In
2006, despite a year of continued economic growth a number of factors combined
to reduce demand and lower sales of fuel oil and kerosene. In 2006, the winter was not only warmer than
the previous year, it was considerably warmer than normal and the summer was
somewhat milder than in 2005. In
addition, prices that had increased sharply during the last few months of 2005
continued to rise, although at a slower rate.
Consequently, the combined sales of the three product groups fell by 5.6
percent to total 73.3 billion gallons, reflecting a drop of nearly 4.4 billion
gallons from 2005, and the lowest combined total since 2002.
Although
distillate sales fell by more than 973 million gallons during the year, and
kerosene sales dropped by 247 million gallons, it was the drop in sales of
residual fuel oil that dominated the overall decline. Falling by 3.2 billion gallons, the drop in
residual sales accounted for more than 70 percent of the overall drop in sales,
hitting a new record low for residual fuel oil sales. For both distillate fuel oil and kerosene,
total sales were the lowest since 2002.
In
2006, sales of residual fuel oil accounted for 14.0 percent of total sales, the
lowest percentage of total fuel oil and kerosene sales since EIA began
collecting data. The large drop in sales
of residual fuel oil, coupled with the drop in sales of kerosene, resulted in
distillate fuel oil sales accounting for 84.9 percent of total sales, which
surpassed the previous highest percentage of total sales set in 2002, when
distillate sales accounted for 84.3 percent of total fuel oil and kerosene
sales. Sales of kerosene accounted for
1.1 percent of total sales compared to 1.4 percent in 2005.[1]
Distillate
Fuel Oil
Distillate
sales decreased in 2006, countering the long-term trend of rising distillate
sales and echoing the unusual drops in sales that occurred in 2001 and 2004.[2] However, in 2004, the magnitude of the drop
was not only approximately 40 percent larger, it was more widespread with small
increases registered in only two energy use sectors. In 2006, the results were considerably more
mixed, in fact, despite a decrease of 973 million gallons (more than 1.5
percent) in overall sales of distillate fuel oil, sales dropped in five energy
use sectors, whereas sales to six energy use sectors increased in comparison to
the previous year, some by considerable amounts.
Although
higher prices played a role in the drop in sales, other factors also had a
negative impact on the market during the year.
In particular, weather was an important factor with a winter considerably
warmer than normal, playing a role in decreased sales to the commercial and
especially the residential sectors, which fell by 12.9 percent (415.4 million
gallons) and 19.0 percent (1.2 billion gallons) respectively. The warmer than normal winter coupled with a
summer somewhat milder than was the case in 2005, also helped reduce sales to
the electric power sector by 27.6 percent (250.6 million gallons). In addition, a downturn in new home
construction contributed to a drop in off-highway use of distillate of 16.1
percent (477.0 million gallons). Despite
a drop in sales of distillate bunker fuel of more than 102 million gallons,
sales to the transportation sector increased in the aggregate with sales to the
railroads increasing by more than 104 million gallons and sales of on-highway
diesel up by more than 1 billion gallons.
The
introduction of ultra low sulfur diesel caused some market disruption with the
fuel in short supply during the fourth quarter of the year; outages were
reported in a number of states in the upper Midwest from Iowa to the Dakotas
and in the southeast especially in Tennessee, North Carolina and Georgia.[3] Nonetheless, neither the tight supplies nor
the outages had a significant impact on total sales to the on-highway market.
Despite
higher energy prices again in 2006, economic conditions as measured by a number
of factors continued to improve during the year. Gross Domestic Product (GDP), a prime measure
of the state of the economy, increased in constant dollars at 3.3 percent, just
above the rate of 3.2 percent that occurred in 2005 and the second highest rate
of increase since 2000. The unemployment
rate dropped from 5.1 percent in 2005 to 4.6 percent in 2006, the lowest rate
since 2000.[4] Further, in 2006, spending on new commercial
construction increased by 17.6 percent surpassing the increase of 12.9 percent
that occurred in 2005. In addition,
production of durable goods increased by approximately 7.4 percent surpassing the
increase of 6.6 percent in 2005; while manufacturing increased by 4.6 percent
surpassing the rate of 3.9 percent set in 2005; and industrial production
increased by 3.9 percent compared to an increase of 3.2 percent during
2005. However, unlike 2005 when spending
on new housing increased by nearly 13 percent in 2006 spending on new
residential construction fell by 2.6 percent.[5]
Although
a number of factors including tight market conditions and changing regulations
helped push prices of crude oil and petroleum products higher in 2006, the lingering
effects of hurricanes Katrina and Rita on the U.S. oil and gas industry perhaps
had the most significant impact. Data
from the Energy Information Administration (EIA) show that it was not until May
that U.S. refining utilization rate rose above 90 percent for the first time
since the hurricanes Katrina and Rita.
