# DOE/EIA-0615 Distribution Category UC-950



# Petroleum 1996 Issues and Trends

September 1997

Energy Information Administration Office of Oil and Gas U.S. Department of Energy

Washington, DC 20585

This report was prepared by the Energy Information A dministration, the independent statistical and analytical agency within the Department of Energy. The information contained herein should not be construed as advocating or reflecting any policy position of the Department of Energy or any other organization.

# Energy Information Administration / Petroleum 1996: Issues and Trends iii 

# Preface
Contacts
Petroleum 1996: Issues and Trends was prepared by the Energy Information Administration (EIA) Office of Oil and Gas, Kenneth A. Vagts, Director (202/586-6401), and the EIA Office of Energy Markets and End Use, Webster C. Kilgore, Director (202/586-1617). Specific information concerning the report may be obtained from Craig H. Cranston, Acting Chief of the Publication and AnalysisBranch (Telephone: 202/586-6023; Fax: 202/586-4913; Email: craig.cranston@eia.doe.gov) or from Charles P. Shirkey (202/586-6567). Primary analytical contributions to the report were made by the following individuals: Chapter 1 - Charles Dale and Joanne Shore; section above your reaction to this report and your thoughts Chapter 2 - Joanne Shore; with respect to future petroleum analysis. Chapter 3 - David Morehouse; Chapter 4 - Heather Rowland; For further information concerning analysis of petroleum and Chapter 5 - Aileen Bohn; other energy issues, see the Energy Information Chapter 6 - Charles Dale and John Zyren; Administration’s home page on the World Wide Web at Chapter 7 - John Hackworth and Joanne Shore; and http://www.eia.doe.gov

. Chapter 8 - Jon Rasmussen. Significant analytical contributions were also made by Laura Knight and John Ostrich. Editorial support was provided by Dick Richards. Desktop publishing support was provided by Margareta Bennett. 

# Future Analysis This report addresses the phenomenon of volatility, which involves every aspect of the petroleum sector to differing degrees. More analysis of this and other petroleum-related topics can be conducted using the combination of data collected by EIA and available trade data. What EIA will address in the future, and how, depends on both market developments and on you, customers of the Energy Information Administration and users of this first edition of Petr oleum 1996: Issues and Trends . You are invited to convey to any of the contributors listed in the Contacts

# Energy Information Administration / Petroleum 1996: Issues and Trends v 

# Contents

Page 1. Industry Overview ........................................................................... 1 Overview of the Petroleum Sector ............................................................... 3 World Crude Oil Markets ...................................................................... 5 World Petroleum Supply and Demand ............................................................ 7 U.S. Petroleum Supply ........................................................................ 9 U.S. Petroleum Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 U.S. Petroleum Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 U.S. Refining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 U.S. Gasoline Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 U.S. Distillate Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Clean and Alternative Transportation Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Petroleum Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Financial Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 2. Spring ‘96 Gasoline Price Runup: An Example of Petroleum Market Dynamics . . . . . . . . . . . . . . . . . . . . . . . . . 27 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Crude Oil Market in Spring 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Normal Gasoline Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Unusual Gasoline Market In First Quarter ‘96 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 The April Runup: Distillate and Gasoline Markets Clash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Gasoline Price Progress Through Summer 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Price Reversal in Spring 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 3. Oil Supply: U.S. Perspective on a Global Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Oil Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Oil Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Oil Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Future Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 4. Crude Oil Imports: Growing U.S. Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 U.S. Total Oil Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 An Overview of Crude Oil Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Sources Of U.S. Crude Oil Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Where In The U.S. Does the Imported Crude Oil Go? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Quality Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Crude Sources for the Largest Importers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Seasonality of Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Crude Oil Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 5. Petroleum Stocks: Causes and Effects of Lower Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Crude Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Distillate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Motor Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Expected Price Drop Discouraged Stock Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

# vi Energy Information Administration / Petroleum 1996: Issues and Trends 

# Long-Term Influences on Petroleum Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Conclusion/Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 6. Petroleum Futures Markets: Volatile Prices, Controversial Functions, Stagnant Volumes . . . . . . . . . . . . . . . . 101 The Uses of Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Petroleum Futures Market Trading Volume Slowed in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 Futures and Spot Price Correlations May Be Highly Seasonal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 The Basis May Also Be Highly Seasonal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 High Prices in 1996 Led to High Visibility for Futures Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Maximizing Profits Means Hedgers Try to Follow Price Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 1996 Brought Attention to Heating Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Announcement Effects Are Small and Short-Lived . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 7. U.S. Refining Cash Margin Trends: Factors Affecting the Margin Component of Price . . . . . . . . . . . . . . . . . . 121 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Refining Margin Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Background for Interpreting the Margin Calculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Margin Variations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Spring 1996 and Future Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 8. Financial Performance: Low Profitability in U.S. Refining and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Margins, Operating Costs, and Profitability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 Investment and Capital Intensity in U.S. Refining and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 Petroleum Price Rises Yield Profit Gains in First Half of 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

# Energy Information Administration / Petroleum 1996: Issues and Trends vii 

# Tables

1. Spring 1997 and Spring 1996 Summary Market Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 2. Worldwide Crude Oil Production of 20 Leading Companies, 1972 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 56 3. Distribution of Crude Oil Reserves and Production with Corresponding Local R/P Ratios, 1994 . . . . . . . . . . . . 62 4. Estimates of Worldwide Cumulative Production, Identified Reserves, and Undiscovered Technical Recoverable Resources of Conventional Crude Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 5. The Top Six Sources of U.S. Crude Oil Imports, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 6. Crude Oil, Distillate, and Total Gasoline Stocks, January 1981-December 1996 . . . . . . . . . . . . . . . . . . . . . . . 86 7. Average Crude Oil Inventories by Industry Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 8. Average Distillate Inventories by Industry Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 9. Average Gasoline Inventories by Industry Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 10. U.S. Electric Utility Distillate Consumption and Ending Stocks - October . . . . . . . . . . . . . . . . . . . . . . . . . . 100 11. Price Correlations for Spot and Futures Prices Squared Correlation Coefficients . . . . . . . . . . . . . . . . . . . . . . 109 12. Price Basis for Heating Oil Futures, Monthly Average -- Nearby Futures Price Minus Spot Price, June 1986 - November 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 13. Price Basis for Propane Futures, Monthly Average -- Nearby Futures Price Minus Spot Prices . . . . . . . . . . . 110 14. Refinery Cash Margin Calculation East Coast Refinery Using Brent Crude Oil Summer 1995 . . . . . . . . . . . 125 15. Distillation Volume Percent Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 16. Quarterly Margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 17. U.S. Refined Product Margins and Costs per Barrel Sold for FRS Companies, Selected Years, 1979 - 1995 . 144 18. Quarterly Income in U.S. Refining and Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 19. Refined Product Resale Prices, Margins, and Products Supplied, First and Second Quarters, 1995 and 1996 . 150 

# Figures

1. U.S. Petroleum Flow ..................................................................... 2 2. 1996 Crude Oil Prices Rose Due To Tight Supply/Demand Balance ................................ 4 3. World Oil Supply Grew Lighter, but Lagged Demand ............................................ 6 4. U.S. Increases Dependence on Crude Oil Imports .............................................. 8 5. Petroleum Import Levels and Sources Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6. Light Transportation Fuels Drove U.S. Demand Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7. Refinery Utilization and Downstream Capacity Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 8. Gasoline Prices Draw Public Attention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 9. World Distillate Demand Keeps Pressure on Crude Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 10. Clean and Alternative Transportation Fuels Continue to Grow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 11. Futures Markets Are Turbulent in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 12. Downstream Performance in 1996 Is Modest Despite High Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 13. U.S. Average Retail Regular Gasoline Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 14. Price and Cost Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 15. Crude Oil and Gasoline Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 16. Gasoline Price Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 17. Monthly Average Spot Crude Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 18. World Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 19. Changing Term Structure for Crude Oil Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 20. The Seasonal Price Component (New York Harbor Spot 5-Year Average Spot Gasoline and Distillate Spreads) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 21. Gasoline and Distillate Counter-Cyclical Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 22. Relying on Stocks to Meet Peak Demand: Distillate Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 23. 1996 Gasoline Imports Have Been Strong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 24. Spot and Retail Gasoline Prices (Excluding Taxes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 25. Gasoline Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 26. Gasoline Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

# viii Energy Information Administration / Petroleum 1996: Issues and Trends viii 

# 27. Total Motor Gasoline Stocks (End of Month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 28. Distillate Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 29. Distillate Stocks (End of Month) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 30. Distillate Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 31. Gasoline Spot Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 32. Spring 1996 Gasoline Price Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 33. Spring 1997 Gasoline Price Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 34. Weekly Conventional Gasoline and Crude Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 35. Real Domestic Oil Price, 1959-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 36. World Oil Price and Related Events, 1970-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 37. U.S. Petroleum Supply and Demand, 1970-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 38. U.S. Crude Oil Production by Site, 1985 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 39. Direct Oil and Gas Lifting Costs for FRS Companies, 1981-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 40. Exploration Expenditures by FRS Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 41. Development Expenditures by FRS Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 42. Majors and Nonmajors, U.S. Oil Production by Region, 1985-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 43. World, OPEC, and Persian Gulf Oil Production, 1985 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 44. Leading World Oil Producers, 1985-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 45. Domestic Crude Oil Proved Reserves, 1985-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 46. Crude Oil Proved Reserves by Area, 1985 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 47. Domestic Oil and Gas Well Completions, 1985-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 48. Domestic Exploratory Oil Well Completions, 1985-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 49. Domestic Crude Oil Discoveries per Exploratory Oil Well Completion, 1985-1995 . . . . . . . . . . . . . . . . . . . . 60 50. U.S. Oil Imports, 1975-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 51. U.S. Petroleum Supply and Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 52. Regional Supply and Demand Balance, 1985 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 53. Crude Oil Dominates U.S. Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 54. U.S. Crude Oil Imports: Net and Gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 55. Origin of U.S. Crude Oil Imports, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 56. Changing Regional Patterns for U.S. Crude Oil Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 57. U.S. Regional Dependence on Crude Oil Imports, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 58. U.S. Regional Dependence on Crude Oil Imports Over Time, 1975-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 59. A Comparison Between Imported and Domestic Crude Oil Quality in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 79 60. The Quality of U.S. Crude Oil by Supply Region, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 61. Quality Trends in U.S. Crude Oil Imports and Refinery Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 62. U.S. Crude Oil Imports by the Top Nine Importing Refiners and by Supply Region, 1996 . . . . . . . . . . . . . . . 81 63. Quarterly Volumes of U.S. Crude Oil Imports by Sulfur Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 64. U.S. Crude Oil Exports by Exporting Region, 1985-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 65. Aggregate Crude Oil, Distillate, and Total Gasoline Stocks, January 1981-December 1996 . . . . . . . . . . . . . . 86 66. Crude Oil, Distillate, and Total Gasoline Stocks, January 1981-December 1996 . . . . . . . . . . . . . . . . . . . . . . . 89 67. Days Supply of Crude Oil, Distillate, and Total Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 68. Crude Oil, Distillate, and Total Gasoline Stocks by PADD Region, 1994-1996 . . . . . . . . . . . . . . . . . . . . . . . . 92 69. Crude Oil Stock Levels and Differential in Expected Future Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 70. Growth Slows in U.S. Oil Futures Trading - Annual Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 71. Established Contracts Are Hard to Beat - leaded Versus Unleaded Gasoline Futures . . . . . . . . . . . . . . . . . . . 104 72. Monthly Crude Oil Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 73. Monthly Total Gasoline Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 74. Monthly Distillate Fuel Oil Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 75. Monthly Propane Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 76. Changing Term Structure for Crude Oil Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 77. Changing Term Structure for Heating Oil Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 78. Changing Term Structure for Propane Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 79. Spot and Futures Heating Oil Prices - End-of-Week Closing Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 80. Large Commercials Share of Open Interest - Crude Oil Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 81. Large Commercials Share of Open Interest - Unleaded Gasoline Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

# Energy Information Administration / Petroleum 1996: Issues and Trends ix 

# 82. Large Commercials Share of Open Interest - Heating Oil Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 83. Large Commercials Share of Open Interest - Propane Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 84. Heating Oil Net Futures Holdings - End-of-Week Large Positions, May - October 1995 . . . . . . . . . . . . . . . . 116 85. Heating Oil Net Futures Holdings - End-of-Week Large Positions, May - October 1996 . . . . . . . . . . . . . . . . 117 86. Refiners Holdings of Heating Oil Futures - End-of-Week Large Positions, May - October 1996 . . . . . . . . . . 117 87. Cash Margin Component of Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 88. Quarterly Margins East and Gulf Coasts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 89. Quarterly Gulf Coast Refining Margin and Gasoline Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 90. Total Gasoline Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 91. Light Minus Heavy Crude Price Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 92. Light Minus Heavy Product Price Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 93. U.S. Petroleum Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 94. Decline in Heavy Fuel Oil Consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 95. U.S. Downstream Processing Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 96. Western European Downstream Processing Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 97. Gasoline Spread Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 98. Value of Upgrading: Heavy Crude Margin - Light Crude Margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 99. Value of Upgrading: Margin with Coker Minus Margin Without Coker . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 100. Atmospheric Distillation Unit Capacity Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 101. East Versus Gulf Coast Margins Running Brent and WTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 102. Annual Return on Equity for Petroleum Companies and U.S. Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 103. FRS Companies’ Return on Investment in U.S. Refining/Marketing and All Other Lines of Business . . . . . . 142 104. U.S. Refining/Marketing Return on Investment and Refined Product Margins for FRS Companies, 1977-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 105. Net PP&E per Unit of U.S. Refinery Capacity for FRS Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 106. U.S. Refining Capital Expenditures for FRS Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 107. Majors’ First and Second Quarter U.S. Refining/Marketing Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 108. Independent Refiners’ First and Second Quarter Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

# Energy Information Administration / Petroleum 1996: Issues and Trends xi 

# Introduction Purpose of the ReportIncreasingly, users of the Energy Information Administration's petroleum data and analytical reports have expressed an interest in a recurring report that takes a broad view of the petroleum sector. What is sought is some perspective on the complex interrelationships that comprise an industry and markets accounting for 40 percent of the energy consumed in the United States and ranging from the drilling rig in the oil field to the pump at the local gasoline station. This report comprehensively examines historical trends , and selectively focuses on major issues and the events they represent. It analyzes different dimensions of the industry and related markets in terms of how they relate to a common theme, in this case, the volatility in petroleum markets. 

# Theme — Volatility One notable development in petroleum product markets has supply and demand occur suddenly or unexpectedly, they been volatility, as reflected in the rapid and conspicuous can lead to sharp market reactions. The resulting rapid price change in petroleum product prices. An instance of volatility, changes are symptoms of these reactions — evidence of a the turbulence in motor gasoline wholesale and retail market imbalance, and the signal that a market correction is markets in the spring of 1996, made this a matter of national underway. concern. At the time, the Energy Information Administration co-authored a report undertaken at the request of President Clinton, which examined the market conditions that impacted the supply-demand balance leading up to the motor gasoline season, and how the wholesale, commodity, and retail markets responded. In a sense, this report, Petroleum * 

# 1996: Issues and Trends , picks up where that report left off. More recently, the issue of volatility in petroleum markets was addressed by Secretary of Energy Federico Peña in a message to Department of Energy employees throughout the country on the day after he was sworn into office. In outlining the first of four priorities for the Department, Secretary Peña underscored a major long-term source of uncertainty in the world supply/demand balance: “First, we will develop a realistic strategy for strengthening our nation’s energy security. Recent history has demonstrated how vulnerable we are to a disruption in the flow of imported oil or volatility in its price.” ** 

# The volatility, the sharp and rapid fluctuation, in oil prices is a symptom of a combination of underlying market developments. Sharp price movements reflect a high level of uncertainty in all sectors of supply and their associated markets. Thus, more insight may be gleaned from assessment of the supply and demand conditions that led to the shift in prices, in addition to analyzing the impacts on participants in the petroleum markets--suppliers, consumers, investors. Over the past few decades, the petroleum industry in the United States has undergone some fundamental changes in its operations. These changes range from declines in domestic oil production, and in crude and product inventory levels, to emerging new technologies; from new environmental requirements that affect the costs of its operations, to new financial markets that affect the prices of its products. When such changes evolve gradually, they can be absorbed smoothly in the markets. But when changes in



# Outline of the Report The first chapter of the report presents, in summary terms, a broad overview of trends in petroleum markets. The other seven chapters present, in greater depth, analyses of key issues and the underlying trends that influence petroleum markets today and in the future.

! Chapter 1, “Industry Overview,” reviews the broad trends in supply and demand of petroleum. It highlights recent events and summarizes their effects on the markets.

