2011 January 21

The Master Resource Report  2011-01-21

The Bakken. (page 1 )

That lake used to be a coal mine. (page 1 )

The IEA & Opec on the price of oil. (page 2 )

Logistic: It is a question of fuel. (page 2 )

More evidence of Peak Roads. (page 3 )

Petrobras needs more money. Surprise? (page 4 )

Diesel – More good news or is it bad news…?

If you are a diesel supplier it is good news. If you are a diesel buyer it is bad news. According to a report in Bloomberg this week diesel demand in China is set to expand further. “China, the world’s largest energy user, may face a diesel shortage this year as refining capacity expansion lags behind an increase in consumption, the nation’s top oil producer said.”

“The nation’s demand for the fuel used in trucks and power generators may exceed supply by 3.5 million metric tons, China National Petroleum Corp. said in a report in Beijing today.”

This demand will put pressure on countries to export to China if they are willing to pay more than domestic consumers will or are able to pay. As this report has noted a number of times the U.S. is one of those countries. Unless global demand for diesel softens external demand pressure will support rising U.S. diesel prices this years. This is not good news for buyers who already are finding the price hard to manage.

Demand pressure for diesel will not be driven by China alone. “India’s federal government currently has no plan to raise diesel prices, the country’s new oil minister S. Jaipal Reddy said Thursday…” (WSJ) Government subsidies at below market prices remove economic incentives to use less as the global price increases contributing to sustained demand. Indian diesel consumers will not be deterred by the same higher prices that will impact OECD buyers.

Then there is diesel’s refinery cousin, jet fuel.

Jet Fuel is the oxygen that drives the airline industry and it is starting to get a little thin for these high flyers. According to the International Air Transport Association (IATA) the price of jet fuel is now up 27.2% year-over-year and over 7% in just the last month. The IATA Fuel Price Index that is based on a year 2000 level of 100 is now up to 305.4. That is a threefold increase over the decade that just ended. (In 2008 the Index reached 459 in June) Now take a deep breath, close your eyes and imagine the airline industry when it goes up that much in the next five years. It’s not a good image is it?

In 2010 the airline industry had profits of about $15 billion according to IATA with an average oil price for the year of $79 per barrel. The association indicates that in 2011 if oil were to average just $5 per barrel higher at $84 profits would slip to $9.1 billion down $5.9. So all else being constant (of it never is) if oil averages in the $95 to $100 per barrel range for the year this IATA information would lead one to conclude the industry would again be profitless.

So if the economy improves increasing the price of oil and the demand for air transport the industry will be forced to raise fares to avoid loses. Or maybe we will hear more about how the airlines installed credit card readers in their new pay toilets.