Further, it was not until June that EIA and American Petroleum Institute
(API) data show that refinery inputs surpassed 16 million barrels per day for
the first time since before hurricanes struck.[6] Another measure of the impact of the
disruptions to the production, processing and refining of oil and natural gas
is reflected in the fact that for the first time since 2001, total energy
consumption in the United States decreased.
Total energy consumption dropped from the all-time high set in 2005 by
0.904 quads to 99.536 quads.[7]
Sharply
higher prices for fuel oil in the aftermath of
hurricanes Katrina and Rita that continued into 2006 did not have any
dramatically negative impact of sales of distillate fuel to the transportation
sector. In fact, sales to the
transportation sector increased in part because of the rising cost of
gasoline. While vehicle miles traveled
did increase overall, the rate of the increase slowed, 1.1 percent in 2006
compared to 1.4 percent the previous year.
As motorists drove less, miles traveled slowed particularly during the
second and third quarters of the year, increasing only by 0.3 percent and 0.4
percent respectively compared to increases of 2.3 and 1.2 percent in 2005. In addition, anecdotal evidence indicates
that use of public transit increased sharply in such diverse locations as Los
Angeles, California and Tulsa, Oklahoma.
This is supported by the American Public Transit Association reporting
an overall increase of three percent in the use of public transportation during
the months following hurricanes Katrina and Rita.[8]
Sales
to railroads increased by 104.8 million gallons (3.0 percent). During 2006, sales of diesel fuel to the
on-highway segment increased by nearly 1.1 billion gallons (2.8 percent). The increase in sales to the on-highway
sector not only exceeded the increase of 927.9 million gallons that occurred in
2005, it far surpassed the miniscule increase of 21.7 million gallons
registered during 2004. However, sales
for vessel bunkering, the third component of the distillate transportation
market, did not fare so well, sales were down in most districts of the country,
dropping by 102.4 million gallons (5.1 percent).
In
the industrial sector, any negative impact resulting from higher oil prices was
offset to some extent by the largest increase in total industrial production
since 2000, 3.9 percent. Consequently,
sales of distillate fuel oil to the industrial sector were essentially unchanged,
growing only by 4.0 million gallons (0.2 percent).
In
2006, sales to the off-highway sector fell by 477.0 million gallons, a drop of
16.1 percent. This was unlike 2005 when
sales to the sector increased by 208.6 million gallons, accounting for nearly
25 percent of the overall increase in distillate sales. However, in 2005, total private spending for
new construction increased by 11.8 percent over the amount spent in 2004. In 2006, total spending on new construction
increased by only 3.3 percent with spending on new residential construction
falling by 2.6 percent compared to an increase of 15.4 percent in 2005.[9]
As
mentioned above, weather played a significant role in shaping demand for
distillate fuel during 2006. As was the
case in 2005, the impact of weather was more widespread than typical. First, the winter of 2006 was warmer than
normal throughout every district of the country. In addition, the winter was also considerably
warmer than 2005 in the New England and Central Atlantic Subdistricts,
principal consuming areas of home heating oil.
Consequently,
although sales of heating oil to the residential market fell in every district
of the country, sales fell the most in the New England and Central Atlantic
Subdistricts. Sales to the residential
sector fell by 362.7 million gallons (16.4 percent) in the New England
Subdistrict and by 655.4 million gallons (22.6 percent) in the Central Atlantic
Subdistrict. At the national level,
overall sales of residential heating oil decreased by nearly 1.2 billion
gallons or 19.0 percent to just under 5.0 billion gallons.
Second,
the weather also contributed to a change in distillate sales for use in
electric power generation. The summer of
2006, while warmer than normal, was somewhat milder than the previous summer in
the central and eastern portions of the country. Consequently, demand for distillate fuel to
meet peak summer generation loads was considerably lower than it had been in
2005.[10] Nationally, sales decreased by approximately
250.6 million gallons (27.6 percent).
