U.S. Refineries Restricting Diesel Supplies
Lower Gasoline Margins Hindering Output
By Frederick Kiel, Staff Reporter
This story appears in the June 2 print edition of Transport Topics.
U.S. diesel prices roared past gasoline in September, reversing the historic pattern because rising demand for diesel, coupled with the weak dollar, has led refiners to export the fuel even as their use of refinery capacity is at a four-year low, according to market experts.
There was no indication last week that the growing diesel-gas price gap would reverse any time soon, as the Energy Department reported the average price of diesel in the United States was $4.723 on May 26, a price gap of 78.6 cents a gallon over gasoline.
“We don’t see it going away any time soon,” Bob Costello, chief economist of American Trucking Associations, told Transport Topics. “There’s a lot of excess gasoline in the world, but there’s not an excess of diesel,” he said.
Costello said a major factor in the tight diesel supply is that the amount of diesel and the amount of gasoline that can be made from each barrel of crude oil is basically fixed. Ramping up diesel production also would raise gasoline output, which refiners don’t want to do because there’s not enough profit in gasoline at this time.
DOE said each 42-gallon barrel of crude oil yields about 7.8 gallons of diesel and 19.4 gallons of gasoline, as well as other products. Refineries cannot easily adjust the proportion of diesel and gasoline extracted from each barrel of petroleum.
“It doesn’t make sense for refineries to increase their production to get more diesel, if they can only produce less than eight gallons for every barrel,” ATA’s Costello said.
“The chemical properties of crude limit the amount of middle distillates you can get out of a barrel,” Douglas MacIntyre, an analyst for the Department of Energy’s Energy Information Administration, explained. “You can tweak that to some degree, but without major investments, a refinery is limited to how much diesel it can put out.”
Therefore, despite the low level of distillate stocks, which are used for diesel, refiners won’t make more because gasoline inventories are high.
Although U.S. prices for gasoline and diesel are at record levels, American refineries have been running at just 85.7% of capacity in recent months, their lowest springtime level in four years, MacIntyre said.
“A refinery has to look at what profit can be made by refining crude at their record high prices,” he said. “When you add in the cost of refining, consider the high gasoline stocks and falling demand, the profit level is not very much.”
The EIA expects U.S. gasoline demand to fall 0.6% this year from 2007, the first annual drop since 1991.
U.S. gasoline inventories totaled 206.2 million barrels, as of May 29, compared with 198 million a year earlier, but distillate inventories have been less than 110 million barrels weekly since March 28, the first time since 2005 their inventories fell below that mark. Total distillate stocks on May 29 were 109.4 million, compared with 120.4 million on May 25, 2007.
Analysts said the present global tightness in diesel supply has been building up for several years.
“We have been noting for the past three or four years that growth rates in the use of distillates have been rising faster than gasoline in both the United States and globally,” Joann Shore, another EIA analyst, told TT.
BP, the global energy company, said in its 2007 review of world energy that daily global demand for “middle distillates” grew to 29.8 million barrels in 2006 from 27.1 million in 2002.
Demand for distillates in China grew to 2.53 million barrels a day in 2006 from 1.8 million in 2002. Europe also has made a rapid transition to diesel-powered cars, which now constitute more than 50% of all new autos.
Over the same period, U.S. demand grew to 6.2 million barrels daily from 5.7 million barrels; to 7.7 million barrels daily from 6.9 million barrels in Europe; and to 1.9 million barrels daily from 1.7 million in South America, BP said.
“The prices of distillates had not caught up with its demand until late last year,” Shore said.
Adding to the tightness of diesel, U.S. refineries have been exporting the fuel, because the weak dollar makes exports attractive.
“Refineries, especially on the East Coast, have found that they could make more profit exporting diesel in recent months to Europe, Asia and South America,” said Laurie Falter, another EIA analyst.
Meanwhile, the problem is not in production.
“In terms of refining, the United States has produced record amounts of gasoline and diesel over the past year,” John Felmy, chief economist of the American Petroleum Institute, told TT: 8.9 million barrels of gasoline a day, up 1% from April 2007, while distillates were produced at 4.2 million barrels daily, or 1.7% above year-earlier levels.