! Chapter 2, “Spring ‘96 Gasoline Price Runup: An Example of Petroleum Market Dynamics,” recaps the factors that led to last year’s jump in motor gasoline prices, and tracks the resumption of more stable market conditions since then. This chapter serves as a case study in dynamics of wholesale and retail product markets and

U.S. Department of Energy, An Analysis of Gasoline Markets Spring * 

# 1996 , DOE/PO-0046 (June 1996). U.S. Department of Energy, “Secretary Federico Peña’s Greetings to ** 

# DOE Employees,” DOECAST (3/14/97).

# xii Energy Information Administration / Petroleum 1996: Issues and Trends xii 

# the interaction with other sectors of the petroleum ! Chapter 6, “Petroleum Futures Markets: Volatile Prices, industry and their related markets. Controversial Functions, Stagnant Volumes,” discusses

! Chapter 3, “Oil Supply: U.S. Perspective on a Global petroleum products over the past two decades. It Market,” identifies factors that have contributed to describes how they are used by petroleum industry historical volatility in world oil prices. It examines participants to hedge their price risk, and by the declining domestic oil production and rising global nonco mmercial traders that provide liquidity for the production over the past decade. Future shifts in the hedgers. It addresses several controversial issues related sources of world oil supply, based on current reserves, are to futures markets. projected. It addresses resource potential, development costs, and technological advancements in the U.S. and ! Chapter 7, “U.S. Refining Cash Margin Trends: Factors overseas. Affecting the Margin Component of Price,” investigates

! Chapter 4, “Crude Oil Imports: Growing U.S. factors that influence margin fluctuations. In particular, Dependence,” describes the conditions that have driven it examines the effects on margins of refinery the steep rise in U.S. oil imports over the past decade, configuration and location, crude oil quality, and and addresses issues related to increasing reliance on environmental regulations. foreign suppliers. It covers regional shifts in domestic demand and foreign supply, patterns in the quality of ! Chapter 8, “Financial Performance: Low Profitability in imported crude oil, and the economic, logistical, and U.S. Refining and Marketing,” draws upon data from political implications of these changes. EIA’s Financial Reporting System to explore profitability

! Chapter 5, “Petroleum Stocks: Causes and Effects of major oil companies. It concludes that their profitability Lower Inventories,” reviews EIA’s survey data on stocks over the past 10 years has been volatile and frequently to determine the underlying trends in the recent decline lower than U.S. industry in general. in inventory levels. Forces that influence petroleum inventory levels, such as current and expected prices and refinery margins, are assessed. the evolution of futures markets in crude oil and

margin behavior over the past decade to identify the

in domestic refining and marketing operations of the

# Energy Information Administration / Petroleum 1996: Issues and Trends 1 

# 1. Industry Overview

This section provides an overview of the petroleum industry, ! U.S. Petroleum Demand summarizing recent trends in some of the major petroleum ! U.S. Refining markets and major industry sectors. Each summary focuses ! U.S. Gasoline Markets on 1996, but puts the year in historical perspective. The areas ! U.S. Distillate Markets reviewed are: ! Clean and Alternative Transportation Fuels ! Petroleum Futures Markets ! Overview of the Petroleum Sector ! Financial Performance ! World Crude Oil Markets ! World Petroleum Supply and Demand The remaining sections of the report examine, in greater ! U.S. Petroleum Supply depth, issues relating to the major petroleum markets and ! U.S. Petroleum Net Imports major industry sectors.AAA AAA AAA AAA AAA AAA AAA AAA AAA

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# Motor Gasoline 7.9

Distillate Fuel Oil 3.4

Liquefied Petroleum Gases 2.0 Jet Fuel 1.6 Other 2.6 Natural Gas Liquids and Field Production

of Gasoline 1.6 Refined Products Net Imports 0.4 Process Gain 0.8 Total Refinery Output

16.3 Crude Oil Input

to Refineries 14.2 Crude Oil Stock Changes, Losses, and Unaccounted for (Net) 0.3 Crude Oil Production 6.5

Unfinished Oils, Blending Components, and Oxygenate Inputs 0.8 Crude Oil Net Imports 7.4

Refined Products Supplied

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# 2 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 1. U.S. Petroleum Flow, 1996 (Million Barrels per Day)

Source: Energy Information Administration, Petroleum Supply Annual, DOE/EIA-0340 (June 1997), Table 3.

# Energy Information Administration / Petroleum 1996: Issues and Trends 3 

# Overview of the Petroleum Sector This overview highlights recent events and trends in major hydrocarbon products such as sulfur and vanadium. petroleum markets and segments of the petroleum industry, Different crude oils can be used to produce different including: amounts of these products depending on their original

! The United States Uses More Energy from Petroleum than from Any Other Energy Source. Petroleum supplies over 50 percent more energy than natural gas, close to twice the energy of coal and 2.5 times the energy coming from all other energy resources. The United States is also one of the largest petroleum producers in the world, but consumes more than it produces, requiring net imports of both crude oil and products to meet demand.

! Petroleum Markets and the Industry That Serves Them Are Complex. The oil business is very capitalintensive, is international in scope, and requires a complex transportation and storage infrastructure to operate. Crude oil resources are found worldwide, with many crude-producing regions (e.g., the Middle East) being some distance away from large consuming areas like the United States, Europe and Asia. Crude oil is shipped to refineries worldwide using tankers and pipelines. Generally refineries are located near large consuming areas, but substantial international movements of refined petroleum products also occur as supply/demand balances and market opportunities change.

! Crude Oils Are Heterogeneous. Crude oils differ as to the relative quantities of light and heavy hydrocarbons and content of other materials, such as heavy metals and sulfur. Each barrel of crude oil is processed in refineries to produce a wide range of hydrocarbon products, including gasoline, heating oil, diesel fuel, residual fuel,coke, lubricants, asphalt, and waxes, as well as noncomposition and the type of equipment used by the refinery to process the crude oils. Crude oils with higher percentages of light hydro carbons are more valuable than those with a lower light hydrocarbon content because they yield larger percentages of high-valued products such as gasoline with less processing equipment investment.

! Changing Regulations and Economics Have Affected the Domestic Refinery Business. Since the early 1980's, the number of U.S. refineries has fallen by almost 50 percent, but the remaining refineries have improved their efficiencies and flexibility to process heavier crude oils by incorporating improved technology and by adding upgrading units downstream of the distillation units. In the 1990's, investments were driven mainly by new clean fuel requirements and the need to improve on the environmental impacts of operations.

! The Many Products Coming from the Refineries Travel Down Complex Distribution Systems to Very Different End-Use Markets. Products leave refineries by different routes to reach their end-use customers. Each end-use market has its own supply, demand and price factors. Products such as residual fuel oil are subject to direct competition from alternative fuels like natural gas,while in other cases, such as gasoline, no viable shortterm alternatives exist. Gasoline consumption varies with factors such as vehicle efficiency, miles driven and the number of vehicles using this fuel, rather than by consumers’ ability to switch fuels. Long-term factors, such as the evolution of alternative fuels and the use of more efficient vehicles, can affect the gasoline market.

# 0 12.00 14.00 16.00 18.00 20.00 22.00 24.00 26.00Monthly Average Spot Crude Oil Prices



# Brent West Texas Intermediate

1991 1992 1993 1994 1995 1996(Dollars per Barrel) 

# 1991 1992 1993 1994 1995 1996 1997 0 6 4 6 6 6 8 7 0 7 2 7 4 7 6C rude O il Supply and Dem and



# Demand
Stock Draw(M illion Barrels per Day)



# Supply

Stock Build

4 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 2. 1996 Crude Oil Prices Rise Due To Tight Supply/Demand Balance Increasing World Demand Tightens Crude Oil Markets

Sources: World Supply and Demand: Energy Information Administration (EIA), 1991—EIA, International Petroleum Statistics (March 1995), Table 2.1. 1992-1996—EIA, International Petroleum Statistics (May 1997). 1997—Estimates of actual and projected derived from Oil Market Intelligence , publisher Edward L. Morse, New York, NY, p. 1 (June 2, 1997). World Petroleum Supply and Demand Balance: EIA, 1991— International Petroleum Statistics (March 1995), Table 2.1. 1992-1996— International Petroleum Statistics (May 1997). Spot Crude Oil: Standard and Poor’s Platts. 

# Even Iraqi Sales in December 1996 Have Little Effect on Prices World Petroleum Supply and Demand Balance (Million Barrels Per Day)
Year Supply Demand Stock Change 1991 66.6 66.7 -0.1 1992 66.9 66.7 +0.2 1993 67.3 67.0 +0.3 1994 68.2 68.3 -0.1 1995 69.9 70.2 -0.3 1996 71.7 71.7 -0 

# Supply Demand Balance in 1996 Keeps Pressure on Crude Oil Prices

# Energy Information Administration / Petroleum 1996: Issues and Trends 5 

# World Crude Oil Markets Following the Gulf War in 1991, world petroleum supply brought buying pressure to the world crude market, and increased, while demand languished through a recession, and prices began to rise well before the heating season got crude oil prices weakened. As the recession ended, demand underway. In late October, markets questioned whether began growing again, and the petroleum supply/demand the concerns about distillate were exaggerated, and the balance tightened, bringing prices up. As 1996 began, the pr ice fell back briefly. Then, cold weather in Europe world supply demand balance had tightened further, setting caused the market to end the year on a high note. Crude the stage for the price increases that occurred during the oil prices increased approximately $6 per barrel over the year. course of 1996.

! Increasing World Demand Tightens Crude Oil ! Expectations and Backwardation Discourage Stock Markets. Prices increase when the balance between Building. Throughout 1996, with new supply on the supply and demand is tight. A tight balance develops horizon, analysts expected the tight oil markets to loosen. when demand exceeds supply, and stocks are pulled In believing that a supply surplus would develop, these down. Stock levels serve as an indicator of tightness, analysts anticipated a weakening in crude oil prices. representing immediate short-term supply. When they are Given this expectation with current tight markets, the low, and demand is increasing, buyers tend to bid more futures markets exhibited fairly strong backwardation aggressively to assure supply. In 1992 and 1993, supply throughout the year. "Backwardation" occurs when the exceeded demand, petroleum stocks were building, and price of crude oil for future delivery is less than the prices were on a downward trend. That situation began to prompt (current) price. Backwardation can be expected reverse in 1994 as the world economy improved and to occur when prompt prices are bid up relative to future demand growth increased. In 1994 and 1995 demand prices, reflecting expectations that prices will exceeded supply and stocks were drawn down. As 1996 subsequently fall off. In 1996, the outlook for a supply began, demand was high and continued to exceed s urplus, coupled with tight prompt markets, kept crude production. The stock draw in the first quarter was a very oil prices virtually always in fairly deep backwardation, strong 1.8 million barrels per day, setting the stage for and the persistent expectation that prices would fall price increases. provided a disincentive to stock building. Buyers did not

! Supply/Demand Balance in 1996 Keeps Pressure on to be several dollars cheaper within a month or two. Crude Oil Prices. The winter of 1995-96 was cold, which pushed distillate demand up and pulled inventories down as demand surged ahead of production. Thus, 1996 began with oil inventories already depleted. As the cold in 1996 was the re turn of Iraq to the market as a result of weather continued, crude prices rose in March and U.N. negotiations. When Iraqi sales finally began in peaked in April when a late cold snap drove refiners to December 1996, the West Texas Intermediate (WTI) the market to meet the distillate demand surge when they pr ice f ell about $2.50 per barrel, but within about a would normally be preparing for the gasoline season. week’s time, the price came back to the level before sales Strong petroleum demand growth continued through the began and pushed to new heights. In the strong world 2nd and 3rd quarters. World petroleum stocks normally demand period of the fourth quarter, the Iraqi volumes of build in these quarters. Although the 1996 stock build a bout 500 thousand barrels per day were readily absorbed was normal, it was not large enough to offset the effects by the market. In the medium term, however, the Iraqi of the previous winter’s drawdown, so world petroleum volumes, in combination with growing non-OPEC stocks remained low at the end of summer. As production, could be a factor in creating surplus supply, preparation for the 1996-97 heating season began, the e roding market supply/demand tightness and bringing low state of distillate stocks both in Europe and the U.S. down prices. want to fill their s torage with crude oil that was expected

! Iraqi Sales in December 1996 Have Little Immediate Effect on Prices. One of the anticipated supply increases

# 1991 1992 1993 1994 1995 1996 1997 0 25 30 35 40 45Crude Oil Production(Million Barrels per Day) 

# Non-OPEC Production

OPEC Production



# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 2 4 6 8 10 12 14

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAALight Sweet Crude Oil Production AAA A AA A AA AAA 

# Africa Latin America Sweet North Sea(Million Barrels per Day)



# 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 2.00 4.00 6.00 8.00 10.00Spot Crude Price Difference(Dollars per Barrel)



# Bonny Light - Arab Light Bonny Light - Arab Heavy



# 6 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Both OPEC and Non-OPEC Sources Increase Production 

# Figure 3. World Oil Supply Grows Lighter, but Falls Behind Demand

Light-Heavy Crude Oil Price Differentials Fell in 1991-1994, But Began to Recover in 1995 Production of Atlantic Basin Light-Sweet Crude Oil Increases Actual and Predicted World Petroleum Supply and Demand 1995 Actual 1996 Actual Increase Demand OECD 40.5 41.2 +0.7 Non-OECD 29.7 30.5 +0.8

Total 70.2 71.7 +1.5 Supply OECD 19.2 19.7 +0.5Other NonOPEC 23.1 23.7 +0.6 OPEC 27.6 28.3 +0.7 Total 69.9 71.7 +1.8 Stock Change -0.3 0 N/A 

# 1996 Supply-Demand Balance Keeps Market Tight

Sources: OPEC and Non-OPEC Production: Energy Information Administration (EIA), 1991-1996—EIA, International Petroleum Statistics (various issues), Table 2.1. Estimate of First Quarter 1997 Actual— Oil Market Intelligence Update (New York, NY) (June 2, 1997), p. 1. Actual and Predicted World Petroleum Supply and Demand: EIA, Actual— International Petroleum Statistics (May 1997), Table 2.1. Predicted—International Energy Agency (December 1995) and Oil and Gas Journal (January 29, 1996), p. 68. Light Sweet Crude Oil: EIA, derived from Form EIA-814 data. Spot Crude Price Differences: Standard and Poor’s Platts.

# Energy Information Administration / Petroleum 1996: Issues and Trends 7 

# World Petroleum Supply and Demand World demand and supply have both been growing since day. The North Sea alone fell short of predictions by over 1994, but demand has grown more strongly than supply, 300 t housand barrels per day. Non-OPEC and OPEC keeping the world supply/demand balance tight. Both OPEC production together just met demand for the year, and non-OPEC production rose to help meet this growing keeping crude oil markets tight. demand, with particularly strong growth coming from the non-OPEC light sweet crude oil producing regions of the ! Atlantic Basin Production of Light Sweet Crude Atlantic Basin. This increase in light sweet crude oils served to depress the light heavy crude price differences that affect refinery economics worldwide.

! World Demand Growth Continues to Be Strong. Initial estimates indicate world petroleum demand grew 2.2 much of this new pr oduction was light sweet crude. From percent in 1996, which was lower than the 2.8 percent 1985 to 1995, world crude production increased by 16 growth experienced in 1995, but still strong. U.S. percent. At the same time, crude production from sweet demand, which represents over 25 percent of the world crude producing areas of the Atlantic Basin (North Sea, total, increased 2.9 percent, but Western Europe only Africa, Colombia, and Argentina) increased by 48 rose by 1.3 percent. OECD countries in total grew 1.6 percent. The area with the greatest volume increase was percent in 1996 as their economies continued to expand. the North Sea, where production increases are expected Non-OECD countries, however, experienced a 2.9 to continue for a few years. Africa also showed large percent increase in 1996 as their economies flourished increases, with Nigeria and Angola together adding over and as developing countries continued to evolve and use 900 thousand barrels per day to the market from 1985- more energy. Non-OECD countries now account for 43 1995. Sweet crude oil production also increased in Latin percent of world demand. America, and greater increases are coming in the next

! Both OPEC and Non-OPEC Sources Increase Production. OPEC production increased by about 700 thousand barrels per day in 1996. The largest part of the increase came from Venezuela, where production rose about 330 thousand barrels per day, followed by Nigeria, where it rose about 180 thousand barrels per day. Many of the OPEC member countries are producing above their OPEC-established quotas, which have not been changed for several years. Growing world oil demand and increasing crude prices have allowed OPEC to avoid confronting the difficult task of changing quotas. Production from non-OPEC countries increased about 1,150 thousand barrels per day, with the largest increases coming from the North Sea (up from about 400 thousand barrels per day) and Latin America (Mexico, up 250 thousand barrels per day and Brazil, up 100 thousand barrels per day).

! 1996 Supply-Demand Balance Keeps Market Tight. Demand in 1996 was slightly below forecasted levels. Non-OPEC supply, however, fell well below expectations. It was expected to increase 1.9 million barrels per day, but only increased 1.1 million barrels per Increases at a Faster Rate than World Production. The rate of growth of light sweet crude oil production in the Atlantic Basin since 1985 greatly exceeded world crude production g rowth. Growth in crude oil production since 1985 came largely from the Atlantic Basin, and

few years as Colombia attains full production of Cusiana. The strong growth in Atlantic Basin light sweet crude production had signific ant impacts on the relative market value of crudes in the region and on other world markets.

! Recovery of Light-Heavy Crude Price Differential Continues. Increased availability of light sweet crude in the Atlantic Basin drove light-heavy crude oil and product price differences down. From 1990 to 1994, the price differential between light and heavy crude narrowed because of the increased availability of light crude oil in the region. The light-heavy difference has a major impact on refining margins, as discussed in Chapter 7. Beginning in 1995, the price difference widened slightly due to a sharp increase in light crude oil shipments from Africa to Asia. The differential had declined to the point that, in spite of the long haul, African crudes became attractive to meet Asia's growing light product needs. The Asian market effectively sets the floor price for the light African crude oils, which in turn provides a price floor for the other Atlantic Basin light crude oils. Production increases in Atlantic Basin light sweet crude oils should continue for the next few years, keeping downward pressure on the light-heavy price differential.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800Product Net Imports



# Total Product Net Imports

Residual Fuel

1995(Thousand Barrels per Day)



# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1996 0 2 4 6 8 10 12 14 16 18 20

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

A A A A A A A A A A A A A A A A A A A A AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

A A A A A A A A A AU.S. Petroleum Supply AAA AA A AAA

AAA AA A AA A AAA 

# Domestic Production Crude Net Imports Product Net Imports Other

1995(Million Barrels per Day)



# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAU.S. Crude and NGL Production



# Lower 48 Onshore

Lower 48 Offshore Alaska(Thousand Barrels per Day)



# 198519861987198819891990199119921993199419951996 0 280 300 320 340 360 380 400End of Month Crude Oil Stocks (Excluding SPR)(Million Barrels)



# 8 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 4. U.S. Increases Dependence on Crude Oil Imports The U.S. Is Growing More Dependent on Imported Crude Oil

New Offshore Sources Are Slowing Domestic Production Decline Residual Fuel Leads Product Import Decline

U.S. Crude Oil Stocks Are Down Again in 1996

Sources: Energy Information Administration (EIA). Petroleum Supply: 1985-1995— Petroleum Supply Annual (Vol. 1), Table S1. 1996— Petroleum Supply Monthly (February 1997), Tables 26 and 49. Net Imports: 1985-1995— Petroleum Supply Annual (Vol 1), Table 29. 1996— Petroleum Supply Monthly (February 1997), Table 49. Crude Oil and NGL Production: 1985-1995— Petroleum Supply Monthly , Table 26. 1996— Petroleum Supply Annual (Vol. 1), Table 14. Crude Oil Stocks: 1985-1995— Petroleum Supply Annual (Vol. 1), Table S2. 1996— Petroleum Supply Monthly , Table 2.

# Energy Information Administration / Petroleum 1996: Issues and Trends 9 

# U.S. Petroleum Supply Growing U.S. petroleum product demand and declining area has been the Gulf of Mexico, the source of most of domestic crude oil production have combined to make the the lower 48 offshore pr oduction. Crude oil production in United States increasingly dependent on crude oil imports. the Gulf increased about 300 thousand barrels per day Although total net petroleum imports (imports minus from 1990 to 1995, which helped to slow the overall exports) have been increasing, net product imports have pr oduction decl ine rate in the U.S. A large number of oil decreased. Domestic production of crude oil is declining in projects are under development in the Gulf of Mexico, virtually all U.S. production areas with the exception of the many of which are large projects in deep water. A joint Gulf of Mexico, where there is much current activity — Petroleum Economist and IEA estimate projects Gulf of especially in the deep water areas. During 1996, while imports continued to increase, crude oil inventories declined, partially due to the tight crude market that produced high crude oil prices.

