NLIS 3
August 3, 2004
(Government Services)

 

The following is being distributed at the request of the Petroleum Pricing Office:

Petroleum Pricing Office interrupts regular schedule to adjust diesel fuel prices

Increasing world market prices for petroleum products refined from crude oil have prompted the need for an early adjustment by the Board of Commissioners of the Public Utilities Petroleum Pricing Office (PPO) to the maximum allowable price of regulated diesel fuel in Newfoundland and Labrador.

The PPO regularly sets maximum prices for all fuels it regulates on the 15th of every month. Since July 15, significant price increases in global markets for fuel have created a situation requiring intervention to address the PPO objective of fair pricing for all stakeholders in the Newfoundland and Labrador fuel market.

Effective 12:01 a.m., August 3, the PPO will use its interruption formula (IF) to adjust upward its benchmark for diesel by 2.5 cents per litre (cpl). In line with PPO objectives, this change will allow local retailers and wholesalers to recover the additional costs associated with supplying the fuel in Newfoundland and Labrador given the current market situation.

Since changes in world prices for the other PPO regulated products have not yet created conditions where interruption formula criteria have been met, no adjustments will be made for home heat, gasoline or residential propane prices at this time.

While the PPO uses the prices of refined petroleum products on the New York Mercantile Exchange (NYMEX) in its process of setting maximum fuel prices, the price of crude oil factors heavily in those figures. Given that these products are derived from what is currently a more expensive input, additional costs will be recovered in refined fuel commodity markets.

David Toms, PPO director (acting), said both supply and demand concerns are simultaneously the driving forces of current market conditions.

"Demand is up at the same time that there are concerns about continuation of the flow of fuel from key supply sources," he explained. "Whether or not supplies will actually be interrupted, there is a significant element of perceived risk that, with little spare capacity to compensate for any particular source disruption, demand for fuels might exceed supplies at current price levels. As long as there is heightened vulnerability, market pricing will remain volatile."

The demand for fuel has increased in developing countries, such as China and India, as well as in the U.S.A. (the world�s largest oil consumer), because of their growing economies.

Questions continue to persist about whether or not refiners will be able to meet production requirements with existing capacity, while attempting to rebuild stocks for distillate fuels (home heating and diesel) at the same time. According to Bloomberg News, refiners shifted more of its production capacity toward gasoline and away from the distillates in light of this increased demand.

And though the demand for home heating fuel isn�t high at this time of year, distillate supplies (of which diesel is a product) are slowly rebuilding during a period when the price of crude oil has a large role to play in its market performance.

But supply concerns are also pushing fuel prices upward despite a commitment by the Organization for Petroleum Exporting Countries (OPEC) to support lower prices through increasing output production quotas.

According to some analysts, a dispute between the Russian government and Yukos (a major oil company in Russia) may result in halting Yukos oil production. The potential for a disruption of this substantial fuel supply is having an influence on world prices. As well, others suggest that developments in Venezuelan politics may impact on the continued supply of fuel in upcoming months.

However, the PPO does not generally make public predictions about what will happen in the marketplace, noted Mr. Toms. "The further into the future you are from the current market conditions we are experiencing, the less reliable any prediction would be."

BACKGROUNDER

The PPO interruption formula, which was adopted in March 2003, was designed to address periods of extreme price fluctuations in the marketplace, either of an increasing or decreasing nature.

In the case of gasoline and distillate fuels, an interruption occurs when there is an average increase or decrease of 3.5 cents per litre (cpl) over a five trading-day period, provided the adjustment doesn�t interfere with the PPO setting regular prices on the 15th of the month. A minimum of five trading days is deemed necessary for an adjustment of the benchmark based on average prices to ensure a fair and better representation of current market conditions and costs.

For propane, an interruption in price occurs when there is an average increase or decrease of 5.0 (cpl) over a week.

1.Automotive Fuels - Maximum Retail Pump Prices - Effective August 3, 2004

Media contact: Michelle Hicks, Communications. Tel: (709) 489-8837 or 1-866-489-8800.

2004 08 03                                     11:50 a.m.


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