Demand for diesel fuel has long been a signal of financial health, as trucks surge onto the roads in good times, and stay parked when the economy slows.
But amid broader shifts in the transportation industry – tightening fuel economy standards, cargo diversion onto more efficient trains and conversion to natural gas-powered trucks – diesel has become disconnected from economic growth. Numbers tracked by CIBC World Markets Inc. show U.S. diesel demand has steadily fallen since mid-2011 and in January was down nearly 9 per cent. At the same time, trucking activity grew some 2.5 per cent in 2012, and was up 4.6 year-over-year in January.
The disparity may be a sign of the change sweeping the continent's energy use, as governments and natural gas companies seek to reduce reliance on traditional fuels. It could also serve as an early warning sign to Alberta, which has committed future oil royalties to a diesel refinery.
Among the larger possible shifts on the horizons is the adoption of natural gas in trucking fleets, a possibility that is being explored by companies across the continent. Trucking consumes 61 per cent of U.S. diesel, so any changes to that industry could have substantial ramifications.
In "trucking, if we saw natural gas make inroads there, that's where you could get into some big numbers. We're not there yet, but we could be in the future," said Katherine Spector, a commodities strategist with CIBC in New York.
Alberta has been among the key backers of the 50,000 barrel-a-day Redwater refinery that will convert oil sands bitumen into diesel. The province has, through processing agreements, guaranteed $3-billion in debt for the refinery and also committed 37,500 b/d of bitumen, using barrels it takes from the energy industry as royalties. (Construction of Redwater is expected to start this year by partners North West Upgrading Inc. and Canadian Natural Resources Ltd.)
As such, the province has wedded itself to diesel for years to come – at a time when companies such as Encana Corp. and Royal Dutch Shell PLC are working to build new plants in Alberta to fuel drilling rigs and heavy duty trucks with natural gas.
North West has argued that refinery profits are so strong that Alberta would bring in an extra $600-million a year if Redwater was running today – and says diesel will be needed for years to come. "The world has evolved in a certain way, and it's evolved to use diesel fuel. If that changes, it's going to take a very long time," said North West chairman Ian MacGregor.
Alberta Energy Minister Ken Hughes, meanwhile, argued that "evolutionary changes" in the diesel market won't alter the basic economics for a refinery in Alberta, which has more bitumen than capacity to refine it.
According to the Canadian Petroleum Products Industry, however, Western Canada's diesel supply is considered balanced, with enough supply to meet demand for now. – although industrial growth might necessitate more supply in future.
But the transportation industry is changing. New U.S. fuel economy standards mandate a 6- to 24-per-cent boost in fuel economy to heavy trucks by 2018. A study by the U.S. Department of Energy estimates heavy truck efficiency can be raised 25- to 50-per-cent over the next four decades.
A test of trucks for Coca-Cola Co. found that hybrid engines used 13.7-per-cent less fuel than standard diesels, and natural gas-powered trucks have been tested by some of the continent's biggest fleets, including Wal-Mart Stores Inc. and FedEx Corp.
Yet new marine emissions standards may also boost diesel consumption on ships. Another potentially important factor: diesel cars, which saw sales rise 24 per cent last year, according to Diesel Technology Forum.
Exxon Mobil Corp. predicts worldwide diesel demand will surge by 65 per cent between now and 2040 – mostly propelled by Asia, although Exxon believes North America will also see some limited diesel demand growth.