The Oil Drum: Australia/New Zealand

Shortly after Hurricane Ike hit, I wrote an article called Implications of a Ten-Day Refinery Outage. It is a few days later, and we know a little more. The purpose of this article is to give an update on the situation.

Based on what I am seeing now, we are likely to see significant gasoline outages in the next few weeks. These may not be as long-lasting as those with Katrina, but they may temporarily be more severe, at least in some parts of the country. Diesel may or may not be a problem. We are an exporter of diesel, so can theoretically reduce exports if need be. Also distillate (used for diesel) supplies are currently at a more adequate level than are gasoline supplies. Jet fuel stocks seem to be at a relatively adequate level, so shortages may not be a problem.

As one can see from Figure 1, EIA weekly gasoline stocks are diving, on a path to 180 million barrels of gasoline or less, in the next week. Weekly gasoline supplies when Katrina hit in 2005 declined, but not nearly to the extent we are seeing today.

Where is our gasoline and diesel supply headed? Even before Ike hit, quite a few areas of the US were starting to see gasoline shortages. The impact of Ike can only make shortages worse. Most likely, it will take refineries at least a week or two to get production back to normal levels after a storm of this type, considering the impacts of electrical outages and flooding. In this article, I will examine some of the issues that seem to be involved. Based on my analysis, fuel supply shortages are likely to last well into October, and are likely to get considerably worse before they get better.

Insight 1. Even before Hurricane Ike hit, inventories were very low.

According to EIA data, gasoline inventories the week that Hurricane Gustav hit were the lowest that they had been since 2000, amounting to 187.9 million barrels, or about 21 days supply. Quite a bit of this inventory is needed just to keep the pipelines filled. EIA does not publish information as to how far inventories need to drop before we start seeing outages, but it is clear that we have now reached the point where shortages are developing.

I see several possible explanations, including a long term shift in prices valuing diesel (or "distillate") more highly than gasoline; political pressure to keep gasoline prices low; and integrated oil companies not really needing a high gasoline pricing margin to keep overall profits at an acceptable level. I do not see ethanol as playing a significant role at this time. Regardless of the explanation, refineries and gasoline stations that are not part of oil conglomerates may find this a difficult storm to weather.

Figure 1 shows that the differential between the retail price of gasoline and the per-gallon cost of crude oil has recently dropped dramatically, leaving a much smaller margin to cover expenses and profit. It is this shift that I am discussing in this article.

Rep. John Dingell has a long history of opposing fuel-economy increases and other "green" initiatives.  His position as defender of Detroit's remaining auto industry more or less forces him to support the production of whatever vehicles are still profitable there, regardless of what they do to US energy security, balance of trade or global climate.  For the last 20 years or more, this has meant large cars and personal trucks:  the "guzzler" segment.  Because of this, I was surprised and pleased to learn of a proposal from him for a carbon tax and a petroleum tax, to help move the US away from both fossil fuels in general and petroleum in particular.

Both emotions lasted about as long as it took to read the summary.  It does not appear to be a serious basis for initiatives to move away from fossil energy.  Instead, it looks like a straw-man proposal designed to fail, while appearing to promote the interests of union labor in the process.  My final appraisal is "disappointingly cynical".

Shortage of diesel fuel now 'critical'

Two major fuel suppliers are sounding the alarm for Ontario's trucking industry amid "critical" shortages of diesel fuel in the province.

The fuel shortage, which has seen motorists inconvenienced for more than a week as gas pumps intermittently run dry, has forced Ultramar to suspend diesel deliveries to four Toronto-area service centres and three other Ontario cities - Hamilton, Cambridge and London.

"These sites will remain open only while the product currently in the storage tanks lasts," Ultramar said Thursday in a notice to customers....

...."The last thing you want to have is a situation where your gas stations may be closed but, worse, our truckers cannot get the product from A to B," he said.

McTeague said the Energy Supplies Emergency Act allows the federal government to take action if shortages cause social or economic problems.

In a long awaited and hard fought victory, the nation is set this weekend to switch over almost all its diesel fuel to a new vastly lower sulfur content, setting the stage for major improvements in air quality, particularly in dense urban areas like NYC that rely heavily on trucks to deliver goods to our stores and houses.

The new fuel contains 15 parts per million of sulfur, down from the standard of 500 parts per million, thanks to changes in the refining process. As of Sunday, at least 80 percent of the diesel available for trucks and buses has to meet the new standard.

What makes this victory for cleaner air even better was that this was one of those rare instances where environmental lobbyists, government and industry found common ground to cooperate on a long term strategy to define regulations they could all agree to. This is not common and needs to be recognized when it happens.

Unleaded prices have risen by 1.6p per litre (ppl) to 97.5p. Diesel prices have also risen, by 1.0ppl, to 99.1p. The price difference between Unleaded and Diesel has fallen to 1.6ppl.

...conflict in the Middle East, uncertainties surrounding Iran and their nuclear enrichment programme, the annual summer upsurge in motoring in the USA in addition to the continuing high demand for oil from China and India...

The second point is that on 18 July 2006, the government quietly announced that they would not be implementing the inflation-only increase in fuel duty (1.25ppl) on 1 September 2006 and would review the position later in the year (UK fuel duty rise delayed again).

This should hardly come as a surprise given the recent history of fuel duty price rises we discussed back in May (UK Petrol Prices). There we saw that fuel duty has been stuck at 47.1 pence since Oct 2003 with the annual planned increases being postponed each time. Freezing duty like this in the face of inflation is a tax cut in all but name which is exactly what we at The Oil Drum believe is the wrong response to rising fuel prices. From the April press release:

It is nonsensical for political leaders of both parties to eliminate the gas tax temporarily or permanently as this will only worsen our dependence on oil by disincentivizing the innovation of oil alternatives and oil conservation efforts. ...
The answer does not lie in lowering gas prices, which will only encourage people to drive more and further waste our valuable resources.

Since World War II North Americans have invested much of their newfound wealth in suburbia. It has promised a sense of space, affordability, family life and upward mobility. As the population of suburban sprawl has exploded in the past 50 years, so too has the suburban way of life become embedded in the American consciousness....

The consequences of inaction in the face of this global crisis are enormous. What does Oil Peak mean for North America? As energy prices skyrocket in the coming years, how will the populations of suburbia react to the collapse of their dream? Are today's suburbs destined to become the slums of tomorrow?

They also predict a slightly colder winter than NOAA, but clarified this by pointing out that they review heating needs, so that they look at who needs what where, rather than overall temperature changes.  Thus there is a difference in the overall perception because, for example, a higher demand for fuel in the North East may over-ride a reduction in the South.

And to be mildly mischievous a response to a comment.