US gasoline markets to rebalance by 2010

Jan. 15, 2007
A detailed analysis of the US gasoline market shows that a market rebalancing will be under way by 2010, when additional refining capacity will reduce the imbalance between demand and supply.

A detailed analysis of the US gasoline market shows that a market rebalancing will be under way by 2010, when additional refining capacity will reduce the imbalance between demand and supply. The US need for gasoline imports, one of the key market factors that has supported the refining boom, will have less of an influence by then.

Internationally, this outlook suggests that while Europe and Latin America will continue to have an outlet for surplus gasoline production into the next decade, market volatility seen since 2004 is likely to decline and margin peaks will also fall.

The window of opportunity for export refiners (e.g., in Latin America and the Middle East or Asia) building capacity to target the US gasoline market could also diminish by 2010. As more projects come on stream, there will be increasing competition between these refiners to export gasoline to the US market.

The early investors will see the best returns. Some projects being planned today may not find a market and it will become increasingly diffcult for developers beyond 2010.

In the longer term, the successful importers will be those investors with the best partners, economic crude supplies, optimal configuration in the right location, and those that can exploit multiple opportunities in the global marketplace.

Other market forces must emerge to ensure that the balance does not tip completely and the refining boom lasts into the next decade. Although we have restricted our analysis to the US gasoline market, it only accounts for 42% of total oil product consumption in the US.

Supply-demand dynamics for other products such as LPG, naphtha, jet-kerosine, diesel, gas oil, low-sulfur fuel oil, and high-sulfur fuel oil combined will have an effect on future industry prospects and the longevity of the refining boom.

It is likely that the middle of the barrel will become increasingly important for refinery profitability into the next decade.

Moreover, supply-demand dynamics in other regions will also have a crucial influence on the US. It is possible, for example, that demand growth in Asia-Pacific could exceed increases in regional product supply. If so, Asia could pick up a large proportion of any future slack in the global market, and it could be the key region that prolongs the boom. Indeed, Asia could supplant the US as the key region for the global refining market.

An alternative scenario would be a global gasoline surplus due to new build capacity in Asia; this is a particularly gloomy long-term prospect for the industry. Although gasoline in the US remains the most influential single refined-product market and can provide some insight to the global picture, it cannot be considered in isolation from other products or regions.

US refining

Refining has been transformed into an industry that is once again attracting significant investment. Many factors have converged to improve dramatically the industry’s profitability, especially in the US:

  • Growth. Oil demand has increased significantly.
  • Historic underinvestment. Refinery capacity and supply growth have lagged demand.
  • Oil prices. High crude prices and widening light-heavy crude price differentials have provided a significant margin boost for highly upgraded facilities.

Hurricanes, growing deficits, and recent specification changes have further stoked the US boom. New capacity, however, will hit the market in the next few years.

Based on our Global Products’ Outlook service, we conclude that demand will outstrip capacity additions for the next 2 years, thus maintaining the current sustained period of strong refining margins. In the medium term, however, the market may begin to rebalance by around 2010 as more capacity is added.

A critical market to watch as a bellwether for any correction is the US gasoline market. Consumption there represents more than 40% of total global gasoline demand, and the US is home to about 20% of total world refining capacity (Fig. 1).

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By year 2020, the US gasoline deficit-a key factor underpinning margins in the Atlantic Basin-could be significantly lower than it is today because domestic gasoline supply will increase. There could be fierce international competition, therefore, to supply the US market, and potential major implications for global trade flows.

US gasoline markets

Recent market tightness and associated high prices and margins are stimulating a market response for both demand and supply.

In the short term, oil product consumption has remained surprisingly inelastic to price fluctuations. Wood Mackenzie maintains, however, that in the medium to long term, consumers will begin to respond.

This response will take the form of improved automobile energy efficiency and the greater use of alternative energy products. The key questions concern the degree of the response and the ultimate impact that it will have on refined-product demand.

On the supply side, there has been a wave of refinery investment announcements caused by the prospect of attractive returns. The primary questions are: How much of this new capacity will be built? Where and when will it be built? And what will be the impact upon oil product supply?

US in global context

Due to the current state of tight market fundamentals and with the predominant US position on both sides of the supply-demand situation, any disruption in the US gasoline market sends ripples through the global market.

This was evident when global gasoline prices spiked in 2005 when the hurricanes hit the US and again in 2006 when methyl tertiary butyl ether was phased out.

Response to high oil prices

US gasoline demand has grown at 1.6%/year during the past decade because car ownership and travel have increased, while vehicle fleet efficiency has changed very little. Passenger car ownership has grown only slightly during the past 20 years; much of the incremental growth was in sales of light trucks, such as sport utility vehicles (SUVs) and multi-purpose vehicles.

These light trucks have less stringent mandatory fuel-efficiency standards than cars. Indeed, the average fuel efficiency of the light-truck fleet has remained largely unchanged since 1990, although the passenger car fleet efficiency has improved somewhat.

There were 780 cars/1,000 people in the US in 2005, the highest in the world. Recent high pump prices have brought fuel economy into focus once more and sales of SUVs have faltered. Wood Mackenzie expects that the fleet’s fuel economy will gradually improve because motorists will seek more efficient cars and SUVs.

