Saturday, May 31, 2008

New era of expensive oil

Things are officially nuts - diesel prices have surpassed already crazy gasoline prices here. When my parents bought their first diesel-powered SUV four or five years ago, they were delighted that they were going have to pay only a third of what they had been paying to fill up the tank.

Diesel prices, however, have been rising steadily, at a faster pace than other petroleum products including gasoline, as global demand increased. At the same time, the Korean government has been raising the domestic tax on diesel with a goal to make it almost - but not exactly - as expensive as gasoline. The idea is to protect the environment by curbing diesel consumption. Combine these two factors, the result is people being forced to pay more for diesel than for gasoline at the pump, although in theory, diesel is supposed to be cheaper than gasoline because of the quality differential.

Refiners must be having a field day - who would've thought they could sell diesel at higher prices than gasoline? Particulalry, Korean refiners are so-called "export-oriented" refiners, with products like diesel making up the bulk of their exports. So, as long as overseas folks like China buy, they will make money.

Meanwhile, SUV drivers like my parents are getting screwed, but more broadly, truckers and bus drivers will be hit hard, and eventually, the impact will be felt by consumers. As such, truckers' unions are threatening to walk out if the government doesn't do something about this. And the government is busy trying to come up with a solution, looking into giving subsidies to certain businesses or even lowering the tax.

But with oil prices trending up, we all know none of these measures will solve the problems fundamentally, especially given that using fiscal policies to control oil prices can only be detrimental to economies. So everyone's hands are tied. Perhaps it's about time to really give a serious thought to going green.


Richard said...

I just saw your blog. I am a korean adoptee who lives in the US for half the year. The other half of the year I work in a little country called Equatorial Guinea in central Africa. Equatorial Guinea is the third richest oil country in Africa, and I am a chemical engineer for one of the major oil companies producing oil here. Prior to this I worked at a refinery.

The reason diesel prices were traditional lower then gasoline prices was not because of the quality difference, it was due to the difference in supply and demand.

There are two types of refineries. they are labelled as 3-2-1 or 3-1-2. The reason for this is because for every 3 barrels of oil - 2 barrels of gasoline - 1 barrel of diesel is made or 3 oil, 1 gasoline, 2 diesel. The vast majority of the refineries in the US (probably in the world) were 3-2-1, making more gasoline that diesel because it made more money. However, when gasoline prices rose, the demand for diesel steadily grew and was competitive with gasoline.

In the US there is only 1 company that primarily operates on the 3-1-2 ratio of oil:gasoline:diesel. That company is Valero. When the pricing of diesel switched to be more expensive then gasoline, they made a lot more money then any other refining company did because their plants were designed to produce more diesel. The price difference wasnt because it costs more or less to produce (they actually cost about the same) its that the supply of diesel is severely limited.

I am glad to see your last paragraph/statement. In the US a big issue right now is a lot of the politicians (particularly the democrats) want to impose a "windfall profit tax". Basicaly taxing oil companies for the profits they made. This is not a solution because the oil companies will just "pass" the cost onto the consumers as any company does. Also, an interesting side note, in the last 5 years (with high oil prices) the US government has made more money than all of the oil companies combined. Thats irony for you :)



Intelligent design

The Korean government are forward thinkers. Some bright spark at the internal affairs office realised that instead of buying costly street sweepers they could just use bored middle aged women. Thusly every Korean mother or aunt is bowlegged, shaped like a question mark and smells of bins. But those street corners, wow.