Gas Prices Rising 2012: Diesel Exports May Drive Them Higher

Increased profit margins for diesel fuel exports have boosted U.S. diesel production over the past five years and tightened domestic gasoline supplies, contributing to rising gasoline prices in 2012.

U.S. oil refineries, whose numbers have been falling for years because of poor profitability, have found that selling diesel overseas commands a higher price than it does in the U.S., where the profit margin on gasoline can often slip into negative territory. That has led the struggling refinery industry to maximize its production of diesel fuel, part of a family of petroleum products known as distillates.

In general, a refinery takes a barrel of crude, [where] the higher margin comes from distillates, so a refinery will opt for more diesel if possible, said Anne Cameron, an analyst at BNP Paribas.

Production of distillates increased roughly 3.5 percent from March 2007 to March 2011, according to James L. Williams, owner of WTRG Economics, an oil and gas consulting firm in London, Arkansas. Williams added that production of distillates has definitely grown to increase exports.

The U.S. now exports close to 600,000 barrels of distillates a day. Moreover, the U.S. is now a net exporter of petroleum products, exporting slightly more than 1 million barrels a day, a change from 2007 when the nation imported roughly 2 million barrels a day. The bulk of petroleum product exports are to South America, Mexico and the Caribbean.

Exports of distillates in 2011 rose 30 percent from a year earlier, said Timothy Hess, an analyst for the U.S. Energy Information Administration.

[Refineries are] producing a little bit more (distillates) than they used to because the margins you get globally have been so strong ... they've kind of been tweaking that up to increase the amount of diesel, he said.

Motiva Enterprises LLC, a 50-50 joint venture between Royal Dutch Shell Plc's American subsidiary Shell Oil Co. and Saudi Aramco, has been increasing exports of U.S. produced fuels. The Houston company is expanding its Port Arthur, Texas refinery's capacity to increase its diesel production and take advantage of high export prices, the Wall Street Journal reported recently.

When U.S. refiners maximize the production of diesel fuel, however, as they have been in recent years, it reduces the amount of gasoline produced.

The EIA said U.S. refineries are capable of increasing distillate production -- at the expense of gasoline production -- by approximately 3 to 5 percent over historic yields, according to a 2010 report from the EIA. Because the supply of gasoline being produced has been lowered to increase the supply of distillates, the market has tightened for gasoline, pushing prices higher.

[Increased distillate production) certainly has had a pressuring effect on gas prices, said Avery Ash, AAA's manager of regulatory affairs.

If oil refining companies hadn't shifted focus to producing distillates, we'd have too much gasoline and not enough distillate, making gasoline cheaper as the supply increased and tightening the international distillate market, WTRG's Williams said.

Meanwhile, retail gasoline prices in the U.S. continue climbing. The average price of gas nationally reached a 10-month high of $3.89 a gallon on Wednesday.

The rise in prices, due to increased distillate production putting pressure on gasoline supplies, has been compounded by refinery closures in the Northeast. Four east coast refineries have closed in the last year.

Imports are actually up at the same time [as exports] to supply the East coast ... a lot of it is coming from Europe, AAA's Ash said, adding that importing gasoline drives up distribution costs.