! The U.S. Is Growing More Dependent On Imported Crude Oil. Decreasing domestic crude oil production combined with rising demand are causing the United buffer against demand and price changes. A number of States to become more dependent on imports of crude oil f actors can affect stock levels, including price and refined products. Since the crude oil price collapse in expectations, demand surges, supply problems, and even 1986, domestic production has declined as high-cost how the crude oil is delivered to refiners. Pipeline wells were closed. In 1985, net imports of crude oil and delivery of domestic crude oil requires the least storage, products were 4.3 million barrels per day and provided 27 but much more tankage is required to accommodate the percent of oil product supply. By 1996, net imports of i nfrequent deliveries of large batches of crude by very crude and products had nearly doubled to 8.4 million large, l ong-haul tankers. Increased reliance on short haul barrels per day and represented 46 percent of U.S. supply. crude oils can produce a reduction in stock levels simply Other domestic sources rose slightly, primarily as the due to the use of smaller tankers. Crude oil stocks are result of growth in the use of oxygenates in gasoline. also affected by variations in the tightness or looseness of

! Residual Fuel Leads Product Import Decline. The as discussed in Chapters 2 (Spring ‘96 Gasoline Price large increase in oil imports has been in the form of crude oil rather than products. Net product imports have declined both on a percentage and a volume basis. From 1985 to 1990, product imports averaged 1,434 thousand barrels per day, but from 1991 to 1996 the average dropped 484 thousand barrels per day to 950 thousand barrels per day. At the same time, product imports’ average share of total imports fell from 24 percent to 13 percent. A large part of the decline in product imports came from the drop in net imports of residual fuel, which fell 220 thousand barrels per day as demand for residual fuel diminished. Another important part of the net import decline derived from an increase in exports of distillate fuel oil and petroleum coke.

! New Offshore Sources Are Slowing the Domestic Production Decline. From 1985 to 19 95, U.S. production of crude oil and natural gas liquids fell from approximately 9 million barrels per day to 6.6 million barrels per day. Production in the onshore lower 48 states declined steadily over the entire period, while Alaskan production rose between 1985 to 1988, but declined since then. In recent years the most promising U.S. production 1 

# Mexico oil production to increase by 1 million barrels per day between 1995 and 2000. Overall U.S. production will still decline at about 2 perecent per year.

! U.S. Crude Oil Stocks Are Down Again in 1996. Inve ntories or “stocks” of crude oil are maintained to provide working volumes in the system and to provide a

the crude markets, both seasonally and for longer periods Runup) and 5 (Stocks). From 1984 to 1995, crude oil stocks fluctuated around 320-360 million barrels, but fell considerably in 1995 and again in 1996. While it looked like stocks might be leveling off during the second and third quarters of 1996, they plunged again during the fourth quarter to end the year at a record December low of 285 million barrels. In addition to crude oil, many other petroleum product stocks were lower than normal. During the fourth quarter 1996, refiners increased their runs to meet distillate needs, pulling down crude oil stocks in the process. In general, the low stocks in 1996 cannot be explained by any one of the factors affecting stocks mentioned above, but the refiners’ reluctance to build stocks was at least partially due to current and expected prices. Prompt (current) crude oil prices remained strong, but future prices were expected to decline.

"Shell Leads Rush to Deeper Waters," Petroleum Economist (January 1 

# 1997), pp. 5-10.

# 1993 1994 1995 1996 0 50 100 150 200 250 300 350 400 450

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A ADistillate Exports by Destination(Thousand Barrels per Day) AAAA A AA A A AA A AAAA 

# Europe Asia/Pacific Latin America

1991 1992 1993 1994 1995 1996 0 100 200 300 400 500 600Gasoline and Distillate Imports 

# Gasoline and Blending Components

Distillate(Thousand Barrels per Day) 

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA(Thousand Barrels per Day) AA A AA A AAA

AAA A A A A A A AAA AA A AA A AAA AAA AAA 

# Middle East Latin America Africa Europe Asia CanadaCrude Oil Imports by Region



# 10 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Crude Oil Imports From Atlantic Basin Are Increasing Sulfur Content and Gravity of Imported Crude Oil Sulfur Gravity 1990 MB/D 1990 Percent 1995 MB/D 1995 Percent <=0.5 %S >36 API 1,041 16.7 1,341 17.6 <=0.5 %S 30-36 API 804 12.9 1,016 13.4 <=0.5 %S <30 API 535 8.6 639 8.4 >0.5<=2.0 %S >36 API 547 8.8 469 6.2 >0.5<=2.0 %S 30-36 API 839 13.5 1,057 13.9 >0.5<=2.0 %S <30 API 474 7.6 730 9.6 >2.0 %S >36 API 5 0.1 16 0.2 >2.0 %S 30-36 API 726 11.7 776 10.2 >2.0 %S <30 API 1,253 20.1 1,557 20.5 

# Quality of Crude Imports Has Not Changed Much 

# Figure 5. Petroleum Import Levels and Sources Change

Product Imports Help to Meet Seasonal Demand Swings Market Opportunities Drive Changes in Distillate Export Patterns

Sources: Energy Information Administration (EIA). Crude Oil Imports: 1985-1995— Petroleum Supply Annual (Vol. 1), Table 21. 1996— Petroleum Supply Mo nthly (February 1997), Table S3. Sulfur Content and Gravity of Imported Crude Oil: EIA, Petroleum Supply Annual (Vol. 1), Table 16. Gasoline and Distillate Imports: 1991-1995— Petroleum Supply Annual (Vol 1), Table 21. 1996— Petroleum Supply Monthly (various issues), Table 35. Distillate Exports: EIA, 1993-1995— Petroleum Supply Annual (Vol. 1), Table 28. 1996— Petroleum Supply Monthly , Table 47.

# Energy Information Administration / Petroleum 1996: Issues and Trends 11 

# U.S. Petroleum Imports From the late 1980's into the 1990's, supply sources of U.S. ! Gasoline Imports Rise in 1996 with Europe Picking crude oil imports shifted from the Middle East towards Latin America. While light sweet crude oil availability increased dramatically in the Atlantic Basin, U.S. light sweet crude imports did not increase proportionally. Gasoline product imports increased from marginal sources, such as Europe and the Middle East, when the United States market presented price opportunities. Conversely, export opportunities for distillate grew during the 1990's as world markets changed.

! Crude Oil Imports from the Atlantic Basin Are Increa sing. From 1985 to 1990, total crude imports increased from 3.2 million barrels per day to 5.9 million to tal imports for a given month can reach 400-500 barrels per day. Saudi Arabia accounted for nearly 60 t housand barrels per day. The strong prices in the United percent of the additional imports. Since 1990, the supply S tates in April 1996 drew gasoline and blending sources for U.S. crude imports have shifted toward Latin component imports of 573 thousand barrels per day. America. Imports from Mexico, Venezuela, and other Europe supplied 139 thousand barrels per day for the Latin American countries nearly doubled from 1990 to year, compared to 68 thousand barrels per day in 1995. 1996, rising from 1.6 million ba rrels per day to nearly 3.0 The increase in European imports represented 46 percent million barrels per day. This increase can, in large of the total increase for 1996. measure, be attributed to the competitive advantage of short-haul crudes, and to the downstream integration of ! Three Countries Are Major Suppliers of Distillate Venezuela and Mexico into the U.S. refining business. The Venezuelan state oil company (PDVSA) acquired and expanded CITGO, which now has 650 thousand barrels per day of U.S. refining capacity. The Venezuelans also acquired a stake in the 265 thousand barrels per day Lyondell refinery. After making these acquisitions, PDVSA invested in process upgrading to handle the Venezuelan crude oils, many of which are heavy. The Mexican state oil company (PEMEX) has acquired a share of the Shell Deer Park refinery with a capacity of 215 tho usand barrels per day, which also was upgraded to run heavy-sour Mexican crude oils.

! Quality of Crude Imports Has Not Changed Much. From 1985 to 1990, imports of light sweet crude oil increased as a percent of total. But from 1990 to 1995, the shares of crude imports by quality attribute have not changed much. Despite increased availability of light sweet crude oils in the Atlantic Basin, and a decline in the price difference between light and heavy crude oils, the U.S. light sweet crude oil imports have only risen in proportion with the total imports. As discussed in Chapter 7 (Refinery Margins), once refiners have invested in heavy-sour crude processing facilities, it takes a large drop in the light-heavy price difference to cause refiners to switch back to the light sweet crude oils. Up a Large Piece of the Growth. The need for gasoline imports varies significantly from year to year. In 1996 gasoline imports and blending components averaged 469 thousand barrels per day compared to 313 thousand barrels per day in 1995. Over 50 percent of the gasoline imported into the United States comes from three areas: Canada, the Virgin Islands, and Venezuela. These provide a fairly steady source of gasoline imports, averaging 200-280 thousand barrels per day annually. If gasoline prices are attractive in the United States relative to Europe, gasoline volumes flow across the Atlantic, and

Imports. Over 90 percent of U.S. distillate imports come from t hree areas: the Virgin Islands, Canada and Venezuela. For the past several years, distillate imports averaged about 200 thousand barrels per day, with each of the three areas providing about 30 percent of the total.

! Market Opportunities Drive Changes in Distillate Export Patterns. While sources of distillate imports have not changed much, distillate exports varied by both volume and country of destination, based on market opportu nities. Some distillate exports flowed to regional Latin American markets on a steady basis, but exports to the Asia/Pacific region and to Europe rose and fell dramatically. In the early 1990's, the Asian market for distillate was tight, and U.S. production was a marginal source of Asian supply. Then, exports to Asian markets fell as Asian refining capacity expanded. During the second half of 1996, high distillate prices in Europe drew strong export volumes from the United States. For the months of September, October and November, distillate exports to Europe averaged about 100 thousand barrels per day, increasing from just 42 thousand barrels per day for the same months in 1995. The strong distillate export volumes in the fall of 1996 occurred when U.S. inventories were low and U.S. prices were high, but not as attractive as European prices.

# 1983 1985 1987 1989 1991 1993 1995 Q1 1997Grade Share of Market (Percent) 

# Regular Share (Leaded and Unleaded)

Midgrade Share Premium Share

0 20 40 60 80 100

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 0 200 400 600 800 1,000 1,200 1,400 1,600Winter Heating Oil Demand



# 1994-95 1995-96

1996-97(Thousand Barrels per Day) 

# 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996* 

# 0 2,000 4,000 6,000 8,000 10,000 12,000

AAAA AAAA AAAA AAAA AAAA AAAA
AAAA A AA A A AA A A AA A A AA A AAAA
AAAA AAA A A

AA A A AA A A AA A A AA A
AAA A A AA A A AA A A AA A A AA A A AA A AAAA

AAA A AAA A AAA A AAA A AAA A AAA A AAAA

AAAA A AA A A AA A A AA A A AA A A AA A A AA A

AAA A A

AA A A AA A A AA A A AA A A AA A AAAA

AAAA A AA A A AA A A AA A A AA A A AA A A AA A

AAAA AAA A AAA A AAA A AAA A AAA A AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A

AAAA AAA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA A AAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAA A AAA A AAA A AAA A AAA A AAA A AAAATransportation Fuel Consumption AAA AAA AAA 

# Jet Fuel On-Highway Diesel Gasoline(Thousand Barrels per Day)



# 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 

# 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000U.S. Petroleum Product Demand 

# Gasoline

Distillate

Kero-Jet

Residual Fuel Other(Thousand Barrels per Day)



# 12 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 6. Light Transportation Fuels Drive U.S. Demand Growth

Premium Grade Loses Market Share with Gasoline Price Increase U.S. Petroleum Product Demand Continues to Rise

Mild Winter 1996-97 Dampens Heating Oil Demand

Diesel Fuel Leads Transportation Growth

Note: In bottom left graph leaded gasoline is included under regular grade gasoline. Sources: Petroleum Product Demand: Energy Information Administration (EIA), 1983-1995— Petroleum Supply Annual (Vol. 1), Tables S1, S4, S5, S6, and S7. 1996— Petroleum Supply Monthly (February 1997), Tables S1, S4, S5, S6, and S7. Other: Petroleum Supply Monthly Tables S4 and S7. Transportation Fuels: EIA, Fuel Oil and Kerosene Sales

. Gasoline by Grade: EIA, 1983-1994— Petroleum Supply Annual (Vol. 1), Table 7. 1995-1996— Petroleum Supply Monthly , Table 7. Winter Heating Fuel Demand: EIA, 1994— Petroleum Marketing Annual (Vol. 1), Table 50. 1995- 1997— Petroleum Marketing Monthly , Table 50.

# Energy Information Administration / Petroleum 1996: Issues and Trends 13 

# U.S. Petroleum Demand U.S. demand for petroleum continued to climb in 1996, distillate (mainly high sulfur diesel and heating oil) and reaching an annual average of 18.2 million barrels per day. residual fuel. The growth comes from the transportation sector, which has little economic alternative to petroleum-based fuel. ! Premium Grade Loses Market Share with Gasoline Transportation growth was countered somewhat by continuing declines in use of residual fuel.

! U.S. Petroleum Product Demand Continues to Rise. In 1996, U.S. demand for petroleum products rose 2.9 percent, with the transportation sector continuing to provide primary support to overall long-term growth. While higher product prices had a noticeable impact on gasoline demand, which increased just 0.8 percent in 1996, a strong economy helped buoy kerosene jet fuel and on-highway diesel demand, up 5.1 percent and 5.5 percent, respectively. Another long-run trend that persisted in 1996 was the further weakening of residual fuel demand, down 1.3 percent in 1996, as cheaper, alternative energy sources continue to erode residual fuel’s market share. 2



# ! Diesel Fuel Leads Transportation Growth. In 1984, light transportation fuels held a 63 percent share of total finished petroleum product demand; by 1996, it had risen ! Mild Winter Dampens 1996-97 Heating Oil Demand. to 69 percent. On-highway diesel fuel showed the greatest growth, gaining 3 percentage points in market share, to reach about 11 percent of the market in 1996. The growth in gasoline and jet fuel were more modest, both gaining about 1.5 points in market share since 1984 to attain 49 and 11 percent total shares, respectively. A contributing factor in moderating the growth in gasoline demand has been the improvements in passenger car fuel efficiency. In 1984, passenger cars averaged 17.8 miles per gallon, but by 1996 they averaged well over 22 miles per gallon. This trend has stopped, partially due to increased use of minivans and sport utility vehicles. Most of the market share growth in light transportation fuels was made possible at the expense of off-highway Price Increase. After stabilizing between 1992 and 1995, prices increased in 1996, and had a noticeable impact on the composition of gasoline grade demand. The more price sensitive (i.e., higher demand elasticity) high octane grades lost share to the lower priced regular grade. Prior to 1989, regular grade lost share as leaded gasoline was phased out and as premium and midgrade gained popul arity. The decline was halted by sharply higher gasoline prices in the latter half of 1990 resulting from the Iraqi invasion of Kuwait. Premium’s share peaked in 1988 at 24 percent, but then fell back, first with the advent of midgrade and later in response to the higher prices precipitated by the Gulf War. The recent price increase induced consumers to use more regular, whose share rose almost 3 percentage points to 70 percent in 1996. In contrast, pre mium’s share fell by 2.4 percentage points to a 17-percent share in 1996, the lowest level since 1986.

While demand for total distillate was very strong in 1996, up 4.7 percent from the prior year, the heating oil (No. 2 fuel oil) component was relatively weak, up just 2.4 percent. Most of this increase was due to severe cold weather in the first four months of 1996, which resulted in a 9.9 percent increase over the unusually mild weather occurring over the same period in 1995. However, mild weather in most of the country for the last quarter of 1996, representing the first half of the 1996-97 heating season, caused heating oil demand to drop by 4.4 percent compared to the same period in 1995. Typically, heating oil comprises about 35 percent of total distillate demand during the peak heating months, and falls to less than 20 percent during the summer. Approximately 80 percent ofheating oil demand is based in the Northeast, MidAtlantic and Midwestern States (PADDs 1A, 1B, and 2). For a detailed discussion on the long-term trends in residual fuel 2 

# demand, refer to Energy Information Administration, Fuel Oil and Kerosene Sales 1995 (September 1996), pp. 11-12.

# 19811982 198319841985 198619871988 198919901991 199219931994 19951996 

# 0 70 80 90 100Gross Inputs/Operable Distillation Capacity(Percent)



# 1981198219831984198519861987198819891990199119921993199419951996 

# 0 31 32 33 34API Gravity of U.S. Crude Runs(Degrees API)



# 14 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Move to Heavy Crude Slate Slows 

# Figure 7. Refinery Utilization and Downstream Capacity Increase

Sources: Gross Inputs/Operable Distillation Capacity and API Gravity: Energy Information Administration (EIA), 1981-1995— Petroleum Supply Annual (Vol. 1), Table 16. 1996— Petroleum Supply Monthly (February 1997), Table 28.



# U.S. Refining Capacity as of January 1

Year Number of Operable Refineries Operable Crude Oil Distillation

(MB/CD) Operable Crude Oil Distillation

(MB/SD) Fresh Feed Catalytic Cracking (MB/SD) Coking (MB/SD) Hydrocracking (MB/SD) Hydrotreating (MB/SD) Alkylation (MB/SD) Isomerization (MB/SD) 1981 324 18,400 18,621 5,543 1,021 909 8,487 974 131 1985 223 15,659 16,504 5,232 1,407 1,053 8,897 917 219 1990 205 15,572 16,507 5,441 1,549 1,282 9,537 1,030 456 1995 175 15,434 16,326 5,583 1,785 1,386 10,916 1,105 502 1996 171 15,286 16,169 5,599 1,842 1,385 11,050 1,122 505 Change 1981-1996 -153 -3,114 -2,452 56 821 476 2,563 148 374 Percent Change 1981-1996 -47% -17% -13% 1% 80% 52% 30% 15% 285%
Sources: 1981-1995: Energy Information Administration (EIA), Form EIA-820 "Annual Refinery Report." 1995: The stream day capacities are projected capacities reported on Form EIA-820 "Annual Refinery Report” (1995)." 1996: Number of refineries and crude distillation capacity from Form EIA-810 "Monthly Refinery Report" (January 1996). 

