Comments by John Felmy, API Chief Economist, and by Ronald J. Planting, Manager, Information and Analysis, Statistics Department, during a press briefing July 19, 2006 on the API 2006 Mid-Year Review.
Statement by John Felmy
Chief Economist
API Office of the Chief Economist
Once again we have seen sharp increases in the price of gasoline and diesel fuel. And, once again, it is due to the fundamental forces of supply and demand – tight world markets for crude oil and high prices, a higher cost of refining and distributing gasoline, a switch to ethanol, and sulfur content changes to diesel fuel. Consumer demand has been affected to some degree, but only at the margin as it is very difficult for consumers to change their usage because of limited flexibility in commuting and driving requirements.
We recently saw the price of crude oil reach a record level on the New York Mercantile Exchange as market perception of supply and demand fundamentals drove prices up. Demand from areas such as China remains strong and a relatively large amount of oil production is offline in areas such as Nigeria, Iraq and Venezuela. Further, some U.S. Gulf of Mexico production remains offline after the hurricanes of last fall.
On the fuels side, the industry has introduced low sulfur gasoline this year in the third year of a program that cost the industry about $8.0 billion. In addition, ultra low sulfur diesel fuel is now being refined and shipped to reach retail stations no later than October 15. This program also cost the industry in excess of $8.0 billion. These programs are very important to improving future air quality and the industry is committed to producing them, but they are not costless.
In short, we are experiencing many of the same factors that have caused high and volatile prices for the past six years. The industry has struggled to supply the fuels that consumers and businesses need by refining and importing record or near record amounts of fuel, but the cost to make that fuel has been high. The industry worked very hard to recover from the hurricanes and our industry took a body blow, with our facilities and employees literally at the point of impact of Category 5 storms. Most of the refinery production has been restored and many precautions have been taken to prepare for any future storms. We have held conferences, reviewed protocols and standards, and are working with all relevant agencies of government to get ready for similar storms this year.
At the same time we have been criticized for inappropriate behavior even though numerous investigations have exonerated the industry. All that has resulted from these investigations has been a lot of wasted government and business spending on the investigations and legal and management costs.
It has been all too easy to call for investigations rather than address the fundamental policy needs that would move us forward and help consumers. The time is now to develop sensible government policies that increase supply, reduce demand and improve the energy infrastructure. The Congress took a first step last year. They need to finish the work to help their constituents.
Statement by Ronald J. Planting
Manager, Information and Analysis
API Statistics Department
Today we are releasing our estimates of U.S. petroleum supply and demand for the first half of 2006. Our figures show that consumers, facing higher gasoline prices, apparently found ways to drive less and to use fuel more efficiently. As a result, we saw a decline in gasoline demand (as measured by "deliveries") in the second quarter. This contrasts with increases in earlier years that had averaged 1.5 to 2 percent annually.
In fact, most products showed flat to declining deliveries in the first half. The reasons included airlines working to operate more efficiently and use less jet fuel, and electric utilities and others switching away from heavy fuel oil because of price-competitive natural gas. The one exception was on-highway diesel fuel. The growing economy produced more goods needing to be transported to consumers, which led to an increase in the demand for diesel. Overall, U.S. petroleum deliveries for the first half of 2006 fell 1.3 percent compared with a year earlier.
Meanwhile, in June, U.S. refiners began producing substantial quantities of the new, cleaner diesel fuel mandated by the Environmental Protection Agency. This fuel is called “ultra-low sulfur diesel” (ULSD) or “clean diesel.” When used with the latest on-highway diesel engines, it promises to significantly improve our country’s air quality. By the end of June, refiners were producing more than 2 million barrels per day of this very stringently-specified fuel. According to government requirements, ULSD will be due at retail beginning October 15.
As for petroleum imports, the strongest increase in the first half was for products, while imports of crude oil actually slipped. Product imports for the first six months reached a level second only to the record reached in the last half of 2005. Then, domestic refining capability was severely hampered by that year’s unprecedented hurricane season. In this year's first half, gasoline imports reached an all-time high of 1.3 million barrels per day.
Offshore, oil and gas production continued to recover from last year’s hurricane disruptions. Nevertheless, oil production still lagged compared with a year ago. For the first six months, crude oil production was down nearly 6 percent compared with a year ago.
Inventories, at mid-year, were ample for the most part. Levels of crude oil and most major products were at or above their historical five-year averages for this time of year. Although gasoline inventories were slightly below the historical average, crude oil inventories were fully 10 percent above.
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