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Fuel prices expected to rise in 2010 and 2011

by Tim Linden | February 04, 2010
Diesel fuel prices are not expected to climb to the dizzying heights reached in 2008, but after declining in 2009, the U.S. Energy Information Administration has predicted increases over the next two years.

In fact, the Washington, DC-based agency sees a significant increase for 2010 with a much smaller one the following year. In 2009, diesel prices averaged $2.46 per gallon, but the EIA has predicted a $2.98 average price per gallon for 2010, which would represent a 21 percent increase. Obviously, if that is the average, rates above $3 per gallon will be common. In 2011, the EIA has projected a much smaller increase of less than 3.5 percent, as the average per-gallon cost for diesel is expected to climb to $3.14.

These increases are based on the belief that the world oil market will gradually tighten over the next two years as the global economy continues to recover. It has long been a truism that world oil prices climb in good times and fall in difficult economic conditions. This is merely a reflection of the supply and demand equation — poor economic times result in decreased demand for oil. Projected economic growth is expected to start to strengthen in 2010, growing at a 1.2 percent clip, and then more than double in 2011 to 2.7 percent.

Global oil demand declined in 2009 for the second consecutive year, the first time since 1983 that this had occurred. The decline bottomed out in the middle of 2009, as the world economy began to recover in the last half of the year. EIA expects this recovery to continue in 2010 and 2011, contributing to global oil demand growth of 1.1 million barrels per day (bbl/d) in 2010 and 1.5 million bbl/d in 2011. Developing countries are expected to account for most of this growth in 2010, although projected demand in the United States increases slightly by 0.2 million bbl/d after a very weak 2009.

China continues to lead world consumption growth with projected increases of more than 0.4 million bbl/d in both 2010 and 2011. After a lull in 2009, China is building again. The nation's oil demand rose by almost 19 percent in November of 2009 compared to consumption figures in November of 2008. That represented the third-straight month of double-digit growth.

The price of oil on the futures market hit an all-time high on July 3, 2008, topping out at $145.28 per barrel. Gasoline and diesel prices soon rose to their all-time high topping out above $4 per gallon. The decline in the cost of a barrel of oil began during the summer of 2008 and fell precipitously once the U.S. economy started its downward spiral in September of that year. By December of 2008, the cost of a barrel of oil had dropped below $34 and the price of a gallon of gasoline dropped as low as $1.62 in the United States. Both oil prices and gasoline prices rebounded in 2009, even as consumption declined. In late January, the cost of a barrel of oil was hovering around $75, and both gasoline and diesel fuel were in the $2.70 per gallon range, depending upon location.

During the past 18 months of oil price volatility, economists have collectively agreed that many factors other than supply and demand have been moving the market up and down. Even as oil consumption declined in 2008, the market price rose significantly. Economists said the lack of strength of the U.S. dollar played a big role because oil is priced in dollars. It seems to be the consensus that the typical supply and demand curve will once again be the dominating price determinant in 2010 and in 2011.

Steve Timmons, logistics manager for Pathfinder Logistics in Commerce, CA, was right in step with economists’ predictions. Mr. Timmons said that indications are that diesel prices will rise in the first quarter of this year. He said that as the demand for transportation increases in the spring, the cost of fuel and truck rates typically rise, and he expects that to be the case again this year.

(For more on transportation and logistics, see the Feb. 8, 2010, issue of The Produce News.)