# Bottoms Processing Capacity Continues to Grow, While the Number of Refineries Declines Domestic Refinery Utilization Continues to Rise

# Energy Information Administration / Petroleum 1996: Issues and Trends 15 

# U.S. Refining Since 1980, refining capacity utilization has increased as ! Bottoms Processing Capacity Continues to Grow. U.S. refining capacity has declined and demand for petroleum products has increased. Refinery distillation utilization rates are now well above 90 percent, but capacity constraints are not yet evident in the marketplace. Much of recent refinery facility investment has been for expansion and debottlenecking of units downstream of the distillation units, partially in response to environmental requirements.

! Domestic Refinery Utilization Rates Continue to Rise. The continuing high utilization rates for cokers in the The utilization rate for U.S. refineries rose in 1996 to meet rising oil demand with virtually unchanged refinery capacity. The average monthly utilization rate increased from 9 2.0 percent to 93.4 percent from 1995 to 1996. Normally, utilization rates are lower in February and March because of refinery maintenance, and highest in Decisions in the 1990's. Refiners' investment decisions summer when throughput increases to meet gasoline requirements. In the last several years peak utilization rates exceeded 95 percent, while the minimum was under 90 percent. Utilization rates in excess of 95 percent caused some market analysts to suggest that utilization rates are approaching an upper limit and may result in heightened market stress. Using EIA's definition of utili zation, 95 percent still leaves room for significant product ion. EIA defines refinery utilization rate as input divided by calendar day capacity, which means that 100 percent is the theoretical maximum average rate. The calendar day rate has already been adjusted down from the stream day capacity to account for shutdown and production disruptions. In months with few shutdowns, rates can exceed 100 percent. 3



# ! Move to a Heavier Crude Slate Slows. The average API gravity of crude oils run in U.S. refineries fell for many cap acity in the U.S. was 269 thousand barrels per day, years, but leveled off in recent years. While crude input compared to 120 thousand barrels per day estimated grew heavier and then stabilized, production of heavy capacity in 1990. products decreased. In 1980, heavy residual fuel represented 11.7 percent of the product barrel. By 1985 ! The Number of Refineries Continues to Decline. residual fuel yield fell to 7.1 percent, and in 1995, it was only 5.4 percent. As crude oil gravity decreases, the fraction of heavy material in the crude increases; however, this heavy material can be converted to light product with one of several bottoms conversion processes. In the U.S., coking is the bottoms conversion process most commonly used. Coker unit capa city grew rapidly in the early 1980's, and continues to grow, but at a more modest rate. From 1990 to 1996 coker capacity increased 19 percent. Utilization rates for cokers are the highest of all the process units EIA tracks. The decline of the price differential between light and heavy crudes and light and heavy products (discussed in Chapter 7) has reduced the economic attra ctiveness of investing in additional coker capacity. 1990's suggests that, on a variable cost basis, continued operation is justified; however, investment return may have declined or disappeared entirely at times.

! Environmental Requirements Drive Facilities in the 1990's were driven by requirements for cleaner fuels and stricter environmental regulation of refineries. The Clean Air Act Amendments (CAAA) of 1990 resulted in new requirements for gasoline and diesel fuel. In California, state regulations required even greater changes to product quality. A CAAA requirement to reduce diesel sulfur content to 0.05 weight percent caused a 827 thousand barrels per day increase in middle distillate hydrotreating capacity from 1990 to 1995. Additionally, a substantial number of process revamp projects enabled units to achieve the 0.05 wt percent product sulfur level. The CAAA reformulated gasoline requirement resulted in an increase of 7.3 percent in alkylation capacity and of 10 percent in isomerization capacity from 1990 to 1996. The most dramatic increase in the period was the increase in oxygenate production facilities. In 1995 ether (MTBE & TAME) production

Between January 1, 1990 and January 1, 1997, the number of operable refineries in the U.S. declined from 205 to 164; although capacity remained roughly the same. Thirty-five refineries with a total capacity of 571 thousand barrels per day capacity were shut down and not reacti vated, and the primary distillation capacity of a large refinery (Transamerican) decreased from 300 thousand barrels per day to 0. There were seven new or reactivated refineries that added 131 thousand barrels per day to distillation capacity. That means that existing refineries increased capacity by about 304 thousand barrels per day. Most of the focus of U.S. refiners was on downstream facilities, but as part of refinery projects there was some debottlenecking and expansion of primary distillation facilities. Tancred Lidderdale, Nancy Masterson, Nicholas Dazzo, "Secondary 3 

# Process Key to Gauging U.S. Refining Capacity," Oil and Gas Journal (February 5, 1996), pp. 54-57.

# 1991 1992 1993 1994 1995 1996 0 5 10 15 20 25

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AAGasoline Spot Spreads AAAA AAAAAAA AA A 

# Actual

5-Year Average(Cents Per Gallon)



# 1991 1992 1993 1994 1995 1996 0 5,500 6,000 6,500 7,000 7,500 8,000 8,500

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA(Thousand Barrels per Day)



# Production and Net Imports DemandGasoline Demand and Supply 

# 1991 1992 1993 1994 1995 1996 0 10 20 30 40 50 60 70 80Regular Gasoline and Crude Oil Prices 

# West Texas Intermediate Crude Oil New York Harbor Regular Conventional Gas Conventional Resale PADD 1(Cents per Gallon)



# 1993 1994 1995 1996 0 190,000 200,000 210,000 220,000 230,000 240,000 250,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAAGasoline Stocks 

# Normal Range AAAA AAAA AAAA 

# Actual(Thousand Barrels)



# 16 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 8. Gasoline Prices Draw Public Attention Spring Price Increase Draws Attention Gasoline Spot Spreads Are Weak for Much of 1996

Gasoline Demand Reaches a Record High in 1996, But Growth Slows Gasoline Stocks Remain Unusually Low in 1996

Sources: Spot Prices: Standard and Poor’s Platts. Resale Prices: Energy Information Administration (EIA), 1991-1994— Petroleum Supply Annual (Vol. 1), Table 31. 1994-1996— Petroleum Supply Monthly (February 1997), Table 32. Spot Spreads: Standard and Poor’s Platts. Gasoline Demand and Supply and Gasoline Stocks: EIA, 1991-1995— Petroleum Supply Annual (Vol. 1), Table S4. 1996— Petroleum Supply Monthly , Table S4.

# Energy Information Administration / Petroleum 1996: Issues and Trends 17 

# U.S. Gasoline Markets The sharp increase in gasoline prices in the spring of 1996 barrels per day, a record high, rising from 7.79 million aroused much public concern. Although gasoline demand barrels per day in 1995. was strong and stocks were low, it was high crude oil prices that caused much of the spring price increase and drove ! Gasoline Production in 1996 Is S table but Imports Are gasoline prices up again later in the year.

! Spring Gasoline Price Increase Draws Attention. The usual seasonal spring increase in gasoline prices was given a large boost this year from rising crude oil prices. As the winter of 1995-96 drew to a close, gasoline and petroleum stocks were low worldwide. Colder weather lingered, and winter heating fuel demand persisted, pushing crude oil prices higher beginning in February. Finally a late, unexpected cold snap hit both Europe and the United States, sending refiners into the market for additional crude oil to meet the spurt in demand for heating fuel. Crude prices experienced a final burst, with WTI topping $25 per barrel in April 1996, just when gasoline markets are normally tightening at the beginning of the summer driving season.

! Gasoline Spot Spreads Are Weak for Much of 1996. The seasonal spring increase in gasoline spot spread (spot ! Gasoline Stocks Remain Unusually Low in 1996. gasoline price minus crude oil price) was not much different than average, in spite of the low gasoline stocks. But the extra push from the underlying crude oil price increase raised the total spring gasoline price substantially. Spot Gulf Coast gasoline prices rose from 48.0 cents per gallon in December 1995 to peak at 66.2 cents in April 1996. Retail gasoline prices, which lag behind crude oil price increases, did not peak until May. Retail conventional regular gasoline prices rose from a low of $1.06 in mid-February to a high of over $1.25 on May 17. Crude oil prices and gasoline prices fell back after the spring increase, but by fall, crude oil prices were again climbing (see World Oil Markets page), and gasoline prices followed. By the end of December, gasoline prices were back at levels seen during the spring runup.

! Gasoline Demand Reaches a Record High in 1996, but Growth Slows. Gasoline demand began the 1990's with d eclining crude prices led to a strong increase in U.S. little growth as the United States experienced a recession. However, growth resumed in 1992, averaging 2.3 percent annually through 1995. Growth slowed again in 1996. Gasoline consumption only grew 0.8 percent in 1996 as bad weather slowed travel in the first quarter and high prices discouraged consumption. Despite this slow growth, U.S. gasoline demand in 1996 was 7.85 million Higher. The increase in gasoline demand in 1996 was satisfied overall by increases in net imports. Total production in both 1995 and 1996 averaged 7.59 million barrels per day. Imports, on the other hand, were stronger in 1996 than 1995. This happened for several reasons (see Chapter 2), including a glut of gasoline production in Europe. While exports in 1996 were almost the same as in 1995, imports of finished gasoline and blending components averaged 469 thousand barrels per day in 1996 co mpared to 313 thousand barrels per day in 1995. Reformulated gasoline (RFG) represented 37 percent of gasoline and blending component imports in 1995 and 39 percent in 1996. (The East Coast is the main area using gasoline imports, and much of this region converted to RFG.) Lackluster price premiums for the costlier RFG and regulatory uncertainties were some of the factors keeping imports down in 1995.
Although total gasoline stocks have been exhibiting a long- term downward trend (see Chapter 6), stocks in 1996 were even lower than the trend would indicate. Stocks began the year low at 202.3 million barrels (ending December 1995), which was 11 million barrels (5 percent) lower than the previous December minimum that occurred at the end of 1989. Stocks returned to the low end of the normal range by the end of April, and high imports and production kept them at the lower edge of the normal range through the driving season. In October, refinery problems caused stocks to drop to 188.8 million barrels, the lowest observed minimum in any month since EIA began collecting data in 1981. Stocks did not recover in November, and buyers, concerned over supply availability, drove prices up. Crude prices, on the other hand, fell back briefly in November as European refiners slowed their pursuit of distillate-rich crude oils. The combination of increased gasoline market pressures and spot gasoline spreads for the month of November. According to trade press reports, the gasoline price rally attr acted more cargoes of imports, and the spread soon declined, but increasing crude oil prices pushed total prices higher in December. Stocks remained abnormally low through December, ending the year at 195.5 million barrels, the lowest December stock level recorded by EIA.

# 1991 1992 1993 1994 1995 1996 0 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAADistillate End-of-Month Stocks 

# Normal Range AAAA AAAA AAAAA A A 

# Actual(Thousand Barrels)

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA



# 0 

# July July

July

1991 1992 1993 1994 1995 1996 Demand

Production and Net Imports

0 1991 1992 1993 1994 1995 1996 1,800 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800Thousand Barrels per Day(Thousand Barrels per Day)Distillate Demand and Supply



# 0 

# 1991 1992 1993 1994 1995 1996 0 10 20 30 40 50 60 70 80No. 2 Fuel Oil and Crude Oil Prices 

# West Texas Intermediate Crude Oil New York Harbor Spot No. 2 PADD 1 No. 2 Resale(Cents per Gallon)



# 1991 1992 1993 1994 1995 1996 0 2 4 6 8 10 12 14 16 18 20

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A ANY Harbor No. 2 Heating Oil Minus WTI AAAA AAAAAA A AAA 

# Actual 5-Year Average(Cents per Gallon)



# 18 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Tight Distillate Market Pulls Crude Prices Up . . . . . . and Boosts Spot Spreads Above Average for Most of 1996

Strong Distillate Demand Reinforces Market Tightness 

# Figure 9. World Distillate Demand Keeps Pressure on Crude Prices

Distillate Stocks Drop to Record Low Levels in Fall 1996

Sources: Spot Prices: Standard and Poor’s Platts. Resale Prices: Energy Information Administration (EIA), 1991-1993— Petroleum Supply Annual (Vol. 1), Table 40. 1994- 1996— Petroleum Supply Monthly (February 1997), Table 40. Spot Spreads: Standard and Poor’s Platts. Distillate Demand and Supply and Distillate Stocks: EIA, 1991-1995— Petroleum Supply Annual (Vol. 1), Table S5. 1996— Petroleum Supply Monthly , Table S5.

# Energy Information Administration / Petroleum 1996: Issues and Trends 19 

# U.S. Distillate Markets A cold winter worldwide in 1995-96 drove up distillate 1995 due to both cold weather in early 1996 and high demand. Refiners drew down petroleum inventories, and transportation demand. then increased crude oil purchases and runs to produce additional distillate, pulling crude oil prices higher. In the ! Jet Kerosene Demand Is Also High. Not only did U.S., distillate demand did not let up over the summer, and inventories never recovered. As fall approached, crude markets worldwide remained tight and crude oil prices again climbed. With distillate markets in the U.S. still tight, prices stayed strong throughout the year.

! Tight World Distillate Market Pulls Crude Oil Prices Up and Boosts Spot Spreads Above Average for Most ! Production and Net Imports Increase, but Still Fall of 1996. While gasoline prices drew the most publicity in Short of Demand. Distillate demand rose 161 thousand the spring of 1996, distillate prices also increased. As barrels per day in 1996 to average 3,368 thousand barrels winter 1995-96 progressed, distillate demand increased, per day. Production rose 170 thousand barrels per day to and distillate markets worldwide tightened. The growing 3, 325 thousand bar rels per day and net imports increased tightness was reflected in lower than normal inventories 24 t housand barrels per day, requiring 9 thousand barrels and higher than normal price spreads over crude oil (spot per day to be met from stocks. While total net imports distillate price minus crude oil price). Winter continued only increased 24 t housand barr els per day over 1995, the into March, depleting distillate inventories, so European trading patterns were much different, which is explained and U.S. refiners turned to the crude markets for further on the Import Overview page. additional oil to produce more distillate. Crude prices were pulled higher. The higher crude prices and higher ! Distillate Stocks Drop to Record Low Levels in the than normal price spreads continued until distillate demand let up after the April cold snap.

! Distillate Market Tightness Spreads to Crude Market in Fall. Price spreads fell back below normal in June and July, but began to pick up again in August, even before cold snap, stocks were still low at 90.0 million barrels, the heating season was underway. Strong demand w ell below the normal range for that time of year. By coupled with the low inventories resulted in early June, inventories l ooked like they might have a chance to distillate price pressure. With worldwide petroleum c limb back, but strong July d emand prevented the needed inventories still low, crude prices again were pulled stock increase. Distillate stock build is usually highest in higher as the distillate heating oil season got underway. July, averaging 11.4 million barrels, but in 1996, the Tight U.S. distillate markets kept distillate price spreads stock build was only 4.7 million barrels, the lowest July above average through the remai nder of 1996. The higher stock build since EIA began collecting data. The gap only spreads coupled with high crude oil prices resulted in grew through October, with fuel oil inventories closing high distillate prices throughout 1996. the month at 115 million barrels, 6 million barrels below

! Strong Distillate Demand Reinforces Market history. Distillate stocks are an important supply source Tightness. Distillate fuel oil serves several end uses. Onhighway transportation represents almost 50 percent of demand. Residential heating, the next largest end-use categ ory, represents more than 13 percent of annual distillate use, but is concentrated in the winter months. 4 

# Annual distillate fuel oil demand grew 4.7 percent over distillate fuel oil demand grow at a brisk pace, but kerosene-type jet fuel also showed strength, averaging 6.0 percent growth in 1996. This product and distillate come from essentially the same boiling range of the crude oil barrel, so its high growth put further pressure on distillate supply.

Fall. The most unusual feature of the distillate market in 1996 was the very low inventory levels that persisted throughout the year. U.S. distillate inventories bottomed out in March at 89.7 million barrels, the lowest level since EIA began collecting data in 1981. After the April

the next lowest stock level recorded for October in during the peak winter demand months, and on average satisfy about 12 percent of demand from December through February. Thus, low inventories going into winter are a concern. Any early cold snap would have caused prices to soar, as happened in December 1989, when stocks also were low and an early cold spell drove prices up. Fortunately, in 1996, no such cold spell occurred, but the continued high demand, high production, and low stocks kept price spreads well over average. Energy Information Administration, Fuel Oil and Kerosene Sales 1995 4 

# (September 1996), Table HL1.

# Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 110 120 130 140 150



# 1996Monthly Average Retail Motor Gasoline Prices, Including Taxes



# Conventional All Gasoline RFG(Cents Per Gallon)



# LPG Natural Gas Alcohols Electricity 0 50 100 150 200 2501996 Consumption of Alternative Fuels(Million Gasoline-Equivalent Gallons) 

# US Northeast Mid-AtlanticSoutheast Mountains West 

# 0 20 40 60 80 100 120 140

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA A AA A AAA A AAA A AAA A AAA A AAA A
AAAA AAA A AAAA

AAAA A AAA AAAA
AAAA A AA A A AA A A AA A A AA A AAAA



# 1996Gasoline Consumption by Formulation and Region

AAA AAA AAA AAA AAA AAA AAA
AAAA A AAA AAAA

AAAA A AA A AAAA AAA A A AA A AAA AAA A AA AAA 

# Conventional

Oxygenate RFG

1995 1996 1995 1996 1995 1996 1995 1996 1995 1996 1995(Billion Gallons)



# Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 0 50 100 150 200



# 1992Gulf Coast Oxygenate Prices



# Spot MTBE Spot Ethanol

Spot Methanol



# 1997 1995 1994 1993 1996(Cents Per Gallon)



# 20 Energy Information Administration / Petroleum 1996: Issues and Trends Sources: Gasoline Consumption: Energy Information Administration (EIA), Prime Supplier Report , December 1996. Gasoline Prices: EIA, Weekly Petroleum Status Report (various issues). Oxygenate Prices: Octane Week (various issues). Consumption of Alternative Fuels: EIA, Alternatives to Transportation Fuels (December 1996). 

