Diesel Fuel – The Unsung Hero

The national and international impact of diesel fuel, both in the U.S. and abroad, is substantial and growing. Traditionally, gasoline has been the shorthand image for American petroleum consumption since it accounts for nearly half of the total consumption, and because it is the most familiar product to the average consumer. However, diesel fuel, at about 20 percent of U.S. petroleum consumption (including its close cousin, home heating oil), is the energy workhorse for major sectors of the U.S. economy. For the rest of the world, that share jumps to 30 percent, and with the substantial long-term growth prospects of the developing economies, trends in petroleum markets are increasingly driven by the developing nations. The result has significance for U.S. and world trade patterns, since the U.S. is strongly linked with world markets, and roughly 85 percent of world distillate fuel oil consumption takes place outside the U.S.   

These developments are taking place against a broader backdrop of the supply and demand of petroleum liquids. More generally, the U.S. has greatly benefited from sharply lower oil imports over the past half-decade, due, in roughly equal parts, to reduced demand and to increased domestic production. While the revolution in oil and natural gas liquid production technology has served to replace substantial volumes of imported crude oil with domestically sourced liquids, the product side, in a way, tells an even more dramatic story. Beginning sporadically in late 2010 and strengthening since then, the U.S. has had the remarkable experience of becoming self-sufficient in products on a net basis for the first time in more than 60 years.

This has been especially dramatic in the market for diesel fuel. In 2012 for example, the industry was able to fully supply the U.S. market of nearly 4 million barrels per day and have enough left over to boost U.S. exports to a level of 1 million barrels per day, in response to a burgeoning diesel and related market demand in other parts of the world. In addition to the role of diesel in fueling key sectors of the American economy, this increase in international trade is adding to U.S. export revenues while supporting the jobs of U.S. refinery workers. 

The current product trade picture contrasts with the situation as recently as 2005, when the U.S. had been a net product importer of 2.5 million barrels per day (3.6 million barrels per day of product imports, 1.1 million barrels per day of product exports) – nearly one out of every eight barrels consumed. While diesel fuel was only a small part of the overall import figure in 2005, the diesel market then was still in need of about 200,000 barrels per day of net imports.

Growing Player in U.S. Market

Diesel fuel and home heating oil have traditionally been grouped together as distillate fuel oil because they have many similarities and come from the same part of the barrel. In the U.S., diesel fuel accounts for nearly 90 percent of all distillate fuel oil consumption. More than two-thirds of U.S. diesel fuel is for on-highway trucks, which transport raw materials, foodstuffs, and manufactured goods to industries, and from industries to retailers and consumers. Roughly 90 percent of the energy used by medium to heavy trucks for freight transport comes from diesel fuel, as does nearly all the energy that propels rail freight across the country, and 85 percent of that for buses.  It provides around 85 percent of the energy used by the construction industry and two-thirds of the energy used in farming, while also fueling ships, peaking units at electric utilities, and industrial users.

 

Thus, it is evident that economic growth and the diesel fuel market are tightly entwined, and will continue to be for the foreseeable future, as seen in diverging trends portrayed in the Energy Information Administration’s Annual Energy Outlook 2013 (early release, reference case). EIA projects U.S. gasoline consumption to decline by 23 percent by 2040 because of stricter fuel efficiency standards and increasing use of hybrid vehicles.  However, distillate fuel oil use is projected to rise by 34 percent as economic growth spurs demand from heavy-duty vehicles. Distillate’s share of total U.S. petroleum demand would rise from 22 percent to nearly 30 percent over that period, even with some displacement from natural gas powered vehicles, according to EIA’s reference case. Based on earlier EIA outlooks, while many transportation and industrial sectors are projected to see rising energy demand, energy needs in the agricultural sector, which is a smaller but reliable market for diesel fuel, are projected to be relatively flat.

Global Demand

Worldwide trends may turn out to be even more defining. According to Exxon’s Outlook for Energy: A View to 2040, global energy demand for transportation will rise by nearly 45 percent by 2040. Even before then, by 2030, it sees the world using more fuel for trucks and other heavy duty vehicles than for all personal vehicles combined. Its projections put global transport still relying on petroleum liquid fuels for 90 percent of its needs in 2040, down only slightly from the current 95 percent. OECD demand for middle distillates (which also includes jet fuel) fell 6 percent.

