Energy Production
Committee
Understanding the Petroleum Industry
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- Asia has been the driving force behind world demand growth over the last
decade or so, accounting for 2/3 of the nearly 14 million B/D of growth between 1985 and
1997.
- The Asian economies have not just been among the world’s fastest
growing; most have also been in transition from a relatively simple to a more
sophisticated stage of development. Urbanization and industrialization were raising the
energy intensity of the economies, while the rapidly emerging Asian middle class was
looking for a higher standard of living, characterized by a Hyundai (or Toyota or Ford) in
every garage, and a fridge, TV, microwave, computer etc. in every home. With limited
infrastructure in Asia for natural gas, the result was soaring oil demand.
- Asia’s economic crisis is much broader based and much deeper than
anyone initially expected. Indonesia, Thailand and S. Korea, the three countries at the
core of the crisis, and the three that made the largest contribution to oil demand growth
in the pre-crash 1990’s, continue to be the most severely impacted. But no one is
immune. SE Asia is now in the midst of a full-blown recession, and Japan is part of it.
The Asian flu has spread, and turned into a resistant strain.
- As a result, instead of maintaining its trend rate of growth of 700
thousand B/D, Asian oil demand in 1998 will decline for the first time since 1985.
Although growth may be restored in 1999, it will probably not recover to its long term
trend rate for some years.
- (Back to
Demand Chapter) (Back
to Top)
- Fifteen years ago, gasoline and distillate were running neck and neck in
the global demand race; a comparability heavily influenced by U.S. gasoline demand, which
even then accounted for around 40% of both total national demand and world gasoline
demand. Most of the expectations about how this race would develop have proved to be
wrong, causing refiners and marketers to be tugged back and forth over what the right
investments and strategies should be.
- The mix in the U.S. was expected to tilt sharply toward distillates
because increasing fuel efficiency and some modest market penetration by alternative fuels
was seen sending gasoline demand into a tailspin. Instead, low prices, high speeds, light
trucks and backpedaling on alternative fuel programs have gasoline demand setting new
highs.
- In Europe, the tilt was expected to be the other way. Distillate demand
was expected to be eroded, as natural gas -- suddenly plentiful -- penetrated the heating
oil market and as freight was diverted to the railroads. At the same time, gasoline demand
was expected to grow as car ownership continued to rise toward U.S. levels. But goods
stayed on the roads and Europeans, influenced by better mileage and pro-diesel fiscal
systems, voted with their pocketbooks for diesel cars.
- The bet in Asia was that demand growth for both products would be
relatively modest. Instead, average growth over the last decade for each of them was a
startling 8% per annum. Not only was economic growth unexpectedly high, boosting demand
across the board, but the latent desire for car ownership was grossly underestimated. In
South Korea, the most vital of all Asia’s tiger economies, there was sustained
gasoline demand growth of over 20% p.a.
- The net result is that, although distillate has been the world’s
fastest growing product, as expected, demand for both gasoline and distillate today is
substantially higher and is in significantly different regional proportions than had been
planned for. This has been a major factor behind the spikes in inter-regional and
inter-product price differentials. With the current demand slowdown, these spikes will be
more muted.
- (Back
to Demand Chapter) (Back to Top)
- See also, The
Gasoline/Distillate Tug-of-War, from the Refining Side
- Product standardization is in retreat. As pollution limits are set ever
lower, legislators are increasingly switching their focus from cleaning up emissions
– scrubbers, catalytic converters, vapor recovery systems, etc. - to cleaning up the
fuels themselves. The result is a tightening of product specifications.
- The principle is not new. Unleaded gasoline, for example, has been around
since the 1970’s. But as the world has gone unleaded, gasoline has remained a
commodity, albeit a different one from before. What is new is the level of detail being
specified, the number of entities doing the specifying and the inter-area differences. The
result is fragmented markets with fewer buyers and sellers in each, a greater risk of
stock-outs and more volatile prices.
- The two products most affected are gasoline and diesel. This is because
of the growing importance of transportation demand both to total oil demand and to total
pollution, now that the easier targets have been tackled.
- The U.S. has been in the vanguard of this fragmentation movement. The
federal government introduced low RVP gasoline, followed by oxygenated gasoline and then
by reformulated gasoline, with each having ever more complex regional and seasonal
variations and applicability. Now, layered on top of this, are various state and city
mandates, such as California's unique brand of RFG, Atlanta gasoline, Alaska’s ban on
the gasoline additive MTBE etc.
- Europe looks set to leapfrog the U.S., with the European Union’s
aggressive new specifications for gasoline and diesel that are set for a 2-stage
introduction in 2000 and 2005. Trans-Atlantic trade will become increasingly difficult.
- Thus, the trend of the last decade or so toward commoditization of oil
products, which was an outgrowth of the steady dismantling of such barriers to entry as
limits on foreign ownership, high import tariffs, market monopolies etc., is now being
reversed by market fragmentation.
- (Back
to Demand Chapter) (Back to Top)
- See also, Specialty
Products and Market Fragmentation, from the Refining Side
- See also, Specialty
Products and Market Fragmentation, from the Trade/Import Side
- See also, Specialty
Products and Market Fragmentation, from the Inventory Side
- The aftershock of the Arab oil embargo combined with forecasts of
dramatically rising oil prices and oil imports led to the institutionalizing of fuel
efficiency improvements for vehicles in 1975 via the CAFE standards. In the first decade
after these standards became effective, there was a 46% improvement in the fuel efficiency
of new, private vehicles.
- In practice, gasoline become cheap, not expensive. Despite rising excise
taxes and the extra costs associated with the more environmentally benign grades of
gasoline now mandated in the U.S., prices, adjusted for inflation, are at an all-time low.
Americans are driving further than ever, and they are now doing so less efficiently too.
- As prices and price expectations receded, not only did the likelihood of
a second phase CAFE recede too, but the proportion of gas-guzzling sports utility vehicles
and mini-vans Americans were buying started to rise steadily. Their lower CAFE standard of
20.7 miles per gallon (mpg), compared to 27.5 mpg for cars, has resulted in new vehicle
fuel efficiency falling 5% in the last decade, to 24.6 mpg. With so many of the old-style
gas-guzzlers already scrapped, this decline has been enough to cause the operating
efficiency of the entire fleet to start falling.
- Hence, and quite contrary to the earlier consensus outlook, U.S. gasoline
demand has continued to grow. Even though the rate of growth has been less than in many of
the emerging economies, its huge baseload of demand gives it tremendous leverage. Thus,
the increase in gasoline demand in the U.S. since the 1991 recession is as large as the
increase in the whole of Asia.
- Back
to Demand Chapter
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