The peak oil crisis: The first shortages
Fuel prices alone are unlikely to bring America to its senses.
It clearly will take outright shortages with lines at the pumps, curtailed deliveries and many other misfortunes before serious measures to deal with declining oil supplies –- speed limits, rationing, mandatory car pools, improved mass transit -- are taken. Thus the question becomes: how soon?
Gasoline and diesel are two different animals in America. Most gasoline is used for personal travel and much of that for convenience and, as we shall find out shortly, is not essential to the economy. Diesel in America is, for the most part, an essential fuel in that it is used to perform money-making work or, in its heating oil form, keep us from freezing. If diesel becomes too expensive, and those expenses cannot be passed on, then the consumption of diesel will be cut back. This in fact is already happening -- the government is reporting that distillate consumption of diesel and heating oil currently is down by 3.1 percent as compared to the same four week period last year. This is undoubtedly due to the price of diesel and heating oil which is now around $4 a gallon, an increase of $1.17 a gallon since last year.
The word “distillates” encompasses both diesel and heating oil which are about the same thing; except that the clean air rules in the U.S. require most of the sulfur be removed before burning it in a motor. Currently there is a world-wide shortage of distillates which is most severe in China where long lines of trucks waiting for fuel are appearing across the country.
Before examining what might lead to shortages in the U.S., it is useful to get some understanding of distillates and the role they play in American life. Few appreciate that diesel is one of the best of the liquid fuels, for it will move your car further than the same quantity of gasoline. As a result, the gasoline-powered car is fast disappearing in Europe and is being replaced by small diesel-powered ones that are delivering 40, 50 and even 60 miles per gallon. In some European countries, diesel-powered cars are now approaching 80 percent of new car sales.
In America, about 77 percent of our daily consumption of about 4 million barrels of distillates is used in diesel engines. Three quarters of this is used in trucks and the rest is used “off highway” on farms or boats or at construction sites, etc. As we only use heating oil for about 6 months in the winter, consumption of distillates in the U.S. is highly seasonal with consumption building to a peak in January and February and then dropping off to the end of April when the heating season is largely over.
Distillate stockpiles in the U.S., therefore, vary by season with a buildup in the late spring, summer and fall followed by a rapid drop from late December to May as oil burners across the northern U.S. are cranked up. The severity of the winter too has lot do to with how much heating oil is consumed each year and there is always a danger unusual cold will deplete stockpiles to the point where shortages exist.
This seasonal pattern suggests that when distillate shortages come to the U.S. they first will arrive during the heating season, either as a result of unusually cold weather or simply insufficient increases in stockpiles during the warmer months. As a 42 gallon barrel of oil will make only abut 10 gallons of diesel and heating oil, the U.S. must import about 6 percent or about 250–350,000 barrels of refined diesel and heating oil each day. Most of this comes from “safe” places like Canada and the Virgin Islands, but some must come from the world market.
It is these imports that may become our Achilles heel, for we are now facing increasingly stiff competition as we purchase distillates abroad. Within the last year China has started to import large quantities of refined diesel. A new source of demand is the power shortage that is developing all over the world. As there is no quick solution to inadequate electricity being available on national grids, the demand for imported diesel to fuel emergency small local generators is already growing rapidly. The bottom line is that world diesel prices have nowhere to go but up.
U.S. imports of diesel appear to be dropping. For most of 2006 we were importing about 350,000 barrels a day. In the first quarter of 2007, we imported an average of 360,000 barrels a day but by last fall this had dropped to 260,000 barrels and was the same for the first quarter of 2008. This could of course turn around, but given growing demand and lack of an increased supply worldwide, it is likely that it will become harder and much more expensive to find diesel and heating oil to import.
In recent years, U.S. stockpiles usually peaked at around 135-145 million barrels in December and then declined to a low of 100-110 million barrels at the end of April.
So far this year seems about normal. Our stockpile at the end of March was 109 million barrels, a little low, but still in the acceptable range.
The two new factors this year, however, are the high prices and slowing economy which already is cutting demand by 3 percent or 130,000 barrels a day and the rapidly increasing demand for imported diesel around the world.
This balance bears close watching. In another two weeks, U.S. stockpiles should start rising again so that we can start accumulating enough heating oil for next winter. If demand continues to stay below normal, we will know that the use of diesel for industry and transport is causing at least some of the drop in demand. If demand returns closer to normal in a couple of months, then it would suggest that drop in the use of costly home heating was behind at least some of the recent decline in demand.
It is a little too early to panic. However, if stockpiles do not start increasing at something approaching normal rates, there could be trouble just ahead. If we should have a mild winter, then we may be able to escape for another year. If, however, we do not build adequate stockpiles this summer or next and winter turns out to be unusually cold, prices will spiral even higher and the first serous U.S. shortages in the last 25 years could easily develop.
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