Distillates: Diesel and Heating Oil Shortages

Posted: May 19th, 2008 by: h2

In the maze of crude oil production and refining, things are not done the way most people think they are. A good case in point is distillates. Distillates are a technical term for refined diesel and home heating oil.

petrodiesel, is produced from petroleum and is a hydrocarbon mixture, obtained in the fractional distillation of crude oil between 200 °C and 350 °C at atmospheric pressure.

The density of petroleum diesel is about 850 grams per litre whereas petrol (gasoline) has a density of about 720 g/L, about 15% less. When burnt, diesel typically releases about 39.8 megajoules (MJ) per litre, whereas gasoline releases 34.7 MJ/L, about 15% less. Diesel is generally simpler to refine from petroleum than gasoline. The price of diesel traditionally rises during colder months as demand for heating oil rises, which is refined in much the same way.
Diesel, wikidedia.org

But this isn’t the real problem with Distillates. The real problem is that they form only a certain percentage of what is refined from each barrel of crude oil. The ratio is I believe roughly 1/3, in other words, from 3 barrels of crude, you refine 2 of gasoline and 1 of distillates.

However, as you probably have heard, distillates like Diesel are rising in price, far more than gasoline currently. This is not an accident, and is going to have almost immediate affects on all trucking, and in some parts of the country, home heating. The latter is especially worrisome, because we are already seeing record prices for heating oil, but in the very near future, we may be getting actual supply shortages, ie, heating oil not available at all.

The reasons for this surge in distillate prices are easy to understand. Conventional oil production, from which distillates are made, has been flat for the last three years while demand from Asia and the Middle East has been increasing rapidly. The trend into higher-mileage diesel-powered cars in Europe and other places, which has been underway for many years, is having a major impact on the demand for diesel. In some European countries, diesels now account for over 70 percent of new car registrations.

Moreover, a worldwide mismatch is developing between the demand for distillates and for gasoline. A recent OPEC report claims that in the last seven years, the demand for distillates grew by 5.2 million b/d while the demand for gasoline increased by 2 million b/d. OPEC notes that during the same period, refiners added 1.2 million b/d of fluid catalytic cracking and coking capacity used to produce gasoline while adding only 700,000 b/d of hydrocracking capacity used to make more distillates.
Tom Whipple, ASPO, www.aspo-usa.com, 19 May 2008

This change in demand and refining capabilities is leaving European and Asian refiners with a surplus of gasoline and a shortage of diesel. The overseas refiners are happy to sell their surplus gasoline to America which still wants it in prodigious quantities. This, believe it or not, helps keep gasoline prices lower than the price of crude suggests it should be as unusually large amounts of gasoline and blending components keep arriving at our shores.

Prices for distillates went up and up and inventories went down and down as we were no longer making enough to satisfy demand even at outrageous prices, and our imports of distillates dropped as everybody in the world wanted more diesel. Imports which were running 300-400,000 b/d early last year have been 200,000 b/d or less in recent weeks. Most of our distillate imports currently are coming from Canada as nobody else seems willing or able to sell us this increasingly scarce and valuable commodity.

At the same time as our imports have been falling, our exports of finished distillates jumped from 275,000 b/d last fall to over 400,000 b/d this spring, according to the most recently available data. Much of our diesel exports, by the way, are going to Chile which is suffering from a drought-caused electric power shortage and has to have power to keep the copper mines going. The wave of electricity shortages and rolling blackouts around the world is not helping the situation as the demand for diesel to power emergency generators is growing rapidly and seems destined to become a significant source of new demand.

The arithmetic is simple; US refineries have been producing about 4.2 million b/d of diesel in recent weeks. (It did jump to 4.4 the week before last as refiners cashed in on the high prices). However, the net of our imports and exports is taking away about 0.2 million b/d. Since we use about 4.2 million b/d in the US at this time of year, our stockpiles have been shrinking and prices rising.