# Reformulated Gasoline Increases Market Share Switching to Cleaner Gasolines Has a Price

Oxygenate Prices Rise Steadily for Much of 1996 

# Figure 10. Clean and Alternative Transportation Fuels Continue to Grow

Propane Is the Dominant Alternative Transportation Fuel

# Energy Information Administration / Petroleum 1996: Issues and Trends 21 

# Clean and Alternative Transportation Fuels The use of cleaner transportation fuels to improve air quality C alifornia. Gulf Coast monthly average spot RFGcontinued to grow in 1996. Smog-reducing reformulated c onventional differen ces averaged 2.3 cents per gallon in gasolines were chiefly responsible for this increase. While 1996, varying between 3.9 cents per gallon in April and the use of alternative fuels also increased, it will be many 0.8 cents in October. Adding on the 2-cent RFG regional years before alternative fuel vehicles become a significant differences and 1 cent logistical costs, retail customers factor in the transportation sector. outside of California probably paid on average a little

! Reformulated Gasoline Increases Market Share. Reformulated gasoline (RFG), which is designed to reduce harmful exhaust emissions that cause smog, O xygenates are an important component of reformulated accounted for 31 per cent of total motor gasoline usage in gasolines. Oxygenate prices in 1996 were less volatile 1996, up from 27 percent in 1995. On the other hand, than in the previous few years, but nevertheless they were oxygenated gasoline, which is designed to reduce affected by numerous special circumstances. The price of emissions of carbon m onoxide, comprised only 3 percent corn r eached $5.00 per bushel in June 1996, compared to of motor gasoline sales in 1996, down from 4.4 percent $2.00 per bushel as recently as October 1994. This in 1995. The Northeast and the West Coast are the affected ethanol prices, which rose steadily on the Gulf biggest users of RFG. Coast from $1.05 per gallon in September 1995 to as high as $1.49 per gallon in September 1996. Methanol prices ! The Switch to Cleaner Gasolines Has a Price. In areas where RFG is used, consumers sometimes pay significantly more for this fuel than they would for conventional gasolines. Gasoline prices are generally relatively high to begin with in these areas, which tend to be more densely populated. Prior to the introduction of RFG, these areas showed about a 2-cent-per-gallon price premium over attainment (non-RFG) areas. Adding in the incremental cost of producing RFG, which EIA calculated to be about 3 cents per gallon, and the extra increase in logistics and other costs, which the National Petroleum Council estimated at about 1 cent per gallon, the typical spread between RFG and conventional propane, are by far the dominant alternative fuel, gasoline is expected to average about 6 cents per gallon. although the use of other alternative fuels is growing. In California’s RFG has more stringent requirements than 1992, natural gas, including both compressed natural gas the Federally mandated RFG, and its production costs are and liquefied natural gas, comprised less than 6 percent also higher, leading this spread to be even wider in of alter native fuels use, but by 1995, EIA estimates its California. California also has had supply problems due share had risen to almost 15 percent. The use of alcohols to refinery operating difficulties and the limited number is small, involving various mixtures of ethanol and of refineries that can produce the gasoline, which has methanol with gasoline. Electricity will be a small factor driven RFG prices there up even further. California in the market for the foreseeable future. Overall, most of consumes over 35 percent of the nation’s RFG, so its the growth in alternative fuel usage is the result of the prices affect national average figures. The differences Ene rgy P olicy Act of 1992, which mandated the use of between the Gulf Coast spot prices for reformulated and alternative fuels in Federal gove rnment fleets in 1993 and conventional regular gasoline prov ide an indication of the in state and local government fleets over the next few RFG premium being paid by consumers outside of years. over 5 cents more for RFG in 1996.

! Oxygenate Prices Rise Steadily for Much of 1996.

were much more stable in 1996 than in recent years, but tight supplies, worsened by idled plants, including the Callowness plant in Alberta, Canada, in early October and the Hoechst-Celanese plant in Clear Lake, Texas in December, drove methanol prices to a high of 51 cents per gallon in December. B ecause methanol is a feedstock for MTBE, higher methanol prices in turn pushed up the price of MTBE, which traded as high as 89 cents per gallon in October.

! Propane Is the Dominant Alternative Transportation Fuel. Liquefied petroleum gases (LPG), predominantly

5



# Energy Information Administration, Alternatives to Traditional 5 

# Transportation Fuels 1994 (February 1996), Volume 1, Table 14.

# Jan Jul Jan Jul Jan Jul 0 290 300 310 320 330 340 350 360Crude Oil Stocks



# 1995 1996 1994(Millions of Barrels)



# Nov Mar Jul Nov Mar Jul 0 16.00 18.00 20.00 22.00 24.00 26.00

2 Oct 1995 15 Apr 1996 1 Jul 1996 3 Sep 1996 10 Dec 1996Futures Contract Prices



# 1997 1995 1996(Dollars Per Barrel) AAAA AAAA AAAA AAAA AA A A A A A A AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AAA AAAA AAAA AAAA AAAA AAAA

A A A A A A
AAAA AAAA AAAA AAAA AAAA AAAA AAAA

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A A A A A A A

AAAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AA A A A A A A A A A A A A AA

AAAA A AAA A AAA A AAA A AAA A AAA AAAA

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A A A A A A A A

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A A A A A A A A A A

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# 1986 1988 1990 1992 1994 1996 0 10 20 30 40 50Contracts (M illions) 

# Crude Oil Heating Oil Unleaded Gasoline

AA A A AA



# Jan Jul Jan Jul Jan Jul 0 80 90 100 110 120 130 140 150 160Heating Oil Stocks



# 1995 1996 1994(Millions of Barrels)



# 22 Energy Information Administration / Petroleum 1996: Issues and Trends Sources: Futures Trading Volume and Futures Contract Prices: New York Mercantile Exchange. Crude Oil and Heating Oil Stocks: Energy Information Administration, Petroleum Supply Monthly (various issues). 

# Futures Trading Volume Levels Off Trading Is Inhibited by Low Crude Oil Stocks

Trading Is Also Inhibited by Low Heating Oil Stocks 

# Figure 11. Futures Markets Are Turbulent in 1996

Expectations Are Reflected in Pricing of Futures Contracts

# Energy Information Administration / Petroleum 1996: Issues and Trends 23 

# Petroleum Futures Markets By any measure, petroleum futures markets were extremely differently, making the futures markets less useful for volatile in 1996. Volatility frequently attracts increasing hedging and thereby causing a slowing in the volume of amounts of both speculative and hedging activity in futures futures trading. markets; however, this has not occurred recently. Trading volume in energy futures grew at a remarkably rapid rate in ! Numerous Factors Contribute to Low Stock Levels of the late 1980's, but volume growth has slowed considerably in recent years. There are many reasons for this. An important reason is that commercial traders historically have been attracted to futures markets as a device for hedging their price risk. But futures contracts that do not accurately reflect the product be ing hedged may have price movements that differ greatly from spot price movements, diminishing the usefulness of the futures contract as a hedging device.

! Futures Trading Volume Levels Off. Uncertainty in unleaded gasoline futures trading is one of the major reasons why futures market trading volume has leveled off since 1994. Unleaded gas oline futures are specified in terms of reformulated gasoline but must serve as a hedging device for numerous types of reformulated, oxygenated, and con ventional gasolines. The fragmented gasoline market causes great uncertainty as to how closely futures prices will follow the spot prices of the type of gasoline being hedged. That uncertainty has led to a slowing in trading volume in unleaded gasoline futures. After large increases in volume as recently as 1988 (60 percent) and in 1989 (36 percent), trading in gasoline futures actually decreased by 5.3 percent in 1995 and another 0.5 percent in 1996.

! Low Oil Stocks Also Inhibit Trading. Another reason for the slowdown in futures trading volume is the effect that low oil stocks have on the markets. Price structures in energy futures markets depend upon a variety of factors. The most important factor by far is the balance between supply and demand that is reflected in the level of stocks. Low stock levels in a tight market can adversely affect the relationship between futures prices and spot prices almost as much as having an inadequately defined futures contract. Heating oil and crude oil stocks reached historically low levels in 1996. In March 1996, heating oil stocks reached a low of 89.7 million barrels, down 22 percent from the previous year, and at a very low level to begin building stocks for the heating season. Also, crude oil stocks were only 299.6 million barrels in March 1996, down 1 1.6 percent from a year earlier. Low stock levels can make the markets very jittery, and futures prices and spot prices may behave very Petroleum and Products. One factor affecting stocks is loosely called "just-in-time" inventory practices. The industry has made a conscious effort to lower inventory costs by holding as few stocks as possible. At least part of the low stocks in 1996 were simply an extension of a long-term trend in the industry to hold fewer stocks. Additionally, a number of supply and demand factors contributed to low stock levels in 1996. Those factors include: an industry-wide reflec tion of expectations about the possibility of the resumption of oil sale from Iraq; cold weather in the spring; strong global oil demand; supply shortfalls from non-OPEC sources; and strong gasoline demand. All those factors made it difficult for refiners to build inventories.

! Pric ing of Futures Contracts Reflects Stock Levels and Supply Expectations. Through 1996, the futures markets reflected changing stock levels and expectations of future supply (market factors that are not independent). In late 1995, the crude oil market showed only mild "backwardation," a situation in which crude oil for future month delivery is priced lower than crude oil for nearby month delivery. On October 2, crude oil for delivery in November was $17.64 per barrel, while crude oil for December 1996 delivery was only 30 cents per barrel lower. But by April 1996, the backwardation in the crude oil futures market had increased sharply. On April 15, 1996, crude oil for May delivery was $25.06 per barrel, but oil for June delivery was $2.58 per barrel lower, driven largely by expectations of imminent oil sales from Iraq. In early December 1996 the backwardation decreased after Iraqi oil sales were finally announced, as the spread between January and February 1997 futures prices dropped to 50 cents per barrel. The announcement of the Iraqi sales removed much of the uncertainty in expectations that had caused market backwardation. Futures markets will continue to be a good measure of both perceived adequacy of petroleum stock levels to cushion suppl y/demand swings and market expectations. They may also cause some controversy, as analysts disagree on the exact nature of the cause-and-effect relationships between futures market backwardation, stock levels, and expectations.

# Jan Apr Jul Dec 0 1.00 2.00 3.00 4.00 5.00 6.00 7.00Marketers' Margins 

# 1995



# Distillate 1995
1996 1996 

# Motor Gasoline(Dollars per Barrel)



# Jan Apr Jul Dec 0 2.00 4.00 6.00 8.00 10.00Refiners' Margins 

# 1995 1996(Dollars per Barrel)



# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -10

0 10 20 30 40Annual Return on Equity (Percent) 

# S&P Industrials Nonenergy

Independent Refiners Majors

Jan Apr Jul Dec -200.00 0 200.00 400.00 600.00 800.00 1000.00 1200.00 1400.00(Million Dollars) 

# 1995 1996

1995 1996U.S. Refining/Marketing Income



# Independent Refiners' Net Income

Majors' U.S. Refining/ Marketing Income

24 Energy Information Administration / Petroleum 1996: Issues and Trends Note: Profitability: Return on equity = net income as a percent of stockholders' equity. Results for 1996 are through the third quarter. Sources: Refiners’ and Marketer’s Margins: Energy Information Administration, Petroleum Marketing Monthly (April 1997) (Washington, DC). U.S. Refining Income and Profits: Company quarterly reports to shareholders. Profitability: Standard and Poor's Compustat. 

# Price Runup Boosts Refiners’ Margins But Not Marketers’ Margins

U.S. Refining Profits Improve in the First Half of 1996 

# Figure 12. Downstream Performance in 1996 Is Modest Despite High Prices

Yet Profitability Remains Below U.S. Industry Norm

# Energy Information Administration / Petroleum 1996: Issues and Trends 25 

# Financial Performance Increases in gasoline and distillate margins raised refinery second quarter’s level. The gross margin in the third margins slightly higher in 1996, but lower retail margins quarter of 1996 almost matched 1995's third-quarter dampened growth in downstream income. While total margin, while the margin in the fourth quarter was 8 prof itability of the major and independent refining percent a bove the compa rable value in 1995. The modest companies was up in 1996, it remained below the uptick in margins was largely due to higher gasoline and profitability of overall U.S. industry. diesel fuel demand stemming from a surge in U.S. economic growth in the last quarter of 1996. ! Price Runup Boosts Marg ins in the First Half of 1996. The spread between product prices and crude oil input costs (the gross refining margin) realized by refiners for distillate and gasoline was nearly a dollar per barrel higher in both the first and second quarters of 1996 than corre sponding 1995 levels. It should be noted that the gross refining margin in the first quarter of 1995 was at a 6-year low. The increase in the first-quarter margin in 1996 reflected the effects of an especially cold winter, particularly in March, with heating oil prices up 17 percent and propane prices up 22 percent compared toprices in the first quarter of 1995. However, the firstquarter rise in gasoline prices merely matched the rise in crude oil input prices. In the second quarter of 1996, gasoline price rises out paced the continued rise in crude oil input costs, as did distillate prices, thereby U.S. Industry Norm. On balance, the profitability of the contributing to higher margins.

! U.S. Refining Profits Improve in the First Half of 1996. Quarterly financial results are available for a profitab ility is return on equity, defined as net income as consistent group of 13 specialized refiner/marketers and 13 major integrated petroleum companies that separately report data for their U.S. refining/marketing line of business. Total first-quarter income from U.S. refining/marketing operations for both groups of companies in 1996 was o ver $400 million above the very poor first-quarter results of 1995. The first-quarter results in 1995 were the worst for U.S. refining operations over the 1987-1996 decade. The rise in downstream profits continued through the second quarter of 1996. The majors’ second-quarter financial results for their U.S. refining/marketing operations were at a 10-year peak, surpassing the previous peak in 1990, when a crude oil market glut yielded record refining margins. Independent refiners also registered a 10-year peak in second quarter net income.

! High Margins Are Not Sustained in the Second Half of 1996. In contrast to the first-half results, refiners’ margins in the second h alf of 1996 were only slightly above prior year's margins. Gross margins showed the typical seasonal pattern, dropping in the third quarter from the Refiners registered a year-over-year drop in income in the second half of 1996, even though margins were slightly higher and overall U.S. refined product demand was up 3 percent. Reduced retail margins appear to be a source of lower downstream earnings in the second half of 1996. The retail margin for gasoline (calculated as the difference in the price to end users and the resale price) was clearly lower in the second half of 1996 compared with 1995. Since most of the majors and independent refiners are involved in retail gasoline marketing to varying degrees, a large drop in retail margins will be reflected in their bottom-line results.

! Refiners’ Profitability Improves, but Remains Below U.S. major and independent refining companies in 1996 was up slightly, but still well below the profitability of U.S. industry overall. An often-used measure of corporate a percent of stockholders’ equity. Although the annual profitability of both the majors and independent refiners rose in 1996, this improvement was mainly attributable to lines of activity other than U.S. refining and marketing operations. Major U.S. petroleum companies’ upswing in overall profitability was traceable to higher oil and natural gas prices realized from upstream operations. For example, the majors disclosing separate financial results for U.S. oil and gas production reported that income from these operations for all of 1996 was up 88 percent compared with results for 1995. For their U.S. refining and marketing operations, the majors reported a much smaller 15-percent increase in income over the same period. The independent refiners’ increased profitability in 1996 in part reflected recent large downstream acquisitions (Clark USA and Tosco) and improved results from other lines of activity including nonenergy businesses (Ashland) and the production and marketing of natural gas and natural gas liquids (MAPCO, LL&E, and Valero Energy).

# Energy Information Administration / Petroleum 1996: Issues and Trends 27 

# The rapid increase in gasoline prices during spring 1996 focused attention on petroleum markets. Petroleum product prices have not drawn much public attention since the Gulf War, but the spring increase renewed interest in the changing petroleum marketplace and raised questions about what caused the increase and the potential for more such price increases in the future. 

# 2. Spring '96 Gasoline Price Runup: An Example of Petroleum Market Dynamics

Introduction Retail gasoline prices in the United States rose sharply over the early months of 1996, increasing by 21 cents between mid-February and mid-May (Figure 13). While gasoline 6 

# prices usually rise somewhat at this time of year, the extraordinary speed and magnitude of the increase surprised and even alarmed many consumers. The spring 1996 price increases resulted from a confluence of factors, some of which were unusual but not unprecedented. Rising crude oil prices and the normal seasonal increase in gasoline prices accounted for most of the retail price increase. However, gasoline markets were also affected by unusual factors, i ncluding: a late-winter cold spell causing refiners to focus on producing distillate (heating oil, diesel fuel and kerosene-jet fuel) instead of gasoline longer than usual; lower-than-normal gasoline stocks; continuing high gasoline demand and high refinery capacity utilization; and persistent expectations that both crude oil and gasoline prices would fall several months in the future, which discouraged production of gasoline in excess of demand to build stocks. In order to assess the main factors influencing gasoline prices, crude oil price movements are separated from the gasoline prices, and spot prices will be explored separately Crude oil, the raw material for gasoline and other petroleum from retail prices. The difference between gasoline price and produ cts, represents by far the largest cost component of crude oil cost is referred to as the price spread. Figure 14 those products. The increase in crude oil prices from shows the relationships between spot and retail prices and December 1995 through April 1996 explains about half of the underlying costs that prices must cover, excluding taxes. the increase in retail gasoline prices. Light and heavy crudes The full retail price of gasoline paid by consumers provides alike rose rapidly in March and April (Figure 17). West the revenues to cover the costs of crude oil, refining, storage Texas Intermediate (WTI) crude oil averaged $19.03 per and distribution, marketing and retail expenditures, taxes barrel in December, fell back to under $18 towards the end (federal, State and local), and to generate a return on of January, and peaked at $25.15 per barrel during April investment (profits). The two largest single costs are crude oil and taxes (Figure 15). For example, West Texas Intermediate spot prices averaged 45.3 cents per gallon during December 1995. Taxes averaged 40.8 cents per gallon. Average monthly spot prices peaked in April at over 65 cents per gallon, and retail prices, which lag spot price changes, peaked a month later in May at $1.24. Figures 15 and 16 show that the crude oil price increase explains a large part of the gasoline price increase. However, gasoline spreads also increased. Spot gasoline spreads normally increase between December and May, followed shortly by increases in retail prices. Figure 16 shows what spot prices would have been, had average spot spreads been experienced. 7 

# This chapter describes the influence of various market factors on gasoline prices and how these factors combined to cause the unusual price increases in the spring of 1996. The analysis focuses on the changes that occurred from December, the normal seasonal low point for spot gasoline markets, through April, when s pot prices peaked, follows the progress of gasoline markets prices through the summer driving season, and concludes with the price reversal in spring 1997. 

# Crude Oil Market in Spring 1996

Regular gasoline, all formulations: Energy Information Administration 6 

# (EIA), Form EIA-878, “Motor Gasoline Price Survey.” (June 1996). Different data series (e.g., Platts versus Reuters) and different crude oils 7 

# (e.g., Brent versus WTI) will produce different numbers, but the trend and conclusion remain the same. That is, crude oil and normal spread patterns explain most of the price increase. Other combinations of gasoline and crude oil prices were inspected and more in depth analyses were performed and discussed in An Analysis of Gasoline Markets Spring 1996 , DOE/PO-0046

# 1994 100 110 120 130 140Nominal Cents per Gallon



# 1990 1991 1995 1996 1997 1992 1993

Crude Oil Costs Refining Operating

Costs Refining Profit (1) Storage and Distribution Costs Delivery Costs Marketing Operating

Costs Marketing Profit (1)

(1) Profits may be positive or negative, based on market conditions. 

