By John W. Schoen Senior Producer
msnbc.com

Though drivers who use gasoline have gotten a break at the pump in the last few weeks, the price of diesel fuel has hit record highs. That has a lot of readers asking: what gives? Meanwhile, last week’s column on investing in stocks prompted Robert in Pittsburgh to go ahead and open an online brokerage account. But he’s not sure exactly how to get started.

DIESEL DILEMMA
Why is the price of diesel so high? Compared to the price at the pump in N.E. Colorado, regular unleaded is $2.55 and diesel is $3.49. Why is there almost a dollar difference? Running trucks and heavy equipment is so costly we should park them. Freight causes the price of everything to increase. Doesn't it cost less to make diesel than unleaded?
          Candie L. Snyder, CO

I keep reading about market forces dictating the price of fuel, but I have difficulty making things add up. An example is the retail price of diesel fuel. According to the EIA, the average retail price for diesel fuel is about $3.15 per gallon. This is nearly $0.97 per gallon more than the same time last year. What I don't understand is the fact that prices are so much higher than last year when distillate inventories are within the average range and are actually 3.7 million barrels higher than the same time last year. All the while, demand for distillates is down from 3.5 percent to 4 percent relative to last year. What gives?
          Jason, Chapel Hill, NC

For many years, diesel has been cheaper than gasoline at the pump -- which is why so many readers are puzzled by the recent flip-flop. There's little difference in the cost of making the two fuels. But while the basic problem remains supply and demand, each of these fuels marches to a different market drummer. And there are a bunch of forces on each side of the supply-demand balance that have combined to make life miserable for diesel buyers.

Let’s start with those inventory numbers. The government tracks total stocks, but they don’t adjust for demand. On that basis (think in terms of “days supply”), diesel supplies are below five-year averages for this time of year.

Meanwhile, diesel demand is still going strong. Demand did drop a month ago, (possibly because of hurricane disruptions) but the latest numbers show that it’s close to where it was last year at this time. Despite higher prices, people seem to be finding a way to pay for diesel. The economy remains (relatively) strong, so people are still buying lots of goods shipped by trucks. (Diesel demand also goes up this time of year as farmers work their harvest equipment overtime to get their crops in.)

Demand for gasoline, on the other hand, has fallen -- as it always does this time of year when the summer driving season ends. It’s fallen even further this year; again, that may be because so driving routines have been upended by hurricanes. And gasoline supplies have been boosted by a wave of imports that began when Katrina hit six weeks ago, much of it from Europe. Because the European transportation fleet has a higher portion of diesel-powered cars and trucks, refiners there (as a general rule) tend to have greater demand for diesel and less demand for gasoline than their U.S. counterparts.

Then there’s the fear factor. We still have 20 percent of U.S. refining capacity off line from hurricane damage. Some will probably be offline through December. The problem there is that diesel and No. 2 heating oil are both brewed from roughly the same part of the oil barrel. Since demand for heating oil always goes up as winter sets in, refiners are supposed to be building stocks for peak winter demand. But judging by those demand-adjusted inventory numbers, they’re not building as fast as they should. And then there’s the weather wild card: It’s too soon for the markets to know reliably whether this is going to be a cold winter. If it is, the current price may seem low by February.

The same thing is also happening with natural gas. More than half of offshore Gulf production is still shut in from storm related damage so inventories are below where they were last year at this time. Again, the government's numbers show natural gas stocks tracking the five-year average, but demand has increased during that period, so the data gives a false indication that stocks are “adequate.”

It’s pretty simple. You open an account with one of the online brokers, just as you would with an offline broker. You’ll have to provide information about your investment knowledge and goals, your general net worth, and enough information to convince the boys down at Homeland Security that you’re not a terrorist. You’ll also be asked to sign a bunch of forms with a lot of lawyer language, which you should read and understand before you sign.

The contract is pretty standard from one broker to the next: much of it designed to protect the brokerage firm. You’ll more than likely be told, for example, that if there is a dispute over a trade, you can’t sue the firm: you have to agree to have such disputes resolved by an arbitration panel. If you’re about to graduate from college, you should be able to understand most of this verbiage. But if you’re not clear on what some of the language means, it wouldn’t hurt to ask around for a friend who knows a lawyer. Some people just click “I agree” without bothering to read what they’ve signed. Not a good idea.

You’ll have to put money in the account, which you’ll use to buy your first stocks. Depending on the service, you can place trades by calling the brokerage or by ordering directly online. Some of these online brokers cater to rapid-fire day traders, with sophisticated information and analytical tools. You should also find out how the trades are executed: some firms have their own trading desks, others get paid by other brokers to steer your trades their way.

You’ll also need to learn a little bit about different types of trades: many online brokerage sites have lots of information explaining what it all means. A “market order” for example, gives discretion to the broker to your buy or sell your shares at the “prevailing market price.” (This is the most common type of order.) If you prefer, you can specify exactly how much you want to pay for a stock – or the minimum you’ll take for it when you sell. (But there’s no guarantee the order will be filled.) Some orders are good only for the day they’re placed; others are “good until cancelled.”

And you’ll pay a commission on each trade. Some brokers offer different pricing for different customers: if you make lots of trades or keep a lot of money in the account, the fee is lower. Others offer a flat fee for all traders.

Which one is best? It depends a lot on how much you expect to trade. It’s important to shop around for low commissions, but like everything else, the lowest price may not be the best. Before you sign up, give a call to the customer service lines of several brokers you’re considering. At some firms, you may be assigned an individual broker who will handle your account. Ask them all of your questions, and see what they say. Especially if you’re just starting out, you‘ll need a brokerage that is responsive, knowledgeable and patient enough to make sure you understand exactly how it all works. No question is “too dumb.”

If they can’t or won’t give you the information you want, hang up and try another one. It’s your money we’re talking about here. 

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