This story appears in the June 2 print edition of Transport Topics.
U.S. diesel prices roared past gasoline in September, reversing the historic pattern because rising demand for diesel, coupled with the weak dollar, has led refiners to export the fuel even as their use of refinery capacity is at a four-year low, according to market experts.
There was no indication last week that the growing diesel-gas price gap would reverse any time soon, as the Energy Department reported the average price of diesel in the United States was $4.723 on May 26, a price gap of 78.6 cents a gallon over gasoline.
“We don’t see it going away any time soon,” Bob Costello, chief economist of American Trucking Associations, told Transport Topics. “There’s a lot of excess gasoline in the world, but there’s not an excess of diesel,” he said.
Costello said a major factor in the tight diesel supply is that the amount of diesel and the amount of gasoline that can be made from each barrel of crude oil is basically fixed. Ramping up diesel production also would raise gasoline output, which refiners don’t want to do because there’s not enough profit in gasoline at this time.
DOE said each 42-gallon barrel of crude oil yields about 7.8 gallons of diesel and 19.4 gallons of gasoline, as well as other products. Refineries cannot easily adjust the proportion of diesel and gasoline extracted from each barrel of petroleum.
“It doesn’t make sense for refineries to increase their production to get more diesel, if they can only produce less than eight gallons for every barrel,” ATA’s Costello said.
“The chemical properties of crude limit the amount of middle distillates you can get out of a barrel,” Douglas MacIntyre, an analyst for the Department of Energy’s Energy Information Administration, explained. “You can tweak that to some degree, but without major investments, a refinery is limited to how much diesel it can put out.”
Therefore, despite the low level of distillate stocks, which are used for diesel, refiners won’t make more because gasoline inventories are high.
Although U.S. prices for gasoline and diesel are at record levels, American refineries have been running at just 85.7% of capacity in recent months, their lowest springtime level in four years, MacIntyre said.
“A refinery has to look at what profit can be made by refining crude at their record high prices,” he said. “When you add in the cost of refining, consider the high gasoline stocks and falling demand, the profit level is not very much.”
The EIA expects U.S. gasoline demand to fall 0.6% this year from 2007, the first annual drop since 1991.
U.S. gasoline inventories totaled 206.2 million barrels, as of May 29, compared with 198 million a year earlier, but distillate inventories have been less than 110 million barrels weekly since March 28, the first time since 2005 their inventories fell below that mark. Total distillate stocks on May 29 were 109.4 million, compared with 120.4 million on May 25, 2007.
Analysts said the present global tightness in diesel supply has been building up for several years.
“We have been noting for the past three or four years that growth rates in the use of distillates have been rising faster than gasoline in both the United States and globally,” Joann Shore, another EIA analyst, told TT.
BP, the global energy company, said in its 2007 review of world energy that daily global demand for “middle distillates” grew to 29.8 million barrels in 2006 from 27.1 million in 2002.
Demand for distillates in China grew to 2.53 million barrels a day in 2006 from 1.8 million in 2002. Europe also has made a rapid transition to diesel-powered cars, which now constitute more than 50% of all new autos.
Over the same period, U.S. demand grew to 6.2 million barrels daily from 5.7 million barrels; to 7.7 million barrels daily from 6.9 million barrels in Europe; and to 1.9 million barrels daily from 1.7 million in South America, BP said.
“The prices of distillates had not caught up with its demand until late last year,” Shore said.
Adding to the tightness of diesel, U.S. refineries have been exporting the fuel, because the weak dollar makes exports attractive.
“Refineries, especially on the East Coast, have found that they could make more profit exporting diesel in recent months to Europe, Asia and South America,” said Laurie Falter, another EIA analyst.
Meanwhile, the problem is not in production.
“In terms of refining, the United States has produced record amounts of gasoline and diesel over the past year,” John Felmy, chief economist of the American Petroleum Institute, told TT: 8.9 million barrels of gasoline a day, up 1% from April 2007, while distillates were produced at 4.2 million barrels daily, or 1.7% above year-earlier levels.
