Petroleum Prices Refined Product Margins Product Imports Refinery Investment Petroleum Prices
Refined Product Margins
Product Imports
Refinery Investment
Crude and average petroleum product prices are lower in all three cases compared to the reference case, with the largest decrement in gasoline. By the year 2020 gasoline prices are 10.1 cents(8) per gallon lower in the 30 percent case relative to the AEO98 (Table 11). Jet fuel price decrements are not as large as those of gasoline, with a price 5.7 cents per gallon lower by 2020 in the 30 percent case compared to the reference case. Diesel and residential distillate prices are slightly lower, with a decrement of 1.5 cents per gallon for transportation diesel in the 30 percent case by the year 2020. (Total distillate prices are higher because of greater consumption of higher-priced diesel fuel.) Overall average petroleum product prices are as much as 7.2 cents per gallon lower in the 30 percent case compared with the AEO98 case, or by as much as 5.1 cents per gallon net of the drop in world oil prices (WOP). The latter comparison shows the reduction in price due to changes in the refinery yield, over and above changes in the price of crude oil attributed to increased diesel penetration.
The lower U.S. petroleum product demands in the three cases result in a lower WOP, with a decrement in 2020 compared to the AEO98 reference case of as much as $0.87 per barrel in the 30 percent case (Figure 5).
The three cases result in lower prices for gasoline, with a price decrement of as much as 10.1 cents per gallon (8 percent) by 2020 for the 30 percent case compared with the AEO98 reference case (Figure 6). Subtracting the decrement in the WOP between cases results in the net gasoline price being slightly higher, with a decrement of about 8.0 cents per gallon in the 30 percent case as compared to AEO98. Net gasoline prices are used to highlight refinery industry effects of shifting product demand excluding the WOP effects. Gasoline prices are lower in all cases compared to the reference case, because investments to meet increasing demand for gasoline are not required in the higher diesel penetration cases. Additionally, the decrement in total petroleum product demand with a resulting lower WOP reduces the average of all petroleum product prices. While most individual product prices are lower, the average price of distillate to all sectors is higher because of the increasing share of the higher-priced transportation diesel.
Transportation diesel prices are slightly lower in the three cases in 2020, compared with the reference case. For the 10, 20, and 30 percent cases, diesel prices are lower relative to the AEO98 by 1.1, 0.9, and 1.5 cents per gallon, respectively (Figure 7). However, most of the lower diesel price is due to a lower WOP. Total petroleum demand is lower, resulting in a lower crude oil price. Net of the WOP, the diesel price is lower in the 10 percent case (by 0.3 cents per gallon), and higher in the 20- and 30-percent cases (by about 0.5 cents per gallon in both cases). Diesel prices remain essentially flat while demand is higher because producing diesel requires fewer investments than producing gasoline, and because overall refinery production is lower, reducing the marginal cost of production.
Jet fuel prices are lower in 2020 by as much as 5.7 cents per gallon (6.7 percent) relative to the AEO98 in the 30 percent case. Jet fuel prices are lower because refiners have available relatively more feedstocks for lighter products because of lower demand for gasoline and higher demand for the heavier diesel fuels, reducing the marginal cost of producing jet fuel.
Higher consumption of diesel fuel has a smaller effect on residential heating oil prices. In the 30-percent case, heating oil prices are lower by 1.4 cents per gallon in 2020 (Figure 8). However, net of the lower WOP, heating oil prices are higher by 0.7 cents per gallon for the high-diesel penetration case. Prices for heating oil and diesel fuel--which are nearly identical products in terms of refinery specifications--are slightly higher because the increased demand for diesel fuel can be produced with small increases in refinery investment.
The refined product margins (refinery gate price minus the world oil price) for the light products follow the same trend as the consumer prices. Product margins diminish for gasoline (Figure 9), while margins for distillate and diesel remain approximately the same compared with the AEO98.