# Retail Price Spot Price Crude Price

28 Energy Information Administration / Petroleum 1996: Issues and Trends Source: Energy Information Administration, Annual Energy Review 1995 (January 1996), pp. 17, 161, and 179. 

# Figure 13. U.S. Average Retail Regular Gasoline Price

Figure 14. Price and Cost Relationships

Source: Energy Information Administration.

# 0 20 40 60 80 100 120 140

A AAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AA A AA A AA A AA A AA A AA A AA A AAA
AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

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A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA



# 65.3Cents per Gallon AAAA AAAA AAAA



# Spot Spread Taxes Crude Oil Spot Price (W TI)

56.0 50.6 50.6 45.3 45.3 56.0 

# 52.1 105.1 120.9

64.3 124.4

Retail Spot Retail Spot Retail Spot December 1995 April 1996 May 1996 AAAA AAAA AAAA AAAA 

# Retail Excl. Tax Spread

Dec Jan Feb Mar Apr May Jun Jul 0 10 20 30 40 50 60 70 80



# 1996C ents per Gallon 

# W est Te xas Interm ed iate C rude (W T I) Average Spread (NYH G asoline M inus W TI) Actual

45.3 44.8 45.5 50.8 56.0 50.6 48.7 50.8

52.1 49.9 52.8 58.3 65.3 64.3 57.3 61.1



# 1995

Energy Information Administration / Petroleum 1996: Issues and Trends 29 Note: Retail Excl. Tax Spread = retail price excluding taxes minus crude oil price. Spot Spread = spot price minus crude oil price. Sources: Spot Prices: Standard & Poor’s Platts. Retail Prices: Energy Information Administration (EIA), Form EIA-878, “Motor Gasoline Price Survey.” 

# Figure 15. Crude Oil and Gasoline Prices

Source: Standard & Poor’s Platts. 

# Figure 16. Gasoline Price Summary (NY Harbor Spot Conventional Regular)

# 1991 1992 1993 1994 1995 1996 0 5.00 10.00 15.00 20.00 25.00 30.00Dollars per Barrel



# Arab Heavy Brent Nigerian Bonny Light W est Texas Interm ediate

30 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 17. Monthly Average Spot Crude Prices

Source: Standard & Poor’s Platts.



# before starting to fall again. Although a similar increase in normal patterns and falling (i.e., demand is greater than crude oil prices occurred in 1994, consumers were not as pr oduction), market participants worry that production levels sensitive to the change because gasoline prices were very may be too low to meet future demand. When stocks are low at the start of the climb, and the increase occurred more limited, increases in demand elevate buyers’ concerns over gradually. s upply availability, and cause them to bid higher prices in The rise in crude prices in the spring of 1996 can be attributed to a tight crude oil supply/demand balance in The Organization of Petroleum Exporting Countries (OPEC) world markets. A tight petroleum balance occurs when plays an important role in the crude oil market’s movement demand exceeds production and when crude oil and product between tight and loose conditions. Non-OPEC producers stocks are low, providing little cushion to meet unexpected generally produce at their maximum capability, but OPEC demand surges or supply disruptions. historically has members who produce at less than capacity 

# Importance of Supply/Demand Balance to Prices As in all commodity markets, crude oil prices respond to the fundamental market forces underlying the crude oil supply /demand balance. For example, when little or no excess short-term supply exists to satisfy demand, markets tighten, producing upward pressure on prices. Stocks are a closely watched barometer of market balance — or tightness — for both product and crude oil markets. Changes in stocks reflect imbalances in production and An important factor in the spring crude price increase was demand and signal when supplies might be growing short or expanding world demand. Figure 18 shows world petroleum long re lative to demand. When stocks are low relative to s upply and d emand for 1991 through 1996. By the end of order to assure supply.

to help maintain price levels. OPEC’s success at controlling produc tion when prices weaken has been limited. Demand for OPEC crude oil varies both as a function of world demand and non-OPEC supply. When the call on OPEC crude oil is high relative to OPEC capacity to produce, the market tends to support higher prices. When demand falls off, OPEC production does not always follow, creating downward pressure on prices due to oversupply. 

# Strong World Petroleum Demand Hit New Peaks in Winter 1995-96

# 1991 1992 1993 1994 1995 1996 1997 0 64 66 68 70 72 74 76Crude Oil Supply and Demand



# Demand
Stock Draw(Million Barrels per Day)



# Supply

Stock Build

Energy Information Administration / Petroleum 1996: Issues and Trends 31 

# Figure 18. World Supply and Demand

Sources: Energy Information Administration (EIA), International Petroleum Statistics

. First Quarter 1997: Actual— Oil Market Intelligence (May 1997), Vol. II, No. 5, p. 3. Second Quarter 1997: Projected— Oil Market Intelligence Update (June 2, 1997), p.1.



# 1993, the global economy was recovering from the recession prior winter was one of the highest during the last five years. of the early 1990's. Demand began increasing and grew The strength was attributed to an extended winter in the robustly in 1994 and 1995. Average daily consumption rates Atlantic Basin, continued strong Asian economic growth, since 1993 have risen each year by about 1.6 million barrels and apparent stabilization of consumption in the former per day (which represented 2 percent growth in 1995). Soviet Union countries. World petroleum demand is seasonal, peaking during winter in the northern hemisphere when world distillate needs are greatest. (This differs from the U.S., where demand peaks in summer because gasoline is the dom inant product in the U.S. market.) In 1992 and 1993, excess supply caused petroleum stocks to build for two years in a row. Rising demand began to eat into this surplus in 1994 as stock draws exceeded stock builds for the year. As might be expected, crude oil prices dropped substantially during this time of over-supply, starting from about $22.37 monthly average (WTI) in June 1992 and bottoming out at an average $14.49 in December of 1993. The increases in demand in 1994 tightened the balance and brought prices up to an average of $19.70 in July 1994. Demand was very high during the winter of 1995-96, exceeding most forecasts for the period prepared only months before. Actual demand in the first quarter 1996 exceeded the Nove mber International Energy Agency (IEA) forecast by 500 thousand barrels per day. The demand increase during winter 1995-96 over summer and over the 

# Winter 1995-96 Crude Supply Affected by Bad Weather Demand growth alone cannot make a market tight. It is the balance between the supply and demand that determines the tightness or looseness of a market. Therefore, the explanation for increased tightness must include the inability or failure of crude oil supply to respond to demand growth. World oil supply increased 1.5 mill ion barrels per day during the winter of 1995-96, but fell short of predictions. Like demand, oil supply was also affected by weather. In early November 1995, the International Energy Agency predicted first quarter 1996 non-OPEC supply would be 43.9 million barrels per day. Actual supply was only 43.1 million barrels per day, or 800 thousand barrels per day short of expectations. Part of the shortfall was caused by bad weather condi tions and operating problems in the North Sea and the Gulf of Mexico, areas located near markets (U.S. and Europe) where consumption was higher than expected.

# 32 Energy Information Administration / Petroleum 1996: Issues and Trends 

# While an 800 thousand barrels per day shortfall is less than The expectation of softening prices was further strengthened 2 percent of world supply, it can put significant pressure on in late January, as the potential for Iraq returning to the prices in a tight market, since the shortfall must be made up market seemed to increase with the scheduling of the initial from stocks or increases in OPEC production. Stocks were round of UN/Iraq discussions on limited oil sales for early low and OPEC was already producing at high levels. OPEC February. Expectations of falling prices discouraged refiners increased crude oil production from 25.4 million barrels per from building or maintaining stocks despite high demands. day fourth quarter 1995 to average 25.6 million barrels per day during the first four months of 1996. This was 1.1 As winter proceeded, distillate demand grew, and stocks million barrels per day over its self-imposed quota of 24.5 disappeared. Prices began climbing again in February and million barrels per day. March. Backwardation in the futures market steepened to 

# Tightening Winter World Petroleum Balance Set Stage for Spring Crude Runup At the beginning of the 1995-96 winter, market analysts expected growing supply to more than offset strong demand growth. The world petroleum supply/demand balance as reflected in world stocks was not a concern. However, widespread, sustained winter weather served both to reduce some of the anticipated supply and to boost winter demand above ex pectations. Even with increased OPEC output over the winter, OECD countries experienced the largest decline in stocks over the fourth and first quarters in the last five years. Winter 1995-96 demand was up by 2.1 million barrels per day over winter 1994-95, while supply was up 1.5 million barrels per day. The OECD winter 1995-96 stock 8 

# draw was 1.1 million barrels per day compared to the 0.8 million barrels per day the prior winter. The 1.1 million barrels per day draw is large and significant in light of the low beginning stock levels. With low stocks and demand still outstripping supply, markets tighte ned. WTI prices rose from $17.44 in October to over $19 in December. Prices relaxed a bit in January, partially due to increased OPEC production. Another factor was at work affecting market behavior. Throughout the winter, forecasters were predicting the arrival of significant new non-OPEC supply during the third and fourth quarters of 1996. Also, the low world demand season occurs in the second and third quarters. With prompt month (near-term) oil prices high due to scarce supply relative to demand, and the market expecting increasing supplies from non-OPEC (as well as from some OPEC) sources, future prices were expected to fall, as reflected in the futures markets. The situation where near-term prices are higher than future months’ prices is called backwardation. unusual levels as the prompt market tightened and the supply outlook still reflected expectations for new supplies in the short term (Figure 19). The late cold spell in April affected Europe as well as the U.S., and sent the already-tight markets skyrocketing. Both regions were left with low crude and product stocks following the long winter, eliminating stocks as a supply source to meet the late surge in distillate demand. Refiners responded by increasing crude oil purchases and increasing refinery runs, which pushed the WTI price up over $25 per barrel. Finally, in mid-April, as cold weather abated and demand for crude oil began to recede, prices began to weaken. WTI prices fell to about $21 per barrel by the end of the month and hovered around that price until the end of August.


# Normal Gasoline Markets While crude oil price increases explained most of the gasoline price increase in spring 1996, the behavior of gasoline markets was responsible for the remainder. As background for discussion of the unusual gasoline market events of this past spring, a brief overview of normal market behavior is presented below. Two major characteristics of normal gasoline markets are particularly relevant: the relati onship between spot and retail prices and the usual seasonal changes in the market. 

# Spot Spread is the Seasonal Component of Price The effect of the gasoline market on prices is revealed in the spot spread (spot gasoline price minus crude price) and in the retail spread (retail price minus spot price). The gasoline spot spread gives an indication of the dollars being generated by refiners to cover their costs to process crude oil into gasoline and gasoline’s contribution to refiners’ taxes, financing costs, corporate overheads, and profits. Spot spreads tend to be low in winter and high in summer (Figure 20). The Organization for Economic Cooperation and Development is the 8 

# international organization of the industrialized, market-economy countries. The following countries are members of OECD: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, Canada, United States, Mexico, Japan, Australia, New Zealand, and Korea.

# Oct 

# 1996 18.00 21.00 24.00 27.00Dollars per Barrel



# 10/2/1995 4/15/1996

7/1/1996 9/3/1996 12/26/1996

Nov Jul Apr Jan Oct Jul Apr Jan 0



# 1997 1995

Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 0 3 6 9 12 15



# 1995Cents per Gallon



# 1996 1994 Gasoline

Distillate

Energy Information Administration / Petroleum 1996: Issues and Trends 33 

# Figure 19. Changing Term Structure for Crude Oil Futures

Source: New York Mercantile Exchange

. 

# Figure 20. The Seasonal Price Component (New York Harbor Spot 5-Year Average Spot Gasoline and Distillate Spreads)

Source: Energy Information Administration, data calculated using Standard & Poor’s Platts.

# 34 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Historically, spot spreads typically increase by 5 to 10 cents 1995 im ports averaged less than 350 thousand barrels per per gallon between their lows in December and their peaks day after averaging 481 thousand barrels per day for the in April and May. Although these spreads exhibit some same period in 1994 (Figure 23). regional variation, they follow a similar pattern throughout the U.S. The seasonal pattern in gasoline spot spreads corresponds to the cyclical tightening and loosening of gasoline supply and demand. The gasoline supply and de mand balance is, in turn, affected by the market for distillate (heating oil, diesel fuel and kerosene-jet fuel). 

# Price Seasonality Stems from Seasonality in Supply and Demand Gasoline and distillate demands are highly seasonal, but environmental regulations requiring different summer and counter- cyclical (Figure 21). Distillate demand peaks in the winter specifications. But now, there is even more need to winter when heating oil requirements are highest, and draw down excess winter gasoline stocks, since winter gasoline peaks in the summer during the high driving season. gasoline does not meet summer gasoline specifications, and Refiners co-produce gasoline and distillate and have a gasoline stocks are required to meet peak summer demand. limited ability to change the relative quantities being produ ced. Production of either product can be changed by March and April are crucial months for both gasoline and shifting a small amount of material from the crude oil that is distillate markets. At the end of March, following refinery in a boiling range acceptable to either product, and also by maintenance, gasoline stock levels are assessed for their changing operating conditions on process units downstream ab ility to help meet summer demand. At the same time, from the distillation t ower. The limits of the changes require dis tillate stocks have been depleted by the end of the winter refiners to build and use stocks to meet seasonal peak season. As a result, any extended-cold-weather distillate demands (Figure 22). demand w ill have to be met t hrough production, since stocks Gasoline stocks build in the fall as distillate production is additional supply. increased and gasoline co-product ion exceeds demand. Since the advent of clean fuels, gasoline stocks have experienced By early April, gasoline demand begins to pick up. Gasoline a slight drop in October as they are used to meet demand sto cks usually continue to fall because refiners are still while refineries convert to winter gasoline fuel production. coming back on stream, increasing imports lag behind the Gasoline stocks then continue their climb as production rising demand, and refiners and terminals are converting outstrips declining demand. Stocks usually peak in January from winter to summer gasoline. With low stocks and when demand is at its lowest point. During the peak demand increasing demand, buyers bid higher prices for product, months of June, July, and August, stocks provide about 2 thereby increasing spot spreads. These increasing spreads percent of demand. (Stocks play an even more important role help to attract marginal imports. Sometime in late April or in the distillate market, typically p roviding almost 12 percent May, refiners return to full production, imports are strong, of demand during the peak winter months of December, and the market is in better balance. Spreads frequently drop January and February). back, jumping again slightly in August before continuing In addition to domestic production, imports help meet U.S. gasoline demand. Some areas, such as Canada, Venezuela, and the U.S. Virgin Islands, provide the U.S. with gasoline imports on a regular basis. Europe and Saudi Arabia are examples of marginal suppliers, because their economics of selling product to the United States are not always attractive. Imports from marginal suppliers tend to increase during the second and third qu arters as both demand and gasoline price spreads grow. However, import volumes can vary significantly from year to year. For example, second quarter 

# Seasonal Supply/Demand Balance Impact on Gasoline and Crude Spread In January, as gasoline production exceeds demand and stocks reach their peak, the oversupply of gasoline pushes the gasoline spreads to their lowest seasonal levels. During the first quarter, crude input to refineries declines and both gasoline and distillate production fall as refineries are shut down for routine, annual mai ntenance around March. Excess gasoline stocks accumulated over the fall and winter begin to decrease at this time. This pattern existed prior to

must be used before summer begins. Still, some extra

are close to minimum working levels and cannot provide

their downward path to their December lows. 

# Prices Moving Through the System Show Lag Between Spot and Retail In addition to seasonality, the pace of price changes moving through the system from refine ries to end users helps explain some of the timing of the 1996 spring gasoline price increase. Price changes move through the system at different

# 1991 1992 1993 1994 1995 1996 0 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 6,500 7,000 7,500 8,000 8,500Thousand Barrels per Day 

# Gasoline

Distillate

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AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA 

# Stock Draws Demand

Production and Net Imports Stock Builds

1991 1992 1993 1994 1995 1996 0 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800y



# 1991 1992 1993 1994 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 35 

# Figure 21. Gasoline and Distillate Counter-Cyclical Demand (Thousand Barrels per Day)

Sources: Energy Information Administration (EIA), 1991-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2.


# Figure 22. Relying on Stocks to Meet Peak Demand: Distillate Supply and Demand

Sources: Energy Information Administration (EIA), 1991-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2.

# 1991 1992 1993 1994 1995 1996 0 100 200 300 400 500 600

AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA A AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A AA

AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AAThousand Barrels per Day AAAA A AA A AAA A AAAA 

# Finished Gasoline Excl. RFG
Reformulated Gasoline Gasoline Blending Components

36 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 23. Gasoline Imports

Sources: Energy Information Administration (EIA), 1991-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2.


# rates. Spot gasoline prices, which change minute to minute, maintenance and draw down winter specification gasoline. respond rapidly to crude oil p rice changes and reflect current So low stocks can become a concern towards the end of perceptions of market tightness or looseness. Retail price March as the market assesses the industry's ability to meet changes, however, lag significantly behind spot price peak summer demand. changes due both to competition and to the way in which the product works its way through the system to the consumer. Despite unusually low stocks throughout the first quarter This lag can be seen from the alignment of peaks in 1996, gasoline spreads were weak for the time of year. Figure 24. Activity and prices increase in wholesale markets Through March, the unusual increases in gasoline prices in May in anticipation of the retail gasoline demand peak in could be explained by crude oil price increases alone. The June through August. When crude prices are stable, spot seasonal spread increases through March were below normal gasoline prices normally peak in May, while retail prices and added very little to spot gasoline price increases. peak in June. The retail price lag results in a price squeeze for retailers when wholesale prices are rising; however, the same lag keeps retail prices up while wholesale prices begin to fall.


# Unusual Gasoline Market In First Quarter '96 Gasoline markets during the first quarter of 1996 were unusual in several ways. While first quarter demand was strong, and both production and imports were fairly high, stocks were unusually low. Du ring the first quarter, marginal demand is normally met by stocks. Fairly large stock draws can occur in March as refineries undergo scheduled 

# Gasoline Demand Growth Was Modest High gasoline demand is one of the factors that can contribute to upward pressure to prices. From 1992 through 1995, gasoline demand grew strongly, mainly because an increasing number of drivers and a stronger economy resulted in an increase in the total miles driven. Overall fleet efficiency (measured in miles per ga llon) remained relatively flat. However, demand growth slowed in 1996. First quarter demand in 1996 was 7.5 million barrels per day, 0.4 percent higher than the high first quarter 1995 (Figure 25). Demand was higher than the previous year in both January and February, keeping a check on stock growth that normally occurs during this period. However, demand growth fell slightly in March compared to the previous year, which put

# 0 

# 1996 60 70 80 90 100Cents per Gallon



# New York Harbor Spot Average Retail (excl. taxes)

50



# 1997 1995

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 6,600 6,800 7,000 7,200 7,400 7,600 7,800 8,000 8,200 8,400

AAA AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAAThousand Barrels per Day AAAA A AAA A AAA AAAA 

# 1994 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 37 

# Figure 24. Spot and Retail Gasoline Prices (Excluding Taxes)

Sources: Spot Prices: Standard & Poor’s Platts. Retail Prices (Excluding Taxes): Energy Information Administration (EIA), Form EIA-878, “Motor Gasoline Price Survey.”



