State Feeling Pain of High Diesel Prices

A refinery outage and ill-timed shipments of diesel from California to Chile are pushing prices of the vital fuel past the $3-a-gallon mark and threatening to crimp the state’s economic growth as truckers, farmers and other big users struggle to cope.

The sudden crunch in the California diesel market pushed the cost of the fuel to a series of record highs last week, and triggered temporary shortages that sent some truck stop owners scrambling for backup supplies.

“We’re treading in uncharted water,” said Andre van der Valk, who was charging $2.99 a gallon for diesel Friday at all four of his stations in the San Fernando and Simi valleys. He said Shell Oil Co., which provides fuel for three of his sites, hiked his diesel costs by 24 cents a gallon in just eight days.

Some of van der Valk’s competitors were selling diesel for more than $3 a gallon, and he expected such prices to become widespread if the supply situation didn’t improve soon.

On Friday, AAA said the average retail price of diesel in California hit a record $2.849 a gallon -- 19 cents above the $2.657 reported last Monday by the U.S. Energy Information Administration and high enough to set new records in 24 of the 25 communities surveyed by AAA.

It was also nearly 24 cents a gallon above the statewide average for gasoline, which hit $2.612 for a gallon of self-serve regular -- a few pennies short of the peak established in April, according to the AAA survey.

“There have been some outages ... but so far, we’ve had no serious problems other than that the prices are sky-high,” said Larry Roberts, fuel supply manager for Tower Energy, which supplies diesel to 7-Eleven stores and other sites in California and several other states.

Although the situation is troubling, he said, “there’s no need to panic.”

For truckers, however, the price surge has cut into already thin profits, causing some to consider parking their rigs until costs subside.

“Every day you don’t know how much it’s going to be, even every second,” said Alex Alvarez, who spent $400 at $2.94 a gallon to fill up his truck Thursday at Alameda Petro, a truck stop in downtown Los Angeles. He hauls mostly appliances and electronics for $1.15 to $1.20 per mile, and his routes cover California, Washington, Arizona and Oregon.

Alvarez, 32, said his per-mile pay hasn’t changed to offset the higher diesel prices. “If the prices of the fuel get higher, that is less money in your pocket.”

Jack Kyser, chief economist at the Los Angeles County Economic Development Corp., said high energy prices ripple through the economy, hurting truckers, businesses and eventually consumers. “It’s the economy’s fuel,” he said. “If this is long-lived, then you’re going to start seeing some significant impacts, and you’ll see the financial health of a lot of firms start to be threatened.”

That’s because nearly every item consumers buy, from dishwashers to tacos to fresh fruit, reaches its destination by truck or train -- and both are powered by diesel fuel.

Although the most visible victim of high diesel prices is the transportation network -- where some railroad and shipping companies have added surcharges to offset their increased fuel costs -- diesel prices also affect the production end of the nation’s food supply because the fuel is used to power farm equipment and irrigation pumps.

“Things have been pretty tight this week,” said Peter Belluomini, who manages a potato farm outside of Bakersfield.

The price hike’s effect on farmers varies depending on the crop as well as the planting and harvesting seasons, said Belluomini, who is president of the Kern County Farm Bureau.

“Right now, it’s not good, but it’s probably not a disaster,” he said. Some major crops, such as almonds and cotton, aren’t in harvest season yet. But “if it drags on, then it gets more critical.”

Nationwide, the costs of gasoline, diesel and all things made from petroleum have been on the rise, mirroring sharp increases in the price of crude oil. On Friday, the U.S. benchmark crude settled at a new high of $62.31 a barrel, up 93 cents, on the New York Mercantile Exchange.

In California, however, there are additional factors behind the skyrocketing prices.

The state’s diesel, like its gasoline, is a special blend that burns cleaner but is hard to make and difficult to find outside of California. In addition, even in the best of times, the state’s 14 fuel-making refineries rely on imports to help satisfy the region’s growing thirst for gasoline and diesel.

On July 20, a fire erupted at Chevron Corp.’s El Segundo facility, one of the West’s largest refineries and a big producer of diesel. Chevron slashed production and shut down some equipment for repairs that are expected to last at least another week.

That production glitch wouldn’t have hit the market so hard if oil traders, faced with a surplus of diesel in June, hadn’t sold large quantities of the fuel to foreign buyers just weeks before the El Segundo fire.

“There was too much diesel on the West Coast” a month or so ago, said Carl Boyett, chief executive of Boyett Petroleum in Modesto. Then three companies sent diesel cargos to other markets, all around the same time, he said.

Vitol, an international oil trader, was one of the exporters. Another was ConocoPhillips, according to Boyett and others. Both of those shipments ended up in Chile. The third company, BP, exported diesel from its Cherry Point, Wash., refinery to Mexico, but the fuel was too high in sulfur to qualify for use in California or Washington, according to spokesman Phil Cochrane.

The Vitol and ConocoPhillips shipments that left San Francisco this summer contained ultra-low-sulfur fuel that could have been sold here, said Roberts of Tower Energy. Former Vitol trader Andy Lipow estimated that the shipments totaled about 21 million gallons of diesel -- equal to about 3 1/2 days of typical consumption in California.

ConocoPhillips couldn’t be reached for comment. Vitol, a Dutch-Swiss company whose U.S. headquarters are in Houston, said the shipment to Chile made financial sense at the time.

At current prices, said Vitol Vice President Jeff Hepper, “I wish [those barrels] were still on the West Coast.”

So do a lot of people.

Because of its limited production, Chevron has been selling diesel only to its own stations and to customers with supply contracts, forcing many regular customers without contracts to find alternative sources for fuel. One of those cut off by Chevron was Pilot Travel Centers, a nationwide company that has eight large truck stops in California.

“We’ve had minor outages,” said Bill Dibble, Pilot’s manager of supply and trading for the West. “But the bigger problem has been the prices. Our cash outlay [for fuel] is twice what it was -- if we spent $1 before, we’ve got to put out $2 now to make 10 cents a gallon.”

In the meantime, California refiners other than Chevron can be expected to show extra-healthy profits for however long the diesel problem persists, said Tom Kloza, chief oil analyst at the Oil Price Information Service, a New Jersey firm that tracks petroleum prices.

“It’s profitable to make diesel everywhere in this country,” he said. “But in California, it’s really off the charts.”

With retail prices already breaching the $3-a-gallon level and money to be made, Kloza and others said, there are plenty of opportunists trying to get cargos to California before the prices retreat. It can take weeks for a tanker to reach California, however, and it’s unclear how many tankers will come, when they’ll arrive -- and how soon diesel prices might come down.

“There is genuine concern at the moment,” Kloza said. “I’ve got a hunch my nectarines from California are going to cost a bit more in the next few months.”