A gentle reminder

It was not really all that long ago when the major concern at this site revolved around whether the world would weather the tight relationship between supply of oil and the anticipated demand that would exist at the end of this year.

At the time the beginnings of demand destruction were beginning to appear with the reduction in subsidies and other government programs in some of the poorer nations around the world.   Ianqui has just reminded us of the problems that India is going to increasingly have to face.  The impact of the hurricanes Katrina and Rita brought the debate closer to home.  Current EIA predictions are that it will take until the end of this year to bring back the lost production that we have seen in the Gulf.  And yet, as I was quizzed again this morning, gas prices continue to remain lower than they should be. The answer, in part, lies at the EIA gasoline page

A year ago we imported 720,000 bd of gasoline, now we are importing over 1.5 mbd.  The reason, of course is the continued outage of refineries.  But given that the world is in a bit of a hurt on supplies, one must presume that this is still coming from loans from reserves as agreed by the IEA.  But that has to be coming to an end within the next few weeks.  If, we then have to go into a bidders war to gain gasoline at others expense, then it could start to get messier, as more nations may face problems as the price goes up, and induces more demand destruction as the US market demand prevails.

The other thing that is bothering, however, is that everyone seems to be assuming that if we can only get through the next month or so, that things will return to an even keel.  But they weren't on an even keel before, and if production from the Gulf is going to be perpetually (or at least for say the next five years) inhibited by seasonal shutdowns and regular rig losses, then existing models of production may have to be modified.  After all, unlike many land sites, we cannot bring in a donkey engine to apply stripper well status in the Gulf, and a lot of the wells that were close to that level, but producing through a now defunct platform, will not be re-opened since the return in cash will not justify the investment in building or rebuilding a platform to go out there and get that oil. Further there may be a bit of a rethink on the design of the deep water platforms that got damaged this year.

And remember that the MMS is still reporting that close to 1 mbd of oil is shut-in, while, now that other disasters have moved the hurricanes and their effects off the front page, demand for gas is beginning to creep up again.  I get the feeling of one shoe having fallen, while, as yet, the second hangs, poised in the air somewhere over our heads.

UPDATE: I meant to add this indication that my thinking is not unique, but had lost the ref. Matt Simmons is now predicting that oil might get as high as $190 this winter. I am not sure I would go that high, but I believe an increase is inevitable.

in a related area, the wall street journal, in a front page article on october 17, reports the following about natural gas supply:

  " the u.s. normally imports about 3% of it's gas supply on tankers. but in the past few months, several large new plants in egypt, qatar, and austrailia that liquify natural gas have experienced problems. this has cut supplies and dried up the spot market. LNG imports to the u.s. tumbled 27% in august verses a year earlier, according to the dept. of energy. "we're on our own," says craig pirrong, a university of houston energy expert.."

has anyone out there seen this info before?..it was a surprise to me. in view of reduced production in the gulf, will this lost import capability place us in worse shape than we think??

Here in central Illinois, it appears if the IEA is not loaning much in the way of diesel.  The price as of this morning at the station I pass on my way to work was $3.649.  However, the average price reported on the DOE website is $3.144.

While gasoline stocks seem to be leveling off, the charts at This Week in Petroleum show distillate (diesel) stocks continuing to drop.  Seems as if we are working hard to keep the average consumer placated with stable gasoline at the expense of other petroleum products.  The curves for distillates (diesel) show a plunge in US production this fall (25% in 2005 versus 8% in 2004) and US stocks, but with a 10% drop in distillate imports compared to this time last year which contrasts with the nearly 100% increase in US imports of gasoline.

What is going to be the impact of this?  If US stocks, imports, and production of distillates continue to drop, will it be a cold winter for heating oil?  How about tractor-trailer freight costs?  As I recall, the switch to low-sulfur diesel is a year away.


Diesel is definitely the soft spot in our fuel dependency. Robert Bryce had an article about it on Salon.com last week (10/11/05) in which he discussed the reasons for diesel being in worse shape than gasoline.

The Europeans can lend us gasoline much easier than diesel because they have more slack in that market. Also, the new diesel regulations go into effect next June and require refiners to reduce the sulfur content from 500 ppm to 15 ppm. The pipeline companies, however, are going to limit the diesel they ship to 6 or 8 ppm because every time it moves from one tank or pipeline to another, it gains sulfur.

