Although Saudi Arabia and the Bush Administration have responded in a two-tiered effort to stabilize the price of oil after it broke the $50-a-barrel barrier Tuesday, it may not be enough to hold off the flow of record-setting diesel prices, according to a Department of Energy spokesperson.
In response to crude hitting the $50/b mark, Saudi Arabia said it would raise production capacity to 11 million barrels/day, up from 9.5 million b/d, according to newswires. The Wall Street Journal reported that the U.S. Department of Energy (DOE) has tapped the Strategic Petroleum Reserve to ship Shell Trading Co. 1.4 million barrels of crude.
“The negotiations are for crude oil to be loaned under short-term contractual agreements from the Strategic Petroleum Reserve (SPR). And to be returned to the reserve once supply conditions return to normal,” stated DOE.
DOE said its decision to tap the oil reserves now — a move that had been resisted by the Bush Administration — is in response to the disruption to oil production in the Gulf of Mexico by the recent hurricanes.
“As this Administration has stated consistently, the SPR was designed to protect American consumers against supply disruptions, including natural disasters,” Secretary of Energy Spencer Abraham said.
Yesterday, DOE reported that the national average diesel price hit a new all-time high last week, at $2.012/gallon. This came after a staggering 10-cent hike— and there could well be more to come, said Jacob Bournazian, economist for the Energy Information Administration.
“The hurricanes were a factor, but I wouldn’t consider them a primary factor,” Bournazian said. “The underlying factor in the diesel prices is the rise in crude prices— this started in August way before the hurricane season.”
In fact, the temporary dip in diesel prices EIA reported in late August through early September were prices that were kept artificially low by suppliers and distributors, Bournazian said. “Wholesale rose 20 cents in the month of September due to steady adjustments to cost of crude oil, while the retail prices increased only increased 3 to 5 cents. There’s a distortion— someone was getting squeezed and it turns out it was the distributors and suppliers.
“Distributors were reluctant to pass on price increases perhaps because no one wanted to risk giving up any volume under the expectation that prices would stabilize — that expectation didn’t come through,” he said, adding that the recent hurricanes only exacerbated the problem.
Indeed, the 10-cent leap in diesel prices appears to be a sign that distributors have finally caved to pent-up wholesale pressures. And looking at recent record-high crude prices, Bournazian warns that more record-high diesel prices could well be in the forecast for October.
“There’s not much relief on the horizon in the diesel market. I think consumers can continue to expect high prices — maybe record high prices,” he said.