The Peak Oil Crisis: Diesel
By Tom Whipple
The evidence is growing that it is going to take a really major event to get America out of its beloved and seemingly essential automobiles. Even with gasoline running a dollar a gallon higher compared to this time last year, consumption is holding about the same or even creeping up a bit. The conventional wisdom is that it is going to take some spectacularly high prices (Europe is already at $8 a gallon) before we see a significant reduction in driving. Shortages, however, are another matter. If your neighborhood gas stations, or perhaps those along the Interstates, are out of fuel, you are going to cut back your driving -- period. There will be very little to do other than call you Congressman and demand that something be done.
Last spring, a combination of refinery mishaps, unusually high consumption and low U.S. prices that sent cargoes of gasoline elsewhere led to an unusually large drop in U.S. gasoline stockpiles. There were fears spot shortages were only days, or perhaps hours, away from developing. Fortunately, the refineries started working better, gasoline prices soared and the great tankers from across the seas soon refilled our gasoline stocks.
Now there seems to be a new problem developing: diesel for the great machines that grow our food, bring us stuff, take away our garbage and do nearly all the chores needed to keep our civilization running. If you think about it for a few minutes, you might conclude that a diesel shortage would be worse than a gasoline shortage. If the availability of gasoline gets tight, we can all cancel recreational car trips, play dates for the kids, and form commuting or shopping carpools. For the sake of some inconvenience, we could cut gasoline consumption by a whole lot.
It’s not the same with diesel however. Two farmers can’t jump on a tractor and plow both their farms at the same time. Most of those 18-wheelers barreling down the interstate are either full or on the way to be filled. One trash truck picking up in two neighborhoods at the same time doesn’t work either. In short, it is going to be a lot harder to conserve on diesel fuel, which for the most part does vital work, than it would be to conserve gasoline for our personal transportation.
A few weeks back, we talked about the situation that has developed in China. You will recall that the government’s efforts to fight growing inflation led to a cap in retail fuel prices. When oil prices shot into the $90s, private refiners which produced about 15 percent of China’s motor fuel were losing money and simply shut down. The result was instant lines at diesel pumps across China. Trucks waiting in line for fuel are not moving all that great merchandise down to the coast for shipping to WalMart so the government took the situation seriously.
One of the remedies was to start importing refined diesel fuel from abroad like it was going out of style --- 2 million barrels in November, 3 million in December, and 3.6 million in January. China is now importing about 120,000 barrels and day and it has got to be coming from somewhere.
Here in America, most of us don’t worry very much about diesel fuel. Some know that it belongs to a class of liquid fuels called distillates and that after you take out the sulfur, is just about the same as the fuel home oil burners use up in our northern states. Most of us are aware that it powers large vehicles – 18 wheelers, earth movers, and trash trucks – and can make great clouds of black, smelly smoke if things are not adjusted right.
OK, so where does our diesel come from and how much do we have in stock? As with gasoline, American diesel consumption outran the ability of our refineries to produce enough distillates some time ago. First it might be nice to know that consumption of distillates in the U.S. is now about 4 to 4.3 million barrels a day or about 20 percent of our total oil consumption. Of this 3.8 - 4.2 million barrels a day comes out of our refineries (depending on the season) and the rest has to be imported. Back in 2006 we imported about 300 to 400,000 barrels a day again depending on the season. In 2007, the imports dropped to 250 to 300,000 barrels and two weeks ago slumped to 215,000 barrels a day.
Even though imports have only been running about 10 percent of our average daily consumption, a shortfall of only a few percent below demand is enough to trigger all sorts of problems. For the last year, U.S. commercial stockpiles of distillates have been taking the hit. They are down from 142 million barrels in mid-December 2006 to 126 million barrels in December 2007, a decline of about 11 percent and they are now at the bottom of the normal range for this time of year. Unless we have very warm weather during the next three months, they will decline by another 25 million barrels so we will bottom out in April at about 100 million barrels or less.
To gain an insight into what will happen in 2008, we need to remember that refined diesel can only come from places that have refineries and a surplus to sell. We are talking about Europe, the Caribbean and some Asian countries, Singapore, Taiwan and Korea. It is interesting to note that in the U.S. diesel is 28 percent of the total daily consumption of gasoline and diesel, while in Europe the number is 63 percent. In other words Europe is much more into diesel than the U.S. and therefore unlikely to have much for sale. International Energy Agency forecasts for 2008 show a substantial drop coming in distillate exports.
As diesel shortages are a real drag on China’s economy, continuing or even increasing imports of this vital commodity are likely to continue. The bottom line seems to be that shortages for diesel and heating oil now seem likely to develop before they do for gasoline. Heating oil prices which have increased by nearly a dollar a gallon since last winter are already causing people to turn down the thermostats significantly, however if the unusually warm weather that is currently forecast for the next two months does not turn up, there is clearly trouble ahead.