Sales to the electric power sector decreased throughout the country
except for a small increase of 2.1 million gallons in the Rocky Mountains
District.[11]
Third,
at the national level, distillate sales to the farm sector totaled just less
than 3.3 billion gallons reflecting an increase of only 45.5 million gallons
(1.4 percent) from the level set in 2005.
The small increase of distillate in the farm sector reflects in part an
increase in the cost of fuel used by farmers of 7.9 percent, which contributed
to the planting of fewer acres of some crops, and in part it also reflects
drought conditions and above normal temperatures that resulted in smaller
harvests of some crops. Although the
number of harvested acres of soybeans increased, the number of acres planted in
wheat, cotton and corn declined. As a
result, for the five principal crops the number of acres harvested decreased by
3.3 percent. Nationally the amount of
citrus fruit harvested increased by 3.0 percent.[12] However, that percentage conceals the fact
that the increase took place primarily in the citrus growing regions in the far
west. Lingering damage along the Gulf
Coast District from the hurricanes is reflected by the drop in sales of 68.3
million gallons (10.2 percent).
Fourth,
weather also had a positive impact on sales for oil company use. Hurricanes Katrina and Rita ravaged the oil
and gas infrastructure in the Gulf of Mexico, causing widespread and extensive
damage to production platforms and to subsurface structures. In addition, the two storms in 2005 also
caused extensive damage to refineries, pipelines, pumping stations and other
facilities and instillations on land.
Much of that damage took months to repair and the work extended well
into 2006 which contributed to a substantial increase in the region of 47.1
million gallons (17.9 percent). In
addition, increased prices for oil and natural gas spurred exploration and
development efforts in the industry, particularly in the Rocky Mountain
region. Nationally, oil company use of
distillate fuel oil increased by 164.0 million gallons (34.6 percent).[13]
On
a regional basis, the warmer winter weather resulted in a drop in distillate
sales to the residential sector in those districts of the U.S. where sales for
home heating are concentrated. Sales
fell the most in the East Coast District dropping by nearly 1.1 billion
gallons. Within the East Coast, sales
fell in all three subdistricts. Sales
fell the most in the Northeast and the Central Atlantic Subdistricts, where
they dropped by 362.7 million gallons and 655.4 million gallons respectively,
and by 55.6 million in the Lower Atlantic.
In the Midwest, sales fell by 104.7 million gallons. In the Gulf Coast District, sales were
essentially unchanged slipping by just 0.7 million gallons. Sales increased slightly in the Rocky
Mountains and West Coast Districts, increasing a total of 9.5 million gallons.
Sales
to the commercial sector decreased in all three subdistricts of the East Coast falling
by 119.5 million gallons in New England, 211.5 million gallons in Central
Atlantic, and 24.8 million gallons in Lower Atlantic. Sales also fell in the Midwest, down by 15.6
million gallons, and the Gulf Coast where sales slipped by 25.3 million gallons. Sales also fell 22.0 million gallons in the
West Coast. Sales increased only in the
Rocky Mountains but even there, sales increased only by 3.2 million gallons.
Despite
an overall decrease nationally in total energy consumption by the industrial
sector of 1.0 percent, sales of distillate fuel oil for use in industrial
applications increased.[14] On a regional basis, sales of distillate to
the industrial sector were mixed, down in some districts and up in others. Although overall sales decreased in the East
Coast, sales increased substantially, growing by 40.8 million gallons in the
Central Atlantic. Sales in both the New
England and Lower Atlantic Subdistricts fell, down 17.2 million gallons and
28.2 million gallons respectively. In
the Midwest, sales also decreased, falling by 23.8 million gallons. However, sales increased slightly in the Gulf
Coast and Rocky Mountains, up 9.6 million gallons and 9.6 million gallons
respectively. The largest increase took
place in the West Coast District, where sales were up by 17.0 million gallons
or 5.4 percent.
At
the national level, unlike the situation in both 2004 and 2005 when distillate
sales to the military fell, in 2006 sales to the military increased by 59.3
million gallons (18.3 percent). On a regional
basis, sales fell in all three subdistricts of the East Coast, dropping by a
total of 23.0 million gallons. Sales in
the Gulf Coast also fell, down 21.8 million gallons. Sales in the Midwest and West Coast
increased, by 2.1 million gallons and 101.9 million gallons respectively.