There is little on the horizon to suggest a major reversal of this situation. Worldwide demand for distillates is likely to continue increasing over the rest of the year. Very high prices may tamp demand in the US and other OECD countries a bit. So far the EIA is reporting that demand for gasoline is only down by 0.2 percent over last year, despite reports from other sources that the demand is dropping much more.

Most observers agree that we have another five or six months before serious problems develop for we can always divert next winter’s heating oil supplies into our trucks, tractors, and heavy equipment. This may require a waiver or two of air pollution regulations, but that does not seem to be a problem these days.

Serious difficulties could come as early as next winter’s heating season when there simply is not enough fuel available or we could muddle along for another year or two with increasing prices. How this will play out is difficult to foresee. There obviously will be more increases in prices for diesel and heating oil, probably to the point where it simply becomes unaffordable for many. As governments are unlikely to let people freeze or crops go unharvested, some form of government intervention, subsidy, or allocation seems likely. From there on all bets are off as one can conjure up many scenarios – debates in the Congress, posturing politicians, hoarding, black markets, truckers’ strikes, food shortages.
Tom Whipple, ASPO, www.aspo-usa.com, 19 May 2008

This is why already this year, China is having major supply issues with diesel.

And to bring this home: in some parts of the United States, especially the NorthEast, winter household heating with heating oil is very common. This means that people are going to be competing directly with China for their heating oil. And as people’s budgets begin to get more and more strained, and as they fall deeper into credit card debt, the added expenses of home heating oil (see current prices and futures prices).

To put this even more into perspective, currently in the United States, natural gas production is essentially at a plateau, and should start dropping roughly in sync with crude production, with one very large difference: unlike crude, which is quite easy to transport and ship, the only truly practical way to transport gas is via pipelines. It can be liquified and shipped, but that’s a very energy intensive method, and besides, the countries who might have exported natural gas are keeping it for the own industries, such as the Saudi decision to start manufactoring fertilizer directly with its natural gas and other resources.

As we are seeing on an almost daily basis, when we got stuck with a globalized world, that’s what we have, like it or not. I won’t say we asked for it, globalization has always been primarily a system designed by and for large corporate interests, who are driven, by law, only to ‘maximize shareholder value’, which has resulted in destroying every remotely sane way of living in exchange for this near mythical shareholder value maximization.

As is the case with global warming/climate change, these disruptions are fast proving that we are looking much more at ‘tipping points’ than gradual changes. When you have global systems of supply and demand, these systems seem to have far less room for adaptation than would have been guessed only a few years ago.

The Energy Watch Group on Heating Oil

The Energy Watch Group pops up now and then in the news, although I’d really like to see some more work coming out of their organization, otherwise they are starting to look like a one trick pony.

Anyway, you can check out a pdf from last year on the question of home heating oil:

If I were to install oil heating at home now I would be able to operate it for some 10 to 20 years. If that what our scientists say is only approximately correct, it is however not at all guaranteed that one can then get fuel oil at the amount of today. And above all not at today’s price. Within just a few years it has already quadrupled.

What would you advise owners of oil heating?
It is difficult to give advice. The big problem is not the running out of oil reserves but the wide difference between demand and availability. My personal advice: Above all I would invest in heat insulation in order to reduce the demand for heat. I do not have to buy energy which I do not need. And the second measure would then be to become independent of fossil resources. It is better to do this as long as the price of energy is still low. That is something which many underestimate. Some people say I will buy a solar plant or a pellet heating system when the price of oil is so high that I have no other alternative. They forget that they will then already be paying these high prices for energy and may not have enough money to invest in alternative methods.

Is gas a sensible alternative?
With gas the situation does not look much better than with oil. Gas even has the disadvantage that one is far more dependent as the distribution is pipeline-bound. Besides, the availability of gas will not increase. Especially then when oil gets more scarce one will use gas more intensely there where it is possible, for example in the transport area.
The Energy Watch Group, Fuel oil will become unaffordable

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