Some of this improvement will be mandated. Unchanged for a decade at 20.7 mpg, the light-truck fuel efficiency standard is now being increased progressively between 2005 and 2007 to 22.2 mpg. Hybrid sales will account for some of the efficiency gains due to increased sales, possibly 1 million vehicles by 2010.

Diesel vehicles will make a modest contribution to fleet fuel efficiency and the erosion of gasoline demand, although not to the extent seen in Europe. Diesel-powered cars have never caught on in the US as in Europe due to inexpensive gasoline and consumer resistance; less than 5% of light truck sales are diesel and the proportion of diesel passenger cars is negligible.

Using technologies improved in Europe, and with tailpipe emissions reductions enabled by the imminent introduction of ultralow-sulfur diesel, some increases in diesel vehicle sales are likely.

Wood Mackenzie anticipates that the overall effect of these efficiency improvements and other factors, such as saturation of the vehicle fleet, will be a reduction in the future rate of growth in gasoline consumption to below historic levels.

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We expect that the slow-down already seen in gasoline demand growth since the 1990s will continue during 2005-10 (Fig. 2); growth rates will fall even further until 2015, such that demand could even begin to stagnate after 2015.

Market response?

Our analysis includes all known and realistic capacity expansions and upgrading projects, and allows for the effects of capacity creep. We believe that the high number of refinery investments being implemented in the US will have an effect on the country’s utilization rates. Shut-downs to tie in new infrastructure will prevent US utilization rates from rising above 90% in 2010.

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Although the 2005 deficit was inflated due to hurricane disruptions, the US gasoline deficit is forecast to drop markedly by 2010, back to levels seen in 2001-02 level (Fig. 3). After 2010, this deficit is expected to reduce even more because incremental refining supply will outpace ever-slower demand growth.

US supply response

The US refining industry consists of 133 refineries with a capacity of nearly 18 million b/d. Although a new refinery has not been built in the US in more than a generation, the industry has been quick in developing its response to improved margins since 2004.

Of the more than 600 projects in Wood Mackenzie’s global refining investment database, some 100 are in the US. Of these, more than 40% are for quality compliance, while the rest are for investment in upgrading or new crude capacity.

We believe that many of the investment projects have a high likelihood of proceeding. We rank almost 70% of these projects as having a “strong” probability rating, a fact that reflects the quality of the sponsors as well as the powerful project rationale. In contrast, only about 25% of projects for the rest of the world are considered as “strong” (Fig. 4).

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Equipment delays and escalating construction costs also have an effect. Although the effect of delivery delays on some long lead items, such as large pressure vessels needed for hydrocrackers, can be minimized by smart project-management strategies, rising costs have already caused some postponements and even project cancellations.

In addition to the large number of small expansions totaling slightly more than 700,000 b/d, there are three major crude expansion projects in the US:

  • The 325,000-b/d expansion of Motiva’s Port Arthur, Tex., refinery.
  • The 180,000-b/d expansion of Marathon Oil Co’s. Garyville, La., refinery.
  • Chevron is evaluating expanding its Pascagoula, Miss., refinery to become the second largest in the US. This would involve adding at least 200,000 b/d of capacity to the existing 325,000 b/d.

We expect all of these major expansions to proceed, although not all of them will start up by 2010. There is one new grassroots refinery proposed, the 150,000-b/d Arizona Clean Fuels refinery in Yuma. We do not believe, however, that this refinery will be constructed within the next decade, if ever.

The total additional crude capacity currently announced in the US, and which Wood Mackenzie believes to be realistic, is about 1.1 million b/d added by 2010.

Americas-overall outlook

The analysis from our Global Products’ Outlook service shows that, in overall terms, North America currently has a large deficit of oil products supply vs. demand. Wood Mackenzie’s view is that this region’s deficit of oil products could fall significantly by 2020 as a result of increased crude capacity (mainly in the US) outpacing growth in oil product demand.

In contrast, Latin America has a current surplus of oil products supply vs. demand and is a major exporter. Our analysis shows that the products surplus (and level of exports) will rise significantly by 2020, primarily due to new crude-distillation capacity coming on stream and the effects of increasing biofuels use, particularly in Brazil. Much of the crude capacity in Latin America is being developed primarily as a means of monetizing extra-heavy crude reserves.

These findings have some fundamental long-term implications. Refiners in Europe and Latin America that currently rely on exporting products to the US could find competition for this market becoming increasingly fierce. New capacity being built in Latin America, which will push this region further into surplus, will need to find alternatives to the US markets, possibly as distant as Asia.

Although this may be an opportunity for shipping companies, it does not bode well for long-term refining profitability in Latin America. Moreover, any additional new crude capacity in the region beyond that which Wood Mackenzie is already forecasting could further increase the risk of a capacity overbuilds and depressed refining profitability in the long term.


This article draws upon an in-depth analysis that Wood Mackenzie has completed for North America and Latin America. This analysis forms part of our newly developed Global Products’ Outlook service, which analyzes the fundamental market issues facing refiners.

The author

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Mike Wilcox ([email protected]) is the global head of downstream oil consulting for Wood Mackenzie, London. He joined Wood Mackenzie in 1991, taking global responsibility for the development of the downstream oil consultancy practice. Before 1991, Wilcox worked for BP PLC, where he held various positions in research, strategic and financial planning, followed by 4 years commercial experience as a crude and then product trader. He holds an honors degree in Natural Sciences from Cambridge University.