# Figure 25. Gasoline Demand

Source: Energy Information Administration, Petroleum Supply Monthly (February 1997), Table S4.

# 38 Energy Information Administration / Petroleum 1996: Issues and Trends 

# less pressure than normal on the low stocks that help to meet downward trend might have predicted (Figure 27). demand in March. Gasoline stock draws in spring 1996 were smaller than 

# Gasoline Production and Imports Were High Since 1992, U.S. gasoline production has increased in conjunction with demand. Production increases are a result of higher refinery utilization, addition of oxygenates to produce reformulated gasoline (RFG), and some yield increase from process improvements. Since 1993, summer refinery distillation capacity utilization has averaged well over 90 percent. Total gasoline production averaged 7.3 million barrels per day for first quarter 1996 (Figure 26), which was 54 thousand barrels per day over first quarter production in 1995. This production i ncrease was only slightly higher than the gasoline demand increase of 34 thousand barrels per day for the same period. However, gasoline stocks were very low at the beginning of 1996, so production did little to improve the stock levels through the first quarter. 9 

# High gasoline imports supplem ented production in 1996 (see Figure 23 and box, p. 39). These imports prevented stocks from dropping as much as they normally would have dropped during the first quarter.


# Gasoline Stocks Remained Low But Spreads Were Weak Gasoline stocks started to drop below the historical seasonal range beginning in August 1995 and fell even further below this range over the winter. Gasoline stocks have exhibited a long t erm downward trend, partially due to companies managing inventories more efficiently (see Chapter 5). But stocks were lower in winter 1995-96 than even the long-term 10 

# normal, mainly because of high imports, but stock levels remained below the average seasonal range through March. Low gasoline stocks do not usually generate much price pressure over the winter months when supply is in excess of demand. Through March, gasoline price spreads remained weak, indicating little market concern with supply. A combination of low spreads, prospects for continued high imports, and expectations of falling crude oil feedstock cost discouraged refiners and wholesale buyers from holding anymore stocks than necessary. Furthermore, winterspecification gasoline cannot be used during the summer and so must be drawn down before building summer gasoline stocks. This situation changed in April. 

# The April Runup: Distillate and Gasoline Markets Clash In April 1996, crude prices jumped considerably and, simultaneously, gasoline markets tightened more than expected. This drove the gasoline spread to, or above, normal levels in different parts of the country on top of the crude price increases. The following factors set the stage for the April runup:

! Crude prices had been strengthening prior to April due to low stocks and continued strong demand, which drove buyers to purchase crude oil as they waited for prices to weaken in the future.

! April began with lower than normal gasoline stocks, but gasoline spreads were a little weak in expectation that high imports and domestic production would satisfy the upcoming summer demand.

! Futures markets reflected expectations that the gasoline market would tighten as usual in April as demand increased towards its normal June-August peak season, but would decline in subsequent months, in response to declining crude prices. Expectations that prices would fall discouraged gasoline wholesalers from holding any more stocks than necessary. The shutdown and sale of the BP Marcus Hook refinery to Tosco in 9 

# January was observed to have little impact on availability of fuel supplies to the Northeast. From the Bayway, New Jersey refinery, Tosco was able to supply the needs of the BP retail marketing assets acquired. Marcus Hook was a merchant refinery (i.e., sold most of its products to other companies) and buyers of its products had ample time to arrange for other supply sources, since possible shutdown had been a matter of public speculation for months. Despite relatively high utilization rates of U.S. refineries, there was still the capability to deal with the loss of capacity the size of the Marcus Hook refinery in the Northeast. Had the refinery been in operation, its production may have replaced some Gulf Coast production and some imports. The weak gasoline build that occurred in the fall and winter 1996 was 10 

# mainly due to the combined effects of cold weather and expectations of falling prices (backwardation). The crude oil price backwardation transferred to the product markets, res ulting in gasoline buyers expecting gasoline prices to fall in conjunction with crude oil price declines several months in the future. (For more discussion, see , An Analysis of Gasoline Markets Spring 1996 , DOE/PO-0046 (June 1996).)

# Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 6,600 6,800 7,000 7,200 7,400 7,600 7,800 8,000 8,200 8,400

AAA AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAAThousand Barrels per Day AAAA AAAA AAAA AAAA 

# 1994 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 39 

# Figure 26. Gasoline Production

Source: Energy Information Administration, Petroleum Supply Monthly (February 1997), Table S4.



# Gasoline Imports Were Expected to Be High in 1996, Due to Several Factors

! Europe was experiencing excess gasoline production as European refiners produced distillate products for their own markets. European refiners have been adding fluid catalytic cracking units to increase gasoline and distillate production, but they are producing too much gasoline versus distillate relative to regional demand. This provided a ready source of gasoline that flowed to the United States in 1996 when price differences between Europe and the United States exceeded transportation costs (approximately 5 cents per gallon).

! The tight U.S. gasoline market (high demand and capacity utilization with low stocks) pushed prices up relative to Europe. Although Europe was affected by higher crude prices, it did not experience tight seasonal gasoline markets affecting the spread between gasoline and crude oil prices.

! Asia has been a primary market for Saudi exports of refined products; however, Asian refining capacity has expanded rapidly, decreasing its product import needs. As a result, Saudi Arabia, a marginal supplier of product to the United States during the summer, was expected potentially to have extra product to sell here.

# 1993 1994 1995 1996 0 190,000 200,000 210,000 220,000 230,000 240,000 250,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAAThousand Barrels 

# Normal Range AAAA A AAAAAA AAA 

# Actual

40 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 27. Total Motor Gasoline Stocks (End of Month)

Sources: Energy Information Administration (EIA), 1993-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2.


# When the late cold spell hit the Atlantic Basin, the distillate in February and March, about 2 cents of the increase could market unexpectedly clashed with the gasoline market. The be attributed to the tight market. cold weather created extra demand for distillate on both sides of the Atlantic at a time when this demand is usually Spot gasoline prices rose with increasing crude oil prices and bottoming out (Figure 28) and distillate stocks are at their increasing spreads, peaking in April along with crude oil seasonal low point (Figure 29). As distillate stocks were pr ices. These increases eventually made their way to the unusu ally low in 1996 following the long winter , the retail market. As retail markets lag behind spot markets, 11 

# unexpected April demand had to be met through increased retail regular conventional prices peaked at almost $1.29 on production (Figure 30). Thus, refiners refocused on distillate May 17, after the April spot price peak. Crude oil price production at a time when they normally would be increases accounted for about 10.7 cents of the 13.2 cent per maximizing gasoline output (Figures 25 and 26). g allon increase in New York Harbor spot prices from Low gasoline stocks combined with refiners focusing in gasoline prices accounted for most of the remainder, with unusu ally on producing distillate in April to meet demand pe rhaps 2 cents per gallon being attributable to unusual from the late cold spell added pressure to the gasoline tightness of gasoline markets since spreads had been running markets. The New York Harbor spot gasoline spread, which low at the beginning of the year, but climbed rapidly to had been running below normal (Figure 31), suddenly average levels. jumped from 2.6 cents below average in March to 1 cent below in April. By May, the actual New York Harbor spread The increase in gasoline prices during the spring of 1996 was was at its normal level. Given the spread’s low starting point more pr onounced in some regions of the country. The box on 12



# December 1995 to April 1996. The normal seasonal increase

p. 43 discusses the unusual circumstances in gasoline markets in California.

Distill ate demand was up 4.3 percent in the first quarter over 1995 due 11 

# to continued cold weather. In spite of the increase in distillate production, distillate fuel stock draw from the end of October through March was 13 percent above normal (as measured by the normal stock range published in the EIA’s Weekly Petroleum Status Report ). Gasoline Markets Spring 1996 , DOE/PO-0046 (June 1996). This graphical New York Harbor and WTI display is supported by a 12 

# more in-depth regression analysis using average resale gasoline prices and refiners’ acquisition cost of crude oil. This is discussed in An Analysis of

# 1993 1994 1995 1996 0 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAAThousand Barrels



# Normal Range Boundaries Actual Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800

AAA AA

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAThousand Barrels per Day AAAA AAAA AAAA AAAA 

# 1994 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 41 

# Figure 28. Distillate Demand

Source: Energy Information Administration, Petroleum Supply Monthly (February 1997), Table S5.


# Figure 29. Distillate Stocks (End of Month)

Sources: Energy Information Administration (EIA), 1993-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2.

# 1993 1994 1995 1996 1997 0 2 4 6 8 10 12 14 16 18

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA A

AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AAA AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AA A A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAA A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AAC ents Per Gallon AAAA AAAA AAAAAAAA AAAA AAAAAA A A AA 

# Actual 5-Year Average 1995-96 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 0 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800

AAA AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA A AA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAA A A

A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AAAThousand Barrels per Day AAAA A AAA A AAA AAAA 

# 1994 1995 1996

42 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 30. Distillate Production

Source: Energy Information Administration, Petroleum Supply Monthly (February 1997), Table S5.


# Figure 31. Gasoline Spot Spreads (NY Harbor Spot Conventional - WTI)

Source: Standard & Poor’s Platts.

# Energy Information Administration / Petroleum 1996: Issues and Trends 43 

# A Special Case: California
California introduced its own new and unique Phase 2 reformulated gasoline (CaRFG) during the spring of 1996. CaRFG has more stringent requirements than Federal RFG, making it more difficult and more expensive to produce than Federal RFG. The California Energy Commission estimates the additional cost to produce CaRFG at between 5 and 15 cents more per gallon. Although the higher costs translate to higher prices, consumers will benefit from significant smog reduction. Average CaRFG demand was projected at 896 thousand barrels per day for the first year (March 1, 1996 through February 28, 1997), taking into consideration the fuel efficiency loss (about 1-2 percent lower than Federal RFG). Average production was projec ted 906 thousand barrels per day, providing a 10 thousand barrels per day cushion. While not large, this cushion was expected to be adequate.* Some supply potential exists outside of California. However, most refiners are not equipped to produce the new fuel in any large amounts, if at all. Refineries in California are expected to use 85-90 percent of their gasoline capacity to produce the new fuel. Unfortunately, supply problems developed as a number of California refineries experienced operating problems and had to shutdown for repairs. Spot prices shot up, driven by uncertainties around potential shortages. Unlike the rest of the country, the supply problems in California affected spreads strongly. Conventional gasoline prices were also affected by the supply problems, since California refiners also serve neighboring states. The price increase experienced in California in 1996 reflected a market stress situation, illustrating price response when supply disruptions occur in a very tight market. With little or no immediate supply alternatives, the loss of expected supply resulted in the market bidding prices up at panic rates. Consumers paid an average of $1.15 per gallon for regular gasoline in December 1995. By April 1996, the average was $1.40, or 25 cents per gallon higher due to crude price increases, the changeover to CaRFG, and the refinery operating difficulties.

_____________ * California Air Resources Board and California Energy Commission’s February 1996 Supply/Demand Analysis.


# Gasoline Price Progress Through Summer 1996 As expected, crude oil prices fell during April after the cold balance. They stayed below the 5-year average spreads with weather abated, distillate demand relaxed, and the short-term the exception of July, when preliminary data indicated demand for crude oil subsided. The decline of WTI prices stronger than normal demand with falling stocks. Since ended in June, when it began hovering around $21 per barrel, stocks were still at low levels, the market reacted quickly to down from its peak of over $25 per barrel in April. The $4 the unexpected tightening by pushing prices higher. Still per barrel decline is equivalent to about 9.5 cents per gallon. gasoline spreads in July only exceeded the 5-year average by Weekly average spot gasoline prices declined over 13 cents 0.7 cents per gallon. The supply/demand balance adjusted per gallon during this time. Crude oil prices began to show and spreads fell well below normal in August and renewed vigor in August and continued to climb through September, alt hough gasoline price rose along with crude oil September, as Northern Hemisphere demand began to price. increase in preparation for winter heating fuel needs, putting upward pressure on all petroleum product prices. Monthly average spot prices fell from their peak of 65.3 . cents per gallon in April to bottom out in June at 57.3 cents. Gasoline stocks, which began the year low, had risen to very Pr ices then began to rise as crude oil prices strengthened, near the normal seasonal range in May, and stayed at the low countering declining spreads. By September, the end of the end of the normal range through September, the end of the trad itional driving season, New York Harbor spot prices had summer driving season. Imports of gasoline and blending increased by 4 cents per gallon over the June price, and Gulf components in 1996 were very high, as had been expected, Coast spot prices were up 2.4 cents per gallon. Retail averaging 355 thousand barrels per day compared to 202 in c onventional regular gasoline fell from its monthly average 1995 and 274 in 1994, which was another year with high imports. Gasoline price spreads reflected the gasoline supply/demand

peak of $1.24 in May to $1.18 in August. But retail prices

# 44 Energy Information Administration / Petroleum 1996: Issues and Trends 

# began to increase in September with the underlying increase months. This discouraged suppliers from building stocks in crude oil price. By year end, retail prices had returned to because they could not lock in a profit on stocks being levels seen the prior spring. held, and might even have to sell stocked product at a


# Gasoline Markets Affected Distillate In spring 1996, distillate markets affected the normal behavior of gasoline markets. But strong gasoline imports affected distillate markets as the year progressed. Greater reliance on gasoline imports to meet gasoline demand resulted in changed gasoline and distillate production and stocking patterns in the United States. Figure 28 shows that 1996 distillate stocks have been low since the draw down during the winter of 1995-96. Although distillate stock levels were low as summer 1996 began, they increased normally in May and June. But in July, which is normally the peak re-build month, historically averaging over 11 million barrels increase, stocks only increased 2.4 million barrels. Since part of gasoline supply in 1996 was being met from higher imports rather than increased refinery runs, refiners increased the yields of kerosene jet fuel and distillate (heating fuel and diesel) to adjust to the new balance between refinery production and demand. But the yield increase of distillate was not uniform throughout the year. In the first quarter, the yield increase provided 27 thousand barrels per day more heating fuel and diesel than in 1995; in the second and third quarters, the higher yield produced 115 thousand barrels per day more distilla te; and in the fourth quarter, when distillate stocks were very low, the volume increase from higher yields was to 226 thousand barrels per day. The distillate volume in the fourth quarter versus the se cond and third quarters was achieved by changing the yield split between kerosene jet fuel and distillate and by increasing crude runs. The uneven increase in distillate yields over the year did not provide enough distillate production to build stocks to normal levels over the summer, but the extra jump in yield and increased crude throughput during the fourth quarter allowed production to meet distillate demand without as much stock draw as might normally have occurred. The affect of gasoline imports on distillate stocks was only in 1997 (Figures 31 through 34). one of several factors contributing to the low distillate stock situation in 1996. Other factors included: The explanation of the spring 1997 price decline lies mainly 13



# ! Distillate stocks began the year low. the main factors behind the spring 1996 price increase. WTI

! Continued backwardation in crude oil markets caused 1996. New York Harbor spot gasoline prices also averaged suppliers to expect distillate prices to fall in the out 9 cents lower in April 1997 than in April 1996. From loss.

! Unusually high demand for distillate occurred in July, which detracted from the strong build in stocks that normally occurs in this month. In spite of increased crude runs during the fourth quarter, the increased distillate yields lowered gasoline production from crude oil over that produced from crude oil fourth quarter 1995. Only by increasing inputs of imported blending components was refinery gasoline production brought back to levels similar to those in 1995. Finished gasoline imports also added to supply, but gasoline stocks dropped much lower than normal in October and declined even further in November when they traditionally increase. December and January builds in stocks were more typical, but by this time, gasoline stocks were running well below normal levels. 

# Price Reversal in Spring 1997 The petroleum markets in spring 1997 completed the story of the spring 1996 runup with a price reversal, providing an excellent opportunity to watch the dyn amics described in this chapter work when crude market factors moved in the opposite direction. Table 1 summarizes some major market factors for comparison. (The following box on p. 46 presents a discussion of whether the crude price increase in the spring of 1996 heralds increased volatility in the future.) In qualitative terms, the supply/demand balance for gasoline in spring 1997 was almost the same as in spring 1996: demand growth was low to modest; levels of gasoline produ ction from January through April supplied about 96 percent of demand in both years; imports were very high in 1996 and even higher in 1997; and stocks were low. Prices, on the other hand, behaved very differently. Prices rose dramatically during spring 1996, but fell during spring 1997, even though gasoline spot price spreads were slightly higher

with crude oil prices and normal seasonal spread changes — crude oil prices in April averaged 9 cents lower than in April
December 1996 through April 1997, crude oil prices fell 13.5 cents per gallon, and spot gasoline prices fell 11.3 cents as the impact from declining crudes price was moderated by normal increases in seasonal spreads. Energy Information Administration (EIA), “Distillate Fuel Oil 13 

# Assessment for Winter 1996-1997,” Petroleum Supply Monthly , DOE/EIA0109(96/11) (Washington, DC, November 1996), pp. xv-xxiii.

# Energy Information Administration / Petroleum 1996: Issues and Trends 45 

# Table 1. Spring 1997 and Spring 1996 Summary Market Comparison Market Factor January-April 1996 January-April 1997 World Petroleum Supply/ Winter stock draw was high. Winter stock draw was low. Demand Balance Strong world economy supported petroleum Strong world economy supported petroleum demand. demand. Cold weather increased winter demand more Winter demand was held in check by milder than expected (3 percent higher than in winter weather (1.8 percent higher than in winter 1994-95). 1995-96). Supply growth was less than expected. Supply growth was strong. Crude Supply Iraqi entry into market was delayed. Iraq began sales in December ‘96. Non-OPEC additions were expected, but did Non-OPEC supply increased, and more was not arrive. expected. Light crude was abundant. Abundance of light crude grew. Crude Markets Prices began 1996 under $20.00 per barrel. Prices began 1997 about $26.00 per barrel after high demand fourth quarter. Tight: Prices rose February thru April with Weakening: Prices fell January through April cold weather and lack of expected supplies. with strong supplies relative to demand. Futures market backwardation was steep. Term structure of crude futures flattened. Light-heavy price differentials were modest. Light-heavy price differentials were very small. U.S. Winter Distillate Winter began with stocks normal, but ended Winter began with stocks low. Demand was March with stocks lower than normal due to met through extra production, and winter ended cold weather. with stocks at normal levels due to mild weather. April: With little or no discretionary stocks, April: Although demand was strong, no late cold weather caused refiners to re-focus unexpected re-focusing on distillate production on distillate production. occurred. U.S. Gasoline Stocks were low. Stocks were very low. Supply/Demand Balance Demand growth was modest (1.1 percent). Demand growth was low to modest (0.8 percent). Demand level was high (7,601 thousand Demand level was high (7,710 thousand barrels per day). barrels per day). Production growth was modest. Production growth was modest. Imports were high (meeting 5.8 percent of Imports were very high (meeting 7.6 percent of demand). demand). Gasoline Market Increasing crude oil prices pushed gasoline Falling crude oil prices brought gasoline prices prices up. down. Spreads were mainly at or below seasonal Spreads were slightly above seasonal norms. norms. Source: Energy Information Administration.