At
the regional level, sales to the off-highway sector fell throughout the country
with the exception of an increase in sales in the Central Atlantic Subdistrict
of the East Coast. Sales dropped the
most in the Midwest falling by 187.9 million gallons. In the East Coast, sales in the New England
and Lower Atlantic Subdistricts fell by 18.0 million gallons and 82.3 million
gallons respectively while sales in the Gulf Coast fell by 106.0 million
gallons. Sales also fell in the Rocky
Mountains and West Coast Districts dropping by 40.7 and 66.2 million gallons
respectively.
On
a regional basis, distillate sales to the electric power sector increased only
in the Rocky Mountains, where a very small increase of 2.1 million gallons took
place. Sales fell the most in the
Central Atlantic Subdistrict of the East Coast dropping by 106.6 million
gallons. Sales also fell in the Lower
Atlantic and the New England portions of the East Coast dropping 47.0 and 4.3
million gallons respectively. Sales
dropped by 35.0 million gallons in the Midwest, 28.2 million gallons in the
Gulf Coast, and 31.5 million gallons in the West Coast.
On
a regional level, distillate sales for oil company use increased sharply in the
Midwest, up by 23.4 million gallons. In
the Rocky Mountains District, where a significant increase in natural gas
exploration efforts, especially in Wyoming and Colorado occurred, oil company
use more than doubled, increasing by 96.3 million gallons. Sales in the Gulf Coast increased by 47.1
million gallons while sales in the West Coast increased slightly, up by 1.3
million gallons. Not all areas of the
country experienced increased usage, in the East Coast District oil company use
dropped by 4.2 million gallons. However,
the drop in overall volume in the East Coast masks the fact that sales in the
Lower Atlantic Subdistrict increased by 3.3 million gallons.
Residual
Fuel Oil
Despite
the strength of the economy and continued strong sales for vessel bunkering
fuel, overall sales of residual fuel oil fell by nearly 3.2 billion gallons
(23.6 percent) from the level attained in 2005.
The drop in sales to 10.3 billion gallons was the largest drop in sales
of residual fuel oil since 2002 when sales fell by nearly 3.3 billion gallons
and resulted in total sales of residual fuel oil reaching the lowest point
since EIA began tracking the data.[15]
Sales
of residual fuel oil plunged in large measure as the result of the drop of 3.3
billion gallons (56.5 percent) in sales for the generation of electricity. However, sales fell in most other sectors as
well, sales declined to the commercial and industrial sectors by 241.2 million
gallons (33.5 percent) and 218.8 (13.1 percent) respectively. Sales to the military fell by 17.6 million
gallons (59.5 percent). Sales grew only
in the vessel bunker sector where an increase of 575.0 million gallons (11.1
percent) occurred. The increase in the
sales of bunker fuel surpassed the increase of 488.1 million (10.4 percent) in
2005.
Sales
for the generation of electricity were adversely affected by the warmer than
normal winter, the somewhat milder summer but especially by the changing
relationship in the price of oil compared to that of natural gas. In 2005 prompted in part by the high price of
natural gas and by supplier constrained natural gas availability following the
hurricane related damage to production and distribution facilities, there is
some evidence that concern over the supply of natural gas for use in the
generation of electricity led to a increased dependence on oil and less
emphasis on natural gas in at least one region of the country.[16] However, in 2006, while the price of residual
fuel to the electric power sector increased by 12.9 percent the price of
natural gas to the sector fell by 15.7 percent.[17] Consequently, rising prices coupled with
lower price for a major competing fuel and the warmer than normal winter
contributed to the drop in the use of fuel oil to generate electric power.
Sales
of residual fuel to the commercial sector decreased in all districts of the
country. Sales fell the most in the New
England and Central Atlantic portions of the East Coast where sales fell by
106.3 million gallons and 93.4 million gallons respectively. Sales fell by 21.7 million gallons in the
Midwest. Sales fell by small amounts in
the Gulf Coast, Rocky Mountains and West Coast Districts, where a total of only
about 1.8 million gallons was sold.
Sales
to the industrial sector decreased in most districts of the country. Sales fell all along the East Coast, falling
the most in the Lower Atlantic, where they dropped by 202.8 million
gallons. Sales increased in the Gulf
Coast, where they were up by 29.9 million gallons. Sales were also up in the West Coast, where
they nearly doubled increasing by 11.8 million gallons.