 

The data show widely diverging trends for the developed vs. the developing world. According to the BP Statistical Review of World Energy, OECD demand for middle distillates fell 6 percent, or by more than 1 million barrels per day, between 2005 and 2011. Meanwhile, non-OECD demand for this product category surged nearly 27 percent, or by more than 3 million barrels per day to 15.6 million barrels per day, within reach of surpassing the OECD’s 16.6 million barrels per day within the next few years.  Within the OECD, Europe’s diesel push has favored diesel over gasoline for personal vehicles. The net result in a stagnant market has been a decline for European gasoline demand while diesel and middle distillate demand has remained roughly flat. In many European countries, gasoline is taxed roughly $0.50 – $1.00/gallon more than diesel, and roughly two-thirds of private vehicles are now diesel. With strict specifications for on-highway diesel and ongoing refinery closings, exports from U.S. refiners have seen growing importance.  Meanwhile, U.S. distillate fuel oil demand (mostly diesel) has declined by nearly half a million barrels per day since its 2008 peak, though that trend is expected by many to reverse in the years ahead with the long-term growth of the U.S. economy.

Downstream Impact

The U.S. has been a product exporter for as far back as the data goes, due to the global nature of the petroleum product market. Clearly, with a flat to declining domestic market and strong growth in international demand, export opportunities have arisen for U.S. refiners to increase sales to some of the high demand areas of the world and to other areas that need additional supplies. U.S. refinery yields on distillate fuel oil are on track to average 29 percent for 2012, up significantly from 25 percent in 2005. The U.S. is now exporting about one million barrels per day of diesel and other forms of distillate fuel oil, which is an all-time high. About 60 percent of these exports go to Latin America, tied to growth of developing economies, and most of the rest to Europe, where policy on gasoline vs. diesel fuel mix has influenced the market. International data shows that distillate demand is also growing in other developing regions, particularly Asia. Strong competition for diesel fuel from Asian economies is edging some world consumers out of other markets and increasing the importance of the international availability of U.S. supplies.

 

While diesel’s domestic self-sufficiency and export opportunities have been prominent stories, the U.S. has seen improving trade balances on other products, as well. For example, net imports of gasoline (including gasoline blending components) has seen a net decline, from more than 1 million barrels per day as recently as 2007 to about 200,000 barrels per day for 2012. In fact, for October 2012, the U.S. was a small net exporter of gasoline for the first time in half a century. Whether or not that is repeated soon in following months remains to be seen, but the broader trend has been clear.  Other products have also seen declining net imports and/or growth in net exports, including jet fuel, as U.S. refiners are able to meet U.S. demand with product to spare.

Thus, in late 2010, as these trends continued, the U.S. became a net product exporter for the first time since the 1940s. Since then, that status has strengthened. The United States’ shift from a net importer of 2.5 million barrels per day in 2005 to a net exporter of 1 million barrels per day in 2012 combined with the effects of increased U.S. crude oil and natural gas liquids production and reduced domestic demand, have taken about 5 million barrels per day off of the world trade balance. The significance of this decline contrasts with the world petroleum growth trend outside the U.S. of more than 10 million barrels per day, according to International Energy Agency data. 

Economic Boon

Since 2005, the value of U.S. petroleum export revenues has risen by nearly $100 billion, from $23 billion in 2005 to about $122 billion in 2012, which is the result of sharp rises for both prices and product export volumes. That increased export revenue helped to mitigate the rise in import costs for petroleum, which rose from $252 billion in 2005 to about $420 billion in 2012 because of higher per barrel prices, despite lower volumes.

While the rise in product exports was one of the causes of higher export revenues, it was the turnaround in American petroleum production that made the vital contribution to the shift in petroleum trade. Specifically, U.S. production of crude oil and natural gas liquids in 2012 was approximately 1.8 million barrels per day higher than in 2005. At current prices, that increment is worth approximately $60 billion in reduced petroleum imports.

Even with the decline in U.S. demand over the past several years, growing export markets have helped the U.S. downstream industry continue to support jobs. Employment for those producing refined products (industries identified in government data as employed in refining as well as the manufacture of lubes and greases) has held relatively steady at about 110,000 since 2005, even as U.S. product demand fell more than 10 percent over this period. This is employment sustained by the workings of international oil markets and by enterprising refiners responding to world market trends.

Given its intrinsic importance, both in the developed and developing world, for global transportation and mechanization in so many key industries (trucking and transportation, construction, and farming), diesel provides us with a unique portal into the broader petroleum landscape.  So often, we isolate or oversimplify genres (like “the oil market”) without fully understanding the global, sectoral and individual benefits of its specific products.  In their efforts to provide the essential feedstock for energy products, including diesel fuel, U.S. independents are providing a linchpin to the economic recovery and trade growth of America, as well as to the development and modernization of nations around the world.

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