While trends surrounding crude imports are often cited as a key determinant for the United States’ energy security narrative, other details are also important, including what is occurring downstream. The U.S. is once again consuming large amounts of gasoline, this summer breaking demand records set back in 2007. At the same time, however, the country is flipping from being a large importer of gasoline to becoming a net exporter. With the country still in love with large cars and trucks and vehicles miles traveled (VMT) going through the roof, it’s an eye-opening turnaround that the U.S. is able to export large volumes of gasoline while slicing its needs from foreign sellers. Growth in refining capacity, high downstream utilization, declining demand for other petroleum products, and flexibility provided by cheap feedstock thanks to the shale boom have all boosted U.S. energy security, lowered pump prices for consumers, and increased refined product exports.
The U.S. is once again consuming large amounts of gasoline, this summer breaking demand records set back in 2007, but the country is flipping from being a large importer of gasoline to becoming a net exporter.
This year, the U.S. has imported on average 63,000 barrels per day of finished gasoline, but has exported some 575,000 b/d. By contrast, in 2005, when imports peaked, the U.S. took in more than 600,000 b/d and exported just 136,000 b/d. When blending components are included in the numbers, the U.S. now basically imports as much gasoline as it sends abroad (see graphic below). That is a stark turnaround from a little more than a decade ago. In 2007, the U.S. imported more than 1 mbd of gasoline and blending components. If current trends continue, the U.S. will be a net exporter of gasoline and blending components, reinforcing its position as an energy superpower.
Refining industry goes boom
At the beginning of this year, U.S. refining capacity totaled 18.1 million barrels per day (mbd), up by about 1.7 mbd from a decade ago. While four new plants came on line in the past couple of years, most of the increase in capacity has occurred from expansions to existing plants. Downstream firms have added capacity as a result of strong margins, expectations for demand growth, and the ability to take advantage of cheap domestic crude grades. The refining industry experienced a “Golden Age” last decade when margins soared because of tight refined product markets, motivating firms to expand capacity and output. Downstream companies went through a tough period in the aftermath of the 2008 financial collapse, but they are now experiencing a mini-renaissance.
Downstream firms have added capacity as a result of strong margins, expectations for demand growth, and the ability to take advantage of cheap domestic crude grades.
One main reason for the relatively strong margins in the U.S. is a rebound in demand for gasoline, refiners’ core product. In 2012, total U.S. gasoline demand bottomed out at 8.62 mbd, but has jumped since then, averaging 9.35 mbd so far in 2016, putting it on pace to surpass 2007’s record. Against the backdrop of higher gasoline demand, refiners have boosted their yields for gasoline, which have risen from 45.5 percent to 47.5 percent since 2012, allowing them to squeeze more out of every barrel of oil. Refiners have churned out roughly 9.8 mbd of gasoline so far this year, almost 500,000 b/d above demand, reducing the need for imports and allowing them to export larger volumes. While gasoline demand has soared, demand for distillates—diesel and heating oil—has taken a hit this year, falling by 160,000 b/d, or 4.2 percent, year-on-year. This allows refiners to further focus on meeting gasoline demand growth, here and abroad. Last decade, the expectations were the opposite—the main growth was expected in distillates, while gasoline consumption was believed to have peaked.
Shale gives refiners flexibility to export gasoline, distillates
There’s little doubt that the U.S. shale boom has emboldened domestic refiners and supported margins, allowing them to boost utilization and keep a lid on retail gasoline prices. From 2010-15, U.S. refiners enjoyed an extended period of cheap feedstock with domestic crudes trading well below international grades. Although margins have dipped this year, as domestic crude prices have converged with global markets as a result of the nixing of the U.S. crude export ban, refiners are still seeing relatively strong profits. With domestic crude production robust, refiners have more choices in buying feedstock for their plants and are able to hold large amounts of crude in inventory, giving them flexibility.
There’s little doubt that the U.S. shale boom has emboldened domestic refiners and supported margins, allowing them to boost utilization and keep a lid on retail gasoline prices.
Before Congress lifted the crude oil export ban last year, the U.S. was already a major exporter of petroleum, but mostly in refined products. In 2015, the U.S. sent some 4.2 mbd of petroleum products to foreign buyers, more than double the amount from 2009, right before shale started taking off. Distillate fuels have been the main beneficiary of the rise in exports. Since 2012, the U.S. has exported more than 1 mbd of distillates, up from just above 500,000 b/d in 2008 and only 110,000 b/d in 2004. Although gasoline remains below distillates on the export hierarchy, its star power is rising, with Mexico being the biggest customer. This year, exports of finished gasoline should reach a record just below 600,000 b/d, almost triple the levels seen at the end of the last decade.
Refiners in a good position, as long as demand holds up
On its most recent earnings conference call, the U.S.’ largest refiner, Valero, said: “The gasoline market, as long as you’re in this low price environment, you’ll continue to see good demand response on gasoline.” That’s, of course, good news for them. Given their high utilization and overall nimbleness, refiners are poised to continue to meet U.S. gasoline demand growth while also feeding markets outside the country’s borders. This wasn’t always the case. Refiners used to have to scramble to buy from overseas to meet their demand, but that situation has significantly shifted and should continue to do so.