Diesel Becomes a Cash Cow at the Retail Pump

By Doug Haugh

Diesel demand in the US is growing and is expected to rise from roughly 48 billion gallons in 2015 to over 67 billion gallons by 2040. This growth will offset what is expected to be a 25% decline in gasoline demand for the same period. So the question for fuel marketers is how to capture more of this growth while dealing with a rapidly changing gasoline market.

For many fuel retailers, the answer has been to add diesel pumps to their existing retail gas stations. For those fuel retailers now selling diesel, the margins have proven to be an unexpected bonanza. At one point in January, the average rack-to-retail margin was $0.90 a gallon. These breathtaking spreads have since come back to earth but are still ranging between $0.30 and $0.50 a gallon, depending on where you are in the US.

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I know those deeply involved in the diesel business will be quick to say, “that’s not how most fleets buy their diesel; they have deep discounts off of retail.” True. Most large fleets have cost plus, retail discount, or the lower of the two formulas that provides significant savings as compared with the cash retail price that DOE reports.

So while neighborhood auto-diesel sales are sporting margins twice that of gasoline, most of the volume is being sold a lot cheaper. Right? Well, one of the major truck stop chains offering these discount price programs is public: TravelCenters of America (TA). Reading the transcript of TA’s fourth quarter earnings call we find “gross margin per gallon was nearly $0.28 or $0.11 per gallon over the same measure in the fourth quarter of 2013.”

So what can fleets do to save money on diesel? Seems that if you are a customer that has to purchase your fuel at a retail fuel island, you simply must find a way to get access to the 10 cent-30 cent savings that the big fleets are saving. If you are a fleet that can possibly squeeze in a bulk tank on at least some of your properties or truck terminals, the payback for doing so is painfully obvious.
What can fuel marketers do to capture more of this growing diesel demand while offering customers better value?

For those with the technical and marketing experience, continuing to invest in commercial cardlocks seems wise, at least where reasonable real estate can be obtained. Easier to deploy and environmentally safe bulk diesel tanks connected to convenient back yard dispensing solutions are a win-win for both the fleet customer and fuel marketer.

Lastly, giving mobile fueling/wet-hosing another look may make more sense than ever. At these retail prices, even if the fleet operator has low labor costs and is close to a retail station with diesel, there is still a strong value proposition to be made.

I wonder what the threshold is for that rack pricing. I have current storage for about 150 gallons of diesel, split unevenly between my generator and my RV.

Do you use off road diesel for the generator?

Not anymore, the rack terminal that I was buying dyed fuel at figured out that they were missing out on a profit line, and the spread between on-road and dyed fuel went from 45 cents per gallon to less than 10.

Not worth the extra drive and the hassles.

How about just buying heating oil for the generator? You'll get it delivered too.

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2006 Liberty CRD.

Nice notion and it might work in some places but I manage paying my Mom's bills and her house uses #2 fuel oil for heat, has since 1950, which is delivered. Looking back to early last year, when I first started recording how many gallons (units ranging from a bit over 100 gallons to ca. 175 gallons) in addition to cost, I can say that the delivered cost is effectively within pennies of the on road diesel pump price at the lower priced stations in this area. I also note that the delivered price closely mirrors the drop in pump prices between Jan 2014 and Jan-March 2015. Bottom line is the cost of delivery offsets off-road/fuel oil lower no tax cost.

I know you can get off-road diesel at some local pump locations for a bit less but it's been ages since I looked. Last time I bought off-road diesel was back ca. 1995 when I got caught on a Sunday driving my 1993 D-250 Cummins way too far from the nearest on-road diesel station and had to get 5 gallons of marine diesel for my "tractor". Might have made the station or might have come up 5-10 miles short...

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Sold to LOST member my 05 Ltd, GDE Stg II turbo + TCM tune, SunCoast TC w. Transgo kit, Steiger window regulators, Samcos, Fumoto valve, 2nd gen filter head with Lub. Spec. bleeder, Hayden clutch & 11 blade fan, inverted spare, P-1 battery, BF Goodrich Long Trail TAs, Etecno1 glow plugs, timing belt at 50K miles/8 yrs

Around here, where many homes and businesses use heating oil, it is usually much less expensive than diesel. It often gets close during the peak of the heating season, but is much lower the rest of the year. I use to fill my tanks in the summer, and could hold enough to make it till spring when the prices drop again.

Right now the cheapest oil dealers are getting $2.29, while the cheapest diesel stations are $2.93. You may have to buy at least 400 gallons to get that price, but even smaller quantities will only be $.10 more. It may come down even more in the summer.

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2006 Liberty CRD.

Interesting how the market varies. Down here fuel oil heat was common back in the 1950-60s but way less common now so it's only older homes that have not been converted that still use it which would seem to keep prices up as demand is low. Local pump price, without looking for cheapest, is $2.60 and Mom's 2 deliveries totaling ca. 250 gallons+ worked out to $2.53.

Pump price has been most entertaining. It seems to have settled down now but for a while I was seeing a $0.50+ spread in pump prices at adjacent stations. I assume due to what they paid wholesale for fuel vs how much they sold hence those that sold lots of fuel got lower prices sooner. Of course those that kept prices up could not get rid of what they paid high $ for. Vicious cycle in action.

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Sold to LOST member my 05 Ltd, GDE Stg II turbo + TCM tune, SunCoast TC w. Transgo kit, Steiger window regulators, Samcos, Fumoto valve, 2nd gen filter head with Lub. Spec. bleeder, Hayden clutch & 11 blade fan, inverted spare, P-1 battery, BF Goodrich Long Trail TAs, Etecno1 glow plugs, timing belt at 50K miles/8 yrs