Can U.S. Supply Accommodate Shifts Can U.S. Supply Accommodate Shifts to Diesel-Fueled Light-Duty Vehicles?to Diesel-Fueled Light-Duty Vehicles?

Joanne Shore

John Hackworth

Energy Information Administration

Hart World Refining and Fuels Conference

October 7, 2005

www.eia.doe.govwww.eia.doe.gov

U.S. Diesel-Fueled LDV PressuresU.S. Diesel-Fueled LDV Pressures

Encouraging Diesel• Higher fuel prices

favor efficient vehicles

• State incentives to address greenhouse gas reduction

• Favorable customer factors

Slowing Diesel• Diminished diesel fuel

price advantage over gasoline

• Potential fuel supply constraints

• U.S. diesel fuel quality & emission issues

• Starting from “no” base; supply and customer issues

OverviewOverview

• Diesel price advantage expected to diminish – but timing/degree uncertain

• Europe is important influence on diesel prices, and provides insight into potential U.S. diesel-fueled LDV growth

• Even under high growth scenarios, LDV impacts on diesel volumes minimal over next decade

• Assuming U.S. does not move to separate quality LDV diesel fuel, growth in diesel LDV’s should not create refining constraints in near term

2005: Continuation of High Product 2005: Continuation of High Product Prices – Especially DistillatePrices – Especially Distillate

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255075

100125150175200225

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$/B

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U.S. New York Monthly Average Spot Prices

Gasoline

No. 2 Heating Oil

Gasoline - No. 2 Heating Oil

Note: Gasoline is conventional regular

Source: Bloomberg

In Response to Price, U.S. Distillate In Response to Price, U.S. Distillate Yields Have Been Unusually HighYields Have Been Unusually High

20%

21%

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23%

24%

25%

26%

27%

28%

J F M A M J J A S O N D

2005

Average (01-04)

Weekly U.S. Distillate Yields

Source: EIA Weekly Data

Unusual 2005 Distillate Prices Unusual 2005 Distillate Prices InternationallyInternationally

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Spot Gasoline - Heating Oil Price Differences

NY Harbor

Northwest Europe

Source: Bloomberg NY Conventional Gasoline, No. 2 Heating Oil; NW Europe 0.2% Heating Oil and Regular Gasoline

Europe Is Unique In Degree of Shift to Europe Is Unique In Degree of Shift to Middle Distillate & Affects World MarketMiddle Distillate & Affects World Market

40%

45%

50%

55%

60%

65%

70%

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Middle Distilate Share of Gasoline and Distillate Consumption

EU-25

World Excl FSU and EU-25

Source: BP Statistical World Review 2005

EU’s Contribution: Price is Not Just EU’s Contribution: Price is Not Just About Volumes, But Quality As WellAbout Volumes, But Quality As Well

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Diesel 10ppm-Heating Oil

Diesel 50ppm - Heating Oil

European ULSD - Heating Oil Prices

Source: Bloomberg NWE Barge

Implications for Future Distillate PricesImplications for Future Distillate Prices

• Seen higher growth in distillates worldwide compared to gasoline in recent years

• Europe is a key factor in growing shift towards diesel

• May not have permanent distillate price parity with gasoline, but trends favor higher distillate prices

• Frequency and duration of future distillate price strength will influence type of refinery investment

Europe Provides Insights into Distillate Europe Provides Insights into Distillate Prices and Diesel LDV PenetrationPrices and Diesel LDV Penetration

• Europe not only affects Atlantic Basin prices, but is also a major player in world distillate market

• Europe’s light duty vehicle growth provides insights for U.S. potential growth

EU-15 Demand Mix Projected to See EU-15 Demand Mix Projected to See Declining Gasoline DemandDeclining Gasoline Demand

0

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1990

1995

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2005

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Th

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ay Diesel Fuel

Gasoline

EU-15 Demand Mix

Source: History IEA; Forecast Purvin & Gertz

European Preference for Diesel Grew European Preference for Diesel Grew Quickly since Late 1990s Quickly since Late 1990s

22.3

48.2

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10

20

30

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cen

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f N

ew

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istr

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W. Europe Diesel-Fueled Vehicle Share of New Passenger Car Registrations

Source: ACEA www.acea.be

EU Distillate Refining Yield Growing as EU Distillate Refining Yield Growing as Gasoline Yield ShrinksGasoline Yield Shrinks

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25

30

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45

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Yie

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EU-15 Refinery Yields (Production/Crude Inputs)

Gasoline Yield

Distillate Yield

Note: Distillate is heating oil and diesel.

Source: IEA

Europe’s Growing Product ImbalanceEurope’s Growing Product Imbalance

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0

200

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

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EU-15 Product Net Imports

Gasoline Net Exports

Middle Distillate Net Imports

Source: IEA

Europe SummaryEurope Summary

• European diesel demand growth supported by recent strong growth in diesel-fueled LDVs

• Recent diesel-fueled LDV growth was primed from previous base already established

• European refineries investing for increased distillate yields, but demand mix changes away from gasoline continue to outpace supply shifts

• Future: Still see increasing gasoline exports for some time – but will economic distillate imports be available? Will large ULSD price premiums be the norm?

U.S. Demand Growing for Both Gasoline and U.S. Demand Growing for Both Gasoline and DistillateDistillate

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1990 1995 2000 2005 2010 2015

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U.S. Gasoline & Distillate Demand

Gasoline

Distillate

Source: EIA, Annual Energy Outlook 2005

Two Diesel Penetration CasesTwo Diesel Penetration Cases

Diesel Share of New LDV Sales

0%

2%

4%

6%

8%

10%

12%

2005 2010 2015

Pe

rce

nt

Reference Case

8% Case

10% Case

Source: EIA

Light Duty Vehicle Sales (Thousands)Light Duty Vehicle Sales (Thousands)

2005 2010 2015

Reference Total LDV 16,416 17,215 17,658

Reference Diesel 716 710 749

8% Case Diesel 716 839 1,338

10% Case Diesel 716 915 1,818

Sources: EIA

Demand Changes Relative to Demand Changes Relative to Reference CaseReference Case

Changes (Thousand Barrels Per Day)

8% Case 10% Case

2010 2015 2010 2015

Diesel Demand 10.8 82.5 14.9 139.0

Gasoline Demand -13.1 -113.7 -18.0 -191.8

Total LDV Demand -2.3 -31.3 -3.1 -52.7

Sources: EIA

U.S. Gasoline & Demand Changes With Light U.S. Gasoline & Demand Changes With Light Duty Diesel 10% CaseDuty Diesel 10% Case

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1990 1995 2000 2005 2010 2015

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U.S. Gasoline & Distillate Demand

Gasoline

Distillate

Source: EIA, Annual Energy Outlook 2005

10% Case

Refinery ImplicationsRefinery Implications

• During next decade, refiners will see little shift in diesel/gasoline demand due to diesel LDV growth

• Since the U.S. has a very small diesel-fueled LDV base, growth for U.S. diesel LDVs in the next 5 years will likely be slower than Europe’s recent penetration surge

• Assuming the U.S. will not create a separate LDV diesel fuel in the near term, refiners should see little impact of a developing LDV diesel market in the next decade

ConclusionConclusion

• Diesel prices may not provide as attractive an incentive for LDV drivers as before – but high prices in general should maintain consumer interest in diesel-fueled LDV

• Europe will remain a key area to watch regarding Atlantic Basin diesel market pressures

• During the next decade, diesel-fueled LDVs should not affect overall U.S. gasoline/distillate mix significantly, and thus refinery supply should not become a constraint in the near term