than ethanol, is the likely candidate.”

Diesel prices tend to reflect trends in crude oil prices, with federal and state taxes, along with manufacturing, distribution and marketing costs also playing major roles. Short-term factors such as refinery outages, weather issues or various distribution complications often create momentary price spikes.

Gasoline supplies and prices, of course, have been far more volatile in recent times, and Schenker believes this summer’s high prices were actually caused in part by the relatively low prices of last winter.

“Retail price of gasoline is driven by the wholesale price of gasoline, and both fell sharply last winter,” Schenker says. “As a result, neither refiners nor importers were financially incentivized to add more supply to the U.S. market. For this reason, inventories fell with the drop in supply, and the supply crunch created an environment where price risks were to the upside. As demand rose in the spring, ahead of the driving season, and inventories were down year over year, prices rose at the pump. Imports and domestic refinery production were unable to eliminate the year-over-year deficit in gasoline inventories, which still shows gasoline inventories down between 5 and 6 percent.”

While construction contractors are more likely than the general population to use diesel over gasoline, they nonetheless have a clear interest in reducing their fuel usage to the extent that they can.

Of course, the nature of construction equipment and its use often do not lend themselves to maximum fuel efficiency—with engines often having to run at top speeds to perform the tasks the equipment was designed to perform.

Experts point to various methods that can be useful in conserving fuel in the operation of off-road equipment. They include fairly obvious recommendations like avoiding unnecessary engine run-on, frequent attention to maintenance issues, tire care and frequent changing of filters. They also note that the way an engine is used will have greater impact on fuel-efficiency than the way it was designed.

Proper storage of diesel fuel is also cited as crucially important, as the alternative is often contaminated fuel, clogged filters and problems with pumps and injectors.

Contractors can also benefit through awareness of the most up-to-date fuel system technologies, particularly the use of more efficient direct-injection engines.

“Some of the newer fuel systems that are available are there because they’re needed for emission-reduction purposes,” says Tim Francis, global sourcing manager for John Deere Power. “But as a side benefit to reducing emissions, you’re not always but in many cases reducing fuel consumption.”

Francis says many contractors who purchase equipment struggle to understand the right choice with respect to fuel-efficiency, and also acknowledged that in many cases, fuel-efficiency takes a back seat to power and performance in purchase considerations.

That may change if prices stay historically high, although contractors will most likely continue to look for the best combination of power performance and efficiency—with lower weights and greater performance flexibility likely being key components of the long-term solution.