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EIA: Refiners Face Changing Gasoline, Middle Distillate Outlook
October 21, 2010

U.S. refiners face a changing outlook for gasoline and middle distillate fuels (diesel, heating oil, jet fuel and kerosene) demand, with the need for petroleum-based gasoline declining and middle distillate consumption growing. Below, we examine the forces that are shifting consumption patterns, and consider how refiners can respond.

Both gasoline and middle distillate fuel consumption fell during the recent economic downturn, but gasoline fell less. The bulk of U.S. middle distillate consumption comes from heavy duty trucking and air travel, which are both affected strongly by economic activity. Gasoline consumption, on the other hand, is more sensitive to changes in personal income, which fared better than economic activity during the downturn, and prices. Once the economy began to recover, middle distillate fuels exhibited stronger growth than gasoline. Over the January through July 2010 period, distillate fuel consumption was 2 percent above its level over the comparable year-ago period while gasoline consumption remained flat.

Longer-term factors also suggest a growing need to produce more middle distillate fuels relative to gasoline. The consumption of petroleum-based gasoline is likely to decline for at least the next 5 years due to increasing light-duty vehicle efficiency standards and the growing use of renewable motor fuels and blending components as mandated by the Energy Independence and Security Act of 2007. From 2010 through 2015, EIA's 2010 Annual Energy Outlook shows U.S. gasoline consumption (which includes volumes of ethanol blended into the fuel) to be relatively flat, which implies a reduced need for petroleum-based gasoline once the increasing volumes of ethanol that suppliers will blend into gasoline are taken into account.

In contrast, EIA's Annual Energy Outlook 2010 projects that U.S. middle distillate consumption will continue to grow in the longer term, averaging 1.6 percent per year growth from 2010 to 2015. The forecast has heavy-duty vehicles experiencing less improvement in vehicle efficiency than anticipated in the light duty fleet, and little non-petroleum fuel penetrating distillate fuel markets.

In addition, U.S. refiners have recently had a robust export market for middle distillate fuels. In 2008, the United States switched from being a net importer to a net exporter of middle distillates, as surging world demand produced strong price incentives for U.S. refiners to export. Most U.S. exports went to markets in Europe and Latin America. U.S. refinery middle distillate yields during summer 2008 jumped 3.4 percentage points over summer 2007 from changes to refinery operations alone, allowing refiners to produce more distillate for export while avoiding surplus production of gasoline. Even though distillate margins have receded from 2008 levels, export opportunities remain attractive, and distillate export volumes have stayed high.

In the United States, the incentive for refiners to supply less gasoline and more distillate fuel may persist for years to come, while U.S. total petroleum demand remains relatively flat. This raises the question of how far U.S. refiners can increase their middle distillate/gasoline production ratios without making significant investments.

A review of actual refinery production, consultation with refiners and process experts, and some refinery modeling, indicates that U.S. refineries in aggregate likely have the ability to increase significantly annual average distillate yields on crude and unfinished oil inputs. Yields could rise 3 to 5 percentage points over typical historical yields of about 35 percent with little or no investments for distillation unit improvements. When planned hydrocracking increases are taken into consideration, the increase in distillate yields could rise to the 4-to-8 percentage point range. (Planned hydrocracking units are targeted for increased distillate fuel production.)

To put these yield changes in perspective, a single percentage point increase in middle distillate yield produces about 150,000 barrels per day more middle distillate volume (based on typical recent levels of 15 million barrels per day of crude oil and unfinished oil inputs). Thus, an increase of 5 percentage points produces an additional 750,000 barrels per day of middle distillate fuel, which is about 15 percent of U.S. middle distillate consumption.

Even if the economy recovers more rapidly than currently forecast and petroleum product demand picks up faster than expected, distillate would still be expected to grow more rapidly than gasoline. Surplus refinery capacity in the United States and Europe appears sufficient to absorb higher consumption growth rates than currently forecast by EIA. Given the outlook for rising distillate consumption, potential yield increases will enable U.S. refiners to meet changing U.S. demand patterns and increased distillate export requirements for at least the next 5 years, if not longer, without significant investments beyond those currently planned. In particular, it appears that U.S. refiners' export volumes will be limited by market conditions between now and 2015, rather than by their capacity to produce more distillate.

Source: U.S. Energy Information Administration

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