Unlike
2005, when sales of residual fuel oil to the military slipped by just 2.1
percent, in 2006, sales to the military at the national level fell by 59.5
percent. Sales fell in all districts of
the country with the exception of the Rocky Mountains where sales increased by
1.2 million gallons.[18]
At
the national level, sales of residual fuel for oil company use decreased by 8.8
million gallons, a decrease of 11.9 percent.
Although sales dropped slightly in New England and the Lower Atlantic of
the East Coast, sales plunged in the Central Atlantic where they dropped by
just under 30 percent. Sales increased
only in the Rocky Mountains, by 1.3 million gallons, where efforts to find and
develop oil and especially natural gas were concentrated.
Although
sales of residual fuel oil plunged in 2006, they had increased in each of the
past three years and this difference underscores the fact that a new dynamic
has entered the market. Whenever weather
and high prices for competing fuels provide the incentive for fuel switching,
larger customers in the industrial, commercial and especially the electric
power sectors may take advantage of the situation and switch temporarily to
oil.
For
residual fuel oil, although the overall trend has been down, fluctuations in
the amount of fuel sold remain likely to occur whenever interruptible gas
contracts take effect during the coldest winter periods and whenever price
differentials make switching attractive.
The fluctuations can occur either in the short-term or when prolonged
higher prices of natural gas make fuel switching attractive for the relative
few with the ability to switch.
Although
the long-term trend toward lower sales of residual fuel continues to affect the
market, with long-term high-priced natural gas, some industrial companies and
particularly some utilities have switched some units to fuel oil on a longer
term basis than simply reacting to seasonal price spikes. In addition, there is some evidence that
there is concern regarding the increasing dependency on natural gas for the
generation of electric power, which may lead to a greater degree of fuel
diversification and provide some stimulation to the sale of residual fuel oil
for the generation of electric power.
Nonetheless,
the principle reasons for the changing relationship remain, changing crude oil
specifications, enhanced refinery sophistication resulting in increased
production of gasoline and distillate at the expense of production of heavier
products such as residual fuel oil, environmental constraints and restrictions
on fuel oil use, and the availability of abundant relatively inexpensive
natural gas have contributed to a diminished use of residual fuel oil in the
production of electric power.[19]
Kerosene
Nationally,
sales of kerosene also fell in 2006, countering the growth in each of the
previous three yeas. Total sales of
kerosene fell to 823.0 million gallons, a drop of approximately 247.2 million
gallons (23.1 percent). Sales fell to
all energy use sectors with the largest drop occurring in the residential
sector where sales fell by 129.3 million (20.8 percent).
Sales
to the residential sector fell in all sections of the country with the
exception of the West Coast. The drop in
sales was greatest in the East Coast, where the use of kerosene for home
heating is concentrated and consequently where the impact of the milder than
normal winter had the greatest impact on sales.
Sales fell in all three subdistricts of the East Coast dropping by 116.6
million gallons. This drop accounted for
fully 90 percent of the drop nationally.
In the West Coast, the only region of the country where sales grew, the
increase was 7.4 million gallons.
Sales
to both the commercial and industrial sectors fell in most districts. Commercial sales were essentially unchanged
in the Gulf Coast; sale grew by about 5.8 million gallons in West Coast. Nationally, industrial sales dropped by 64.9
million gallons (24.3 percent). Sales
increased only in the Gulf Coast, and there they increased by 3.0 million
gallons.
Figure HL1. U.S. Sales of Distillate and
Residual Fuel Oils by Energy Use, 2004-2006
*For distillate fuel oil,
transportation use comprises railroad, vessel bunkering, and on-highway diesel
energy use categories. For residual fuel
oil, transportation use comprises vessel bunkering energy use category.
Source: Energy Information
Administration, Form EIA-821, Fuel Oil and Kerosene Sales Report, 2005 and
2006.
Figure HL2. Volume Distribution
of Distillate and Residual Fuel Oils by PAD District, 2004-2006
*Residual
fuel oil sales in PAD District 4 are too small to appear in the graph.
Source:
Energy Information Administration, Form EIA-821, Fuel Oil and Kerosene Sales
Report, 2005 and 2006.
Figure HL3. Distillate and
Residual Fuel Oil Sales for Selected Energy Use Categories by PADD District,
2006
*Residual
fuel oil sales in PAD District 4 are too small to appear in the graph.
Source:
Energy Information Administration, Form EIA-821, Fuel Oil and Kerosene Sales
Report, 2006.