CHICAGO -- The outlook for fuel in the final years of this decade will largely be more of what we've seen so far, but just a little more or less of it.
That’s one takeaway from the motor-fuels outlook presented by Tom Kloza, global head of energy analysis for Oil Price Information Service (OPIS), Gaithersburg, Md., at the recent NACS State of the Industry Summit in Chicago.
Case in point: the past years’ run of low gasoline prices and its effect on consumers. From 2011 to 2014, consumers paid $1.4 trillion for gasoline, Kloza said. In the next four-year period, from 2015 to 2018 (assuming a projected average 2018 price of $2.56 per gallon), they will spend $1.33 trillion. Even assuming Congress passed a 23-cent-per-gallon increase on the federal gasoline tax in 2018, consumers would still save about a half-trillion dollars in this most recent four-year period.
“If you wonder why c-stores have had a good environment, that’s pretty much it,” he said. “Think about all of that extra disposable income.”
Read on for more of Kloza’s expectations for motor fuels in the rest of this decade—and beyond ...
Fuel prices’ gradual rise
Thus far, the refinery maintenance and turnarounds in 2018 have run very smoothly, which is reflected in the year’s gasoline price trends, Kloza said.
“Gasoline is essentially the dog that hasn’t barked,” he said. “Prices have gone up, especially on the West Coast, but [there has been] nothing spasmodic or that would be called a spike. It’s more slow, subtle increases.” Kloza expects prices to continue to rise as refineries transition to more expensive summer-blend fuel.
“We think gasoline will be modestly more expensive than last year,” said Kloza. However, that would change with a major hurricane strike on the nation’s refining infrastructure, such as 2017’s Harvey.
“Within the context of a week, it knocked out 25% of the U.S. east of the Rockies’ refining capacity,” Kloza said. “It’s unprecedented and hopefully just really bad luck.”
The biggest anticipated factor that could shape the fuel outlook for 2018: exports. Since the export ban on refined product was lifted in 2015, the United States has been shipping record volumes of finished motor fuel, much of it to Central and South America.
“We’ve had a number of weeks where we’ve exported 1 million barrels per day of gasoline or more,” said Kloza. “If you’re a refiner in the Gulf Coast, Texas [or] Louisiana, the world is your oyster.”
This is butting up against domestic demand, which has averaged 9.3 million barrels per day (bpd); that number is projected to rise to 9.8 million bpd during the summer.
“You’re exporting 1 million [barrels]; you’re finding a home for a lot more gasoline than you’re manufacturing,” he said. With more gasoline being sent out of the country, this could put pressure on U.S. supply and ultimately prices.
Demand’s slow decline
The U.S. Environmental Protection Agency (EPA) recently announced that it would revisit greenhouse-gas emission standards for 2022-2025 model-year cars and light trucks. The expectation is that the EPA—in conjunction with the National Highway Traffic Safety Administration (NHTSA), which oversees Corporate Average Fuel Economy (CAFE) standards—would revise the average fleet target of 54.5 miles per gallon downward. So what are the implications for future fuel demand?
“Freezing the CAFE standards at model-year 2021, it doesn’t lower the demand curve—it just tempers it, delays it a little bit,” Kloza said. Most of the drops in demand will still happen from 2020 to 2025, and again from 2025 to 2030.
“Without a recession, [demand stays] where it is until 2020,” he said. After this point, however, today’s 9.3-million-bpd average will be a high mark.
“Should you be worried about nonliquid fuels?” Kloza said. “It’s not a realistic threat in the next 10 years.”
Kloza, of course, was referring to electric vehicles (EVs), which have been the focus of countless projections and news stories predicting their imminent transformation of transportation. Kloza believes EVs are affecting traditional fuels but not because of widespread consumer adoption. Instead, he described it as an example of paradoxical intention.
“Exactly what you don’t want to happen happens to you and alters your behavior,” he said. “To a certain extent, this is going to alter the behavior of the oil patch as well.” Not as much money is flowing from capital markets into oil as a result, he said.
“People are undervaluing oil companies right now because they think electric is coming, and they probably think it’s coming a lot quicker than it is,” he said. Less money is going into long-cycle oil projects, resulting in less of them set to come online in 2021 and beyond.
The other low-sulfur fuel regulation
In what Kloza described as “the most dramatic change in this business since the Clean Air Act,” a new regulation is set to take effect in 2020 that requires sea-container vessels to switch to low-sulfur fuel.
“Put another way, a large container vessel right now emits more sulfur in a year than 10 to 12 million diesel cars,” Kloza said. “We’re going to go to one-seventh of that.”
The net result is that about 4 million barrels per day of global diesel demand will shift to marine blending.
“Our view is it will send prices higher astronomically,” Kloza said. “I believe it’s going to send the price of diesel to $35, $40 [per barrel], which is $1 per gallon more than the price of crude. It will hurt light diesel fuel sales in the U.S.” The expected timing of the price increases: late 2019.