A Record-Setting Year...
Good News Scarce on Diesel Prices

Farmers may experience high diesel fuel prices this summer.

The state’s farmers will be paying significantly more to raise corn and soybeans this year because of the increase in diesel fuel prices. Kansas State Research Extension economists have determined that producers’ whole-farm fuel costs are almost entirely determined by fuel prices, i.e. farmers do not drastically alter their fuel consumption from year to year, based on the price of diesel. Extension farm management specialist Kevin Dhuyvetter said that “Given the strong relationship between whole-farm fuel costs and diesel prices, the impact on farm costs can be forecasted for 2005 simply by looking at the percent change in fuel prices from 2004 to 2005.”

Farmers in the drought areas of the state who use diesel-fueled irrigation pumps will be hit hardest, because they will be irrigating more often. As of 2003, 27 percent of Nebraska irrigation pumps were powered by diesel fuel.

Record Breaking
Five of the state’s larger cities have broken their price records: Grand Island, Lincoln, Norfolk, North Platte and Omaha each established their respective highs for diesel on July 12.

According to the weekly price report, the state average for the second week of July is 63 cents higher than the price at this time last year. This is a 36 percent increase. Three main factors have been cited for the ongoing price rise: an increase in the price per barrel of oil, growing demand for petroleum products, especially in the United States and China, and the inability of refiners to keep up with demand.

A Change from the Past
The price gap between diesel and gasoline prices was wider this last winter than in previous years due to high gasoline inventories and low distillate inventories. Increased global diesel demand tightened the worldwide distillate fuel balance and increased competition, leading to higher prices.

Last year, gasoline prices rose above diesel prices in February. But this year, the crossover to higher gasoline prices relative to diesel fuel has yet to occur. According to the Oil Price Information Service, a new retail diesel pricing record could be set in 2005.

Diesel price rises may affect the trucking industry.
As of July 1, retail diesel prices have had a premium over gasoline prices for over 50 consecutive weeks — an unmatched streak. Usually the relationship between weekly gasoline and diesel fuel prices has shown a clear seasonal pattern. During the summer driving season of April through September, gasoline prices move above diesel fuel prices and, during the winter heating season of October through March, diesel fuel prices usually move above gasoline prices.

The summer driving season is generally dominated by gasoline demand in our nation. This summer, retail diesel is selling at a premium over retail gasoline due to surging global distillate fuel demand in Europe and Asia. And, with diesel selling at a premium to gasoline, refiners have been adjusting their product mix to maximize profits. National distillate production has been at historically high levels as refiners try to take advantage of the price differential between middle distillates such as diesel and gasoline. Even with refineries operating at 95 percent of capacity, many analysts feel that distillate stocks are not showing sufficient signs of replenishment.
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