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Diesel thirst fueling exports, pressuring prices

By Jeffrey Tomich, St. Louis Post-Dispatch –

ST. LOUIS — You don’t need to be able to find the Strait of Hormuz on a map to understand the global nature of the oil market, or that the price at the pump can swing wildly based on uprisings in countries such as Iran or Libya.

Less understood, however, is that the market for fuels produced from all that oil has grown increasingly international as well. Last year, U.S. refiners shipped millions more gallons of gasoline and diesel than they imported — the first time that’s happened since 1949.

The trend represents a huge shift in the trade of petroleum products, one that’s being driven by the same forces that have turned other commodity markets upside down in recent years: Energy-hungry economies in places like China and India.

The effect here can be seen most obviously in diesel fuel prices, which now regularly outpace the price of gasoline, a trend analysts expect to continue. Diesel retail prices have risen steadily since early 2009 and currently average about $3.60 a gallon in the city of St. Louis, according to AAA’s Fuel Gauge Report.

That’s bad news for those who drive trucks, trains, tractors and construction equipment. School districts, too, are feeling a pinch.

St. Louis Public Schools, for instance, spent $106,500 on diesel for its 276 school buses in November compared with $61,600 the same month a year earlier, said Deanna Anderson, executive director of transportation. And that at a time when the district faces other budget pressures.

“We’re between a rock and a hard place,” she said. “Kids have to get to school. And in our district, there aren’t many schools within walking distance of where they live.”

Rising diesel prices here tie directly to rising demand for U.S. fuel exports overseas. The United States imported 2.5 million barrels of fuel than it exported as recently as 2005. Last year, so-called net fuel exports averaged 380,000 barrels a day — a swing of almost 3 million barrels a day, according to data from the U.S. Energy Information Administration, the statistical arm of the Department of Energy.

The increase in U.S. exports has been driven mainly by demand for diesel used to power trucks, off-road equipment and trains.

“Diesel demand worldwide is growing, in some areas considerably faster than here,” such as China, India and Brazil, said Neil Gamson, an EIA analyst. “Their economies are booming and they’re moving a lot of things back and forth.”

U.S. refiners export relatively little fuel directly to places like China. Much of it is sent to countries in Europe and South America that either don’t have enough refining capacity to keep up with demand or have seen supplies diverted to other markets.

The boom in exports also stems from weaker gasoline demand in the U.S., owing to a still-sputtering economy and increasingly fuel efficient cars.

Weak demand might not be evident at the pump, where gasoline prices for this time of year are at record levels — due to higher crude oil prices. But U.S. drivers are consuming less of the fuel than they have in years. In the first week of the new year, gasoline demand totaled 8.18 million barrels a day, the lowest level since February 2003, according to the Energy Department.

Analysts say the corresponding lift in world diesel prices provides strong incentives for refiners to maximize diesel production at the expense of gas.

“There’s been a higher percentage of diesel coming out of our refineries over the last few years, especially because of the high foreign demand and the opportunity to sell it into those markets at a higher profit than you could if you were just selling it into the U.S.,” said James L. Williams, an energy analyst at WTRG Economics in London, Ark.

The international diesel market has been a godsend for refiners, some of whom — especially on the Gulf Coast — have struggled to make money in recent months.

Just last week, Chevron Corp., the second-largest U.S. oil company, said its refining operations would be “near breakeven” in the fourth quarter because of lower refining margins — the difference between what a refiner pays for crude oil and the price of gasoline and other products it makes.

Analysts said diesel has become a profit center for refiners and helped them continue to operate through a sluggish gasoline market.

“It has enabled some refiners to survive or prosper when they might otherwise have fallen victim,” said Tom Kloza, chief oil analyst at the Oil Price Information Service. “A refiner couldn’t make it selling just gasoline right now.”

U.S. refineries are more technologically advanced than in many other parts of the world, meaning they can make a wider range of fuel products from lower grades of crude oil. But there’s still only so much diesel they can squeeze out of each barrel of oil they process, meaning they also produce lots of gasoline in the process, along with kerosene and other fuel products.

“If refiners could stop making gasoline right now and make only diesel, they would,” Kloza said.

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