The Economics of Supply and Demand

It's no surprise that oil drives our economy and the transportation industry, but what is surprising to some is the complex system that is behind fuel prices and availability. Recently, two issues have been building that threaten the price and availability of diesel fuel for the transportation industry.

California has long been a supporter of more environmental protection and clean initiatives. The state's recent plan targets carbon use and supports a cap-and-trade market. While these two initiatives will benefit the environment, their effects on the trucking industry could be disastrous.

Don't get us wrong, we are all about going green and helping our environment, but those plans must be weighed against the cost to business and our economy. Fuel, like every other commodity, operates in a strict supply and demand function. When left to its own devices, the free market will balance the cost and availability of fuel by its demand and price, which buyers are willing to pay. This formula becomes skewed and inefficient when outside forces adjust pricing or availability.

California's actions specifically target the cost of diesel fuel. According to a recent report released by the California Trucking Association, the state's programs geared toward reducing carbon use, and off-setting that, (which is burned,) is expected to raise diesel prices by $2.22/gallon by the year 2020. This change would put California diesel at $6.69/gallon, or $2.33/gallon more than surrounding states. Technology, to curb fuel use and emissions, is important to our society, but these changes have too high of a burden on California truckers and those out-of-state carriers serving California's shipping harbors.

While California faces price changes from policy, the Northeast United States is faced with changes to the other side of the coin, supply. Recently, a number of refineries have been closing or have been slated to close in the region. Refineries process the crude oil into various fuels and oil-based products. While other refineries may be able to support the increased demand, current pipeline capacity will not be able to support the increased need.

What does this mean? This means increased imports and expensive transportation of fuel to feed the Northeast's diesel needs. Some hope is in sight though. Recently, Transportation Topics reported on the purchase of two shuttered Pennsylvania refineries. One, purchased by Delta Air Lines will be used to supply jet fuel to some of Delta's large Northeast hubs. While jet fuel is created from the same part of crude oil as diesel, this purchase is expected to release some jet fuel burdens on other area refineries, allowing more diesel fuel to be produced.

As our country continues to push forward and seek new energy solutions, we must remember our current transportation infrastructure to ensure decisions are made with the best interest of our transportation needs considered.

This entry was posted on May 14th, 2012 by jhubbard and is filed under Recent News & Updates.