Somehow I doubt that the sulphur regs are going to take effect if diesel is still over $3/gallon. "We can't afford to be good for the environment" they will scream. And the self-reinforcing cycles of oil dependence and climate change continue....
That is mostly a political question.  I've been thinking that if I was Damlier-Chysler I'd be very concerned about this.  The only fuel efficent card in their deck are the efficent European diesels.  So they, at least, should be one member of the oligarchy arguing for low sulphur.  The trucking industry, on the otherhand, is in a lot of pain.  Pain today is a very powerful political motivator.

I don't know if this is a technical question; if the refineries have already made the costly production commitments they may prefer for the regs to go into effect.

You are probably right here - I have been seeing the spread between diesel and RUL growing in recent days.  Right now diesel is $3.19 - RUL is $2.79.

I hear rumors that the introduction of ULSD will be delayed, but nobody can find out anything concrete.  I have a friend who is a reporter for a trade rag for truckers, and she was getting quite frustrated with the EPA because she couldn't get a straight answer about this from them.

The problem is the EPA has new regulations for heavy truck emissions coming online for the 2007 model year (which means May 2006). The Particulate filters and catalysts for the 07 engines require ULSD or else they will be fouled. At this point there is not any certainty to what happens to the warranty for one of these engines ($15k+) if non ULSD is used in it.

SO to bail on the ULSD requirement would also require bailing on truck emissions (after 5 years of R&D and the start of a changeover in production). Even if the new requirements go forward mixed availability of ULSD would be another reason for fleets to hold off on the new technology (already there is a massive pre buy going on with fleets loading up on new trucks this year so they do not have to buy new trucks until the tech is proven for a year or two)

On a side note to all this, If the price of the Trucking Fuel stays high all our prices will go up.  Trucking companies Last year ate some of the Costs that Diesel imposed on them.  Well the prices went back up and have stayed up, so they have been passing their costs along to their customers.  

Retail, and Wholesale almost always get their "stuff" from a trucker.  You and I might be able to smile as we fill up the family Automobile as the prices go down a nickel or dime, but we see the costs when we go to buy the food we eat and the clothes we wear.  I have seen prices go up a penny here or there and up for businesses that I have contact with, so that cost of that gallon of diesel is not just going poof.  We are still paying for it.

If the price of diesel stays up, up will go inflation, even if they try to hide the numbers.

I still don't understand why higher imports should lower the gasoline price because prices are negotiated within an international marketplace (NYMEX) and it shouldn't matter where the gasoline is coming from.
it is the difference in the price of gasoline in Europe compared to the US that has opened up the arbitrage opportunity that gives incentive to importers.  A commodity is a commodity but the price is for the product delivered at a specific place and time, for example the NYMEX gasoline price is for wholesale gaoline delivered in New York Harbor. it does NOT mean the same price is being paid for product delivered in Europe or anywhere else.

the import surge in gasoline is similar to what happened in the 73 embargo with oil. when the ambargo was announced so many ships at sea diverted to US and Dutch ports that there was a brief period when oil prices actually went down in the target countries.  Entirely a transient effect.

This is a loan that has to be replaced.
the drawdown/sale protocols and the ability to "loan" oil from SPR's are essentially different programs.  The oil that is sold into the market need not be be replaced, but eventually will be as the SPR continues to be filled.  Ironically, the US SPR was just approaching its legal capacity of 700mb right as this happened.
Anyone know if europe plans to cut back on its exports anytime soon? They have their own problems with french strikes taking 600,000 barrels of refined products for over 20 days. Total refined product loss is tremendous over the last 2 months.
the statement that gasoline imports can't continue is probably not right. The first wave of imports would not have been from IEA reserves anyway.  Europe had several hundred kbd of surplus gas even before hurricanes came, a rate that was probably increasing.  Post-hurricanes price differential between markets will only give incentive to increase that.  But given that US gas stocks are going up despite so many refineries being down, gas imports will likely go down as well, especially as refineries come back online. In fact Pascagoula just came up the other day didn't it.  If things stayed as they are, US would just displace european gas exports to other parts of the world as well since I think US is more willing to pay for gas than most African customers. The next interesting phase here will be when refineries have to switch back toward distillates which could buoy gasoline imports.