Net product imports are lower in each of the three cases compared with the AEO98 reference case. The shift in demand from gasoline to diesel has a direct effect on offsetting refined product imports. Net product imports are as much as 590,000 barrels per calendar day lower in 2020 in the 30-percent case relative to the AEO98 (Figure 10 and Table 12). This result reflects the lower demand for gasoline, the greater energy content per gallon of diesel fuel, and the fact that refiners are able to meet a portion of the increased diesel demand because of the reduction in production of motor gasoline. Imports for gasoline, distillate, and diesel are displayed in Figures 11, 12, and 13. As the figures show, while gasoline imports are lower in all cases, imports of diesel and other distillate fuels are moderately higher to meet the increased consumption. However, the combined result is lower imports for all products.
Compared to AEO98, refinery capacity investment is lower in the three cases due to lower gasoline and total product demand (Figure 14). Lower demand for gasoline results in less need for downstream capacity to upgrade heavier intermediate streams or enhance the properties of lighter intermediate streams required to meet gasoline blending specifications. The production of on-road low-sulfur diesel requires refiners to catalytic-hydrotreat distillate streams to remove sulfur, increase production of low-sulfur distillate streams from the catalytic hydrocracking units, or use low-sulfur distillate streams normally used in the production of kerosene and jet fuel. Light duty vehicle (LDV) on-road diesel fuel quality specifications are assumed to remain the same as in AEO98. Thus, the only downstream capacity additions over those required in the AEO98 to meet the higher diesel demand is distillate desulfurization, with capacity additions doubling in the 30 percent case by 2020, compared to the reference case. Catalytic hydrocracking capacity is actually less in the 10, 20, and 30 percent cases because of the reduced demand for gasoline. Figure 14 displays the percent differences in cumulative refinery capacity investment to year 2020 in the 10, 20, and 30 percent cases as compared to the AEO98. The 30 percent case requires 61 percent less cumulative investment than in AEO98 by 2020.
Total revenues by 2020 from the sale of petroleum products are as much as 9.9 percent lower in the 30 percent case, while revenues minus the differential in WOP are 8.0 percent lower than in the AEO98 reference case. Revenues per barrel of product are 2.4, 3.6, and 6.8 percent lower, respectively, compared to AEO98 (Figure 15). Factoring in investment costs and operating and raw material costs results in net revenues per barrel of product produced 1.1, 1.5, and 5.1 percent lower than AEO98 in the 10, 20, and 30 percent cases respectively. This decreasing revenue per barrel of product supplied is attributed to displacement of the refiners' most valuable product (motor gasoline) by a less economically attractive alternative, diesel. While refinery investment in the three cases is lower than in the AEO98, the additional revenue losses due to lower product prices erode profits. Reductions in total product supplied due to the LDV diesel efficiency gains compounds the reduction in total revenues even further.
Refined product margins reported by EIA's Financial Reporting System (FRS) were $0.41, $0.49, and $0.87 (in 1996 dollars) per barrel for 1992, 1995, and 1996 respectively. While the Petroleum Market Module (PMM) values of net revenues per barrel cannot be directly compared with FRS refined product margins per barrel because of differences in accounting revenues, investments, and depreciation, the FRS refined product margins indicate refining profitability is marginal. Combining this fact with the lower net revenues yielded by the three cases presented, it is clear that refiners would have to continue to reduce operating costs to maintain financial viability under the diesel penetration cases analyzed.
The PMM maximizes profit in a given year with that year's set of assumptions (WOP, product specifications, product demand, costs of imports, etc.) Additionally, the PMM maximizes profitability in any given year while maintaining constant per barrel operating costs and refinery technology. Also, the PMM accounts for some of the costs associated with supplying petroleum products by assuming constant end-user markups to account for distribution and marketing costs. Because operating, distribution and marketing costs, as well as refinery technology costs, are held constant, there is no guarantee that absolute refining profitability will be maintained across the cases. However, the comparison across cases gives a broad indication of the refinery profitability situation with respect to changes in the penetration of diesel fuel.
8All prices in this report are in real (inflation - adjusted) 1996 dollars.
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