# 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 

# 0 20 40 60 80 100 120

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A AAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A AAAA AAA AAA AAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A AAAA AAA AAA AAA AAAAAAAAAAAAAAAAAAA AA A AAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAA A AAA AAA AAA AAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA A AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA AAAAAAAAAAAAAAAAAAAAAAA A A AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA AAAAAAAAAAAAAAAAAAAAAAA AAA AA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA AAAAAAAAAAAAAAAAAAAAAAA AAA A A A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA A A AA AA A A AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAA AAA AA AA A A AA AA A A AAAAAAAAAAAAAAAAAAAAAAA AAA AA A A A AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A A

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AAA AAA A A AA AA A A AA AA AA AA A A AA AA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A AA AA

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AAAA AAAA A A AA AA AA AA AA AA AA AA A A AA AA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A A AA AA

AAAA AAAA A A AA AA AAAA AAAA AA AA A A AA AA AAAAAAAAAAAAAAAAAAAAAAA A A A A

AAAA A AA AAAA AA A AA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A A A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAA A AA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AA AA AA AA

A A AA AA AAAA AAAA A A AA AA AAAA AAAAA A AA AA AA AA A A AA AA AAA AAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AA AA AA AA

AA AA AAAA AAAA A A AA AA AAAA AAAAA A AA AA AA AA A AA AA AAA AAA AAAAAAAAAAAAAAAAAAAAAAA AA

AA AAAA AA A AAA A AA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A A A AAAAAAAAAAAAAAAAAAAAAAA A A AAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA A AA A AAA AAA AA AA

AAA AAAAAAA AAAA A A AA AA A A AAA AAA AA AA AA AA AA AA A A AAAA AAAAAA AA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAA AAA AA A AAAA AAAA AA AA

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AAAAAAA AAAAAAAAAAAAAAAAAAAAAAA A AAAAAAA AAAAAAAAAAAAAA AAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA AA AAAAA AAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA AA AAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAA AAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA A AAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAA A AA AAA A A A AAAA AAAAAAA AAA AAA AAAAAAA AAAAAAAA AAAAAAA AAA A A AAA AAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAA AA A A A AAAA AAAAAAA AAA AAA AAAAAAA AAAAAAAA AAAAAAA AAA A A AAA AAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAA A A AAAAAA AAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A A AAAAAA AAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAA AAAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAAA AAAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A AAAA AAAAAAA AAA A A AAAA AAAAAAAA AAAA AAA AAAAAAA AAAAAAAA AAAAAAA AAA A A AAA AAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A AAAA AAAAAAA AAA A A AAAA AAAAAAAA AAAA AAA AAAAAAA AAAAAAAA AAAAAAA AAA A A AAA AAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAA AAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAA AAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAA AAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAA AAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAA AAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A A A AAAA AAAAAAAA AAAAA A AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAA AA AAAA AAAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A A AAA AAAAAAAA AAAAA A AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAA AA AAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAA A A AAAAAAAA AAAAAAAAAAAAAAAAAAAAA AA AAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAA A AAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA A A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A AAA AAAAAAA AAAAAA AA AAA AAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAA AAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA A A AAA AAAAAAA AAAAAA AA AAA AAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAA AAA AAAAAAAAAAAAAAAAAAAAAAAA A AAAAAAAAA A AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA AA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAA AA 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AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAA A AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAA A AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAA A AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA 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AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAAAAAA AAAAAAAA AAAA AAAA AAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAA AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAACents per Gallon



# Bonny Light Crude Oil Gulf Coast Regular Gasoline

46 Energy Information Administration / Petroleum 1996: Issues and Trends



# Weekly Average Spot Prices

Source: Standard & Poor’s Platts. 

# Was the Spring Crude Price Increase a Sign of Future Increased Volatility? Is the situation experienced in Spring 1996 just another sign of growing price volatility, and will we see more of the same in the future? In short, the crude market supply/demand balance was fairly tight in 1996, which creates an environment for exaggerated price swings. Demand was high, excess production capacity was not available, and world petroleum stocks were lower than average. When unexpected events occur in tight markets, such as the late winter cold snap in 1996, that affect the perceived availability of crude oil, buyers are more likely to over-react, creating large price swings. In spring 1996, a number of unusual factors acted simultaneously to increase buyers concern over crude availability, including unusual late cold weather and expectations for large price declines in the near future, which encouraged keeping low stocks. While these specific triggers may not occur again to drive prices up temporarily, other factors can create the same effect during a tight market. As discussed in this chapter, the transition time between the end of winter, when world crude and product stocks are low, and the beginning of the U.S. high gasoline demand season is a vulnerable period. Events during that crucial time period can have a large influence on the market. In the short-term, crude inventories began to recover worldwide over the winter. World petroleum demand only increased 1.4 million barrels per day over winter 1995-96, while supply increased 2.3 million barrels per day (preliminary estimates). Crude oil prices averaged $25.41 per barrel in December, but began falling in January. By April, WTI averaged $19.75. Although the crude market is loosening, world petrol eum stocks do not seem to be in excess, so there is still some potential for price increases. As new supply grows, the probability of sharp price mo vements will diminish, since buyers will perceive higher crude availability, and thus no need to bid prices higher to assure supply when unexpected events occur. When viewed over the long term (see figure), crude prices were strong in 1996, but not especially more volatile than many other times in history. The short-term price swing that occurred last spring was a little sharper and higher than most swings seen in Figure 14, but was not dramatically out of line with past price variations. It occurred at a time that was very visible to consumers — just when gasoline prices normally increase, and the market had not seen the magnitude of such swings for several years.

# Dec Jan Feb Mar Apr 0 10 20 30 40 50 60 70 80



# 1997C ents per Gallon 

# 67.6 67.2 62.0 60.7 56.3

60.5 59.8 52.8 49.9 47.0



# 1996 W es t Te xas Interm edia te C rude (W T I) Average Spread (NYH G asoline M inus W TI) Actual Dec Jan Feb Mar Apr 0 10 20 30 40 50 60 70 80



# 1996C ents per Gallon 

# 52.1 52.8 58.3 65.3 W es t Te xas Interm edia te C rude (W T I) Average Spread (NYH G asoline M inus W TI) Actual 49.9



# 1995 45.3 44.8 45.5 50.8 56.0

Energy Information Administration / Petroleum 1996: Issues and Trends 47 

# Figure 32. Spring 1996 Gasoline Price Summary (NY Harbor Spot Conventional Regular)

Source: Standard & Poor’s Platts.



# Figure 33. Spring 1997 Gasoline Price Summary (NY Harbor Spot Conventional Regular)

Source: Standard & Poor’s Platts.

# 1993 1994 1995 1996 1997 0 10 20 30 40 50 60 70 80 90Cents per Gallon 

# U.S. Average Regular Retail Excl. Taxes

New York Harbor Regular Spot WTI Spot

48 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 34. Weekly Conventional Gasoline and Crude Oil Prices

Sources: Spot Prices: Standard & Poor’s Platts. Retail Prices: Energy Information Administration (EIA), Form EIA-878, “Motor Gasoline Price Survey.”


# In spring 1997, crude oil markets finally seemed to be ending per day during winter 1996-97, compared to 2.0 million the tight supply/demand cycle that drove prices up in 1996. barrels per day the previous winter. With world stock levels During the winter of 1995-96, oil product demand was high appearing to recover to more normal levels, crude oil prices due to cold weather, while supplies of crude oil were less fell considerably thr ough the spring of 1997, pulling gasoline than expected. Prompt markets were tight during the spring, prices down. While strong backwardation persisted pushing crude oil prices higher, when a late cold snap caused thr oughout most of 1996, crude oil term structures in March prices to leap even higher to peak in April. Strong and April 1997 were relatively flat. backwardation in crude oil futures persisted through 1996 as buyers kept expecting the tight prompt markets to loosen Gasoline stocks in spring 1997 were even lower than in with new supplies and lower demand. With buyers expecting spring 1996, which put more pressure on gasoline spreads in prices to fall, building stocks was discouraged. 1997 than in 1996. While gasoline spreads were relatively Winter 1996-97 was almost a mirror image of winter 1995- slightly a bove average in 1997, reflecting the extra tightness. 96. As winter 1996-97 began, world petroleum stocks were still low, so in creased demand in the fourth quarter, coupled Retail prices averaged 17.9 cents higher in December 1996 with sluggish supply growth, again pushed crude prices up, than in 1995, but by April, were 3.3 cents lower in 1997 than reaching levels at the end of December higher than in April in 1996. Retail prices, which lag behind the change in spot 1996. But the weather in winter 1996-97 was not as severe prices, had fallen 5.5 cents from December 1996 through as the prior winter. In addition, Iraqi production entered the April 1997. Thus, consumers in the spring of 1997 market in December and other supplies increased, taking the experienced falling gasoline prices, after the dramatic pressure off prices. EIA preliminary estimates indicate that increase in prices experienced in spring 1996. the world petroleum stock draw was only 1.1 million barrels low during the first part of 1996, they have been at or

# Energy Information Administration / Petroleum 1996: Issues and Trends 49 

# The U.S. is heavily reliant on the world crude oil market, which has been subject to huge inter-annual volatility since 1973. Neither of these facts is likely to change. Domestic crude oil production declined over the past decade, wh ile domestic crude oil demand increased. The difference was satisfied by increased crude oil imports. The United States’ proved crude oil reserves declined more than 21 percent from 1985 to 1995. Its technically recoverable crude oil resources beyond proved reserves are estimated to be about 6 times more than the year-end 1995 proved reserves. However, excepting the Gulf of Mexico and the Alaskan offshore, many of the most promising oil-prone regions of the country are presently off-limits to exploration. Over the long term — beyond 2020 or so — the United States will be increasingly unable to satisfy its crude oil requirements from domestic sources. Imported volumes and world oil prices can both be expected to rise over time, and much of the new imports will have to be obtained from the Persian Gulf region. 

# 3. Oil Supply: U.S. Perspective on a Global Market

The market for crude oil is global. To varying degrees, every rise, however, from 16.3 billion barrels in 1986 to 18.2 continent on Earth except Antarctica is both a producer and b illion barrels in 1996. The difference was satisfied by a consumer of crude oil. For a host of reasons having to do increased imports, which have ex ceeded domestic production with factors such as how supply and demand evolved over since 1994. time relative to the location and discovery sequence ofcommercially exploitable conventionally reservoired The U.S. is the most intensely explored and developed oildeposits, as well as rates of progress in the geosciences and produc tive nation on Earth. In 1986 there were 623,000 petroleum engineering, the price of crude oil remained pr oducing oil wells with an average daily production rate of remarkably stable from the early 1900's through 1973 at less 13.9 barrels of oil. By 1995, both the number of producing than $15 per barrel in constant 1 992 U.S. dollars (Figure 35). wells and their quality had declined. Eight percent fewer For much of the time prior to 1959 the real (inflation wells (574,000) were producing at an average daily rate of adjusted) price was substantially less. 11.3 barrels of oil (down almost 19 percent). The petroleum After 1973 the coupling of significant concentrations of summarized in the box on p. 51. supply-side market power with short-term inelasticity of demand and regional conflicts rendered the world crude oil Regionally, while relative levels of production for the lower market subject to huge inter-annual volatility. The resulting 48 States and Alaska remained about the same, total post-1970 world crude oil price path, represented by the pr oduction fell 26 percent in the fo rmer and 21 percent in the nominal U.S. refiner acquisition cost of imported crude oil, latter over the 1985-1996 period. Onshore production fell 30 is shown in Figure 36. It is annotated with significant events percent over the period and its share of total production also that affected the market, the U.S. actions taken in response fell by 6 percent, while offshore production increased by to them, and the domestic environmental and energy almost 8 percent (Figure 38). conservation measures referred to or discussed in the other chapters. In keeping with the other chapters’ short-term The above statistics in part reflect continuing depletion of horizon, the following sections of this chapter primarily the Nation’s crude oil resource endowment, but other factors address the past decade, which began with the crude oil price are influencing this trend. The size of new field discoveries collapse of 1986. is economically important because lifting costs per unit of


# Oil Production Domestic Production Is Declining While Demand Is Increasing Domestic crude oil production declined over the past decade from a level of 10.2 billion barrels in 1986 to 8.6 billion barrels in 1996 (Figure 37). Domestic demand continued to products that can be refined from this crude oil are

prod uction fall in response to increasing field size. In general, the largest fields in a new exploration area are among the first to be discovered. Therefore, since the onshore lower 48 States are the most intensively explored area on Earth, the remaining undiscovered oil resources occur in mostly small- to medium-size fields. During the 1985-1995 period oil exploration was prohibited or restricted in most of the few remaining domestic areas where large fields remain to be found, such as the 1002 Area within the Arctic National Wildlife Refuge (ANWR) and the southern California offshore. These restrictions resulted in an inability

# 1959 1964 1969 1974 1979 1984 1989 1996 0 10.00 20.00 30.00 40.00 50.00Real Dom estic Oil Price(1992 Dollars per Barrel)



# 1994

1991: Dissolution of USSR



# 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 

# 0 10.00 20.00 30.00 40.00(Dollars per Barrel)



# 1970 1996: Spring Gasoline Price Jump
1992: Energy Policy Act Phase II RVP Regulations Implemented CAAA's CO 2 

# Nonattainment Program Implemented 1978: Iranian Revolution CAFE Standards Implemented Under EPCA Airlines Deregulation Act Power Plant and Industrial Fuel Use Act U.S. Petroleum Demand Peaks

1973: Arab Oil Embargo Emergency Petroleum Allocation Act (EPAA) 1990: Persian Gulf Crisis CAA Amendments Oil Pollution Act 1981: Petroleum Price and Allocation Decontrol

1985: Netback Pricing

1986: Crude Oil Price Collapse 1974: Introduction of Unleaded Motor Gasoline per CAA Additional EPAA Programs 1989: Valdez Oil Spill Phase I RVP Regulations Implemented

1970: Clean Air Act (CAA) U.S. Crude Oil Production PeaksNominal World Oil Price



# 1975:

Energy Policy and Conservation Act (EPCA)



# 50 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 35. Real Domestic Oil Price, 1959-1996

Note: Price taken to be the crude oil domestic first purchase price. Sources: Energy Information Administration (EIA), Annual Energy Review, 1995 ; and EIA, Monthly Energy Review (March 1997).


# Figure 36. World Oil Price and Related Events, 1970-1996

Note: World oil price taken to be the U.S. refiner acquisition cost of imported oil. Source: Energy Information Administration, Annual Energy Review, 1995 ; and Monthly Energy Review (March 1997). Adapted from The U.S. Petroleum Industry: Past as Prologue, 1970-1992

.

# 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 

# 0 4 8 12 16 20M illion Barrels per Day


# Net Imports Dem and (Assumed to Equal Products Supplied)

Total Production

Energy Information Administration / Petroleum 1996: Issues and Trends 51 Source: Energy Information Administration, Annual Energy Review, 1995

. 

# Figure 37. U.S. Petroleum Supply and Demand, 1970-1996



# The Average 1995 U.S. Oil Well Gave Us: Production of 11.3 barrels per day, which a refinery converted into: 6 barrels per day of motor gasoline 1.1 barrels per day of jet fuel 2.5 barrels per day of distillate fuel oil 0.6 barrels per day of residual fuel oil

2 barrels per day of heavier refined products (lubes, waxes, asphalt, road oil, etc.) 

# Simultaneous use of these refined products could have provided: 5,292 miles of highway travel in the average U.S. automobile. (Equivalent to the shortest round trip between Miami and San Francisco plus 56 in-town miles, or to 2000 2.6 mile utility trips.) 24 miles of air travel in a B737-700 passenger jet 62 average oil-heated homes kept comfortable on an average day 78 kilowatt hours of electricity generated with steam produced by a residual fuel oil fired boiler. (Enough electricity to power 269 light bulbs of 75 watts through one four-hour evening.) Minimal amounts of some of the thousands of useful things made from the heavier refined petroleum products listed above 

# The Bottom Line Is: A day’s production from the av erage U.S. oil well provides many useful products, but it does not provide much of them. Due to its very large number of low yield wells, the United States nevertheless ranked second in the world in 1995 oil production. In Saudi Arabia, the number one oil producing nation in 1995, the average oil well produced 5,800 barrels per day, or 516 times more than the average U.S. well.

# O nshore O ffshore Low er 48 A laska 0 1 2 3 4 5 6 7 8 9M illion B arrels per D ay 

# 1985 1996

52 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 38. U.S. Crude Oil Production by Site, 1985 and 1996

Sources: 1985: Energy Information Administration, Annual Energy Review, 1995

. 1996: Monthly Energy Review (March 1997).



# to maintain domestic lifting costs associated with new fields increase is largely attributable to the member states of the at a worldwide competitive level from 1983 to 1991. The Organization of Petroleum Exporting Countries (OPEC), largest U.S. exploration and production firms — and many where pr oduc tion increased 46.5 percent. The production of smaller ones — therefore increasingly focused their the Persian Gulf members of OPEC, which accounted for 65 exploration and development effort and budgets on more percent of 1996 OPEC producti on, increased by 48.5 percent economically promising prospects located abroad. Trends in in the same period. There was a slight decline in non-OPEC lifting costs, exploration, and development expenditures are production because increased output from such areas as the portrayed by the Energy Information Administration’s North Sea and the Pacific Rim was more than offset by Financial Reporting System, an annual survey of major U.S. declining production in mature producing areas such as the energy-producing companies (see Figures 39, 40, and 41). former Soviet Union and the United States (Figure 43). The majors’ shift away from the United States is also Fi gure 44 shows the recent production trends of the four mirrored in Figure 42, which shows the quantities and largest oil producing countries. Saudi Arabia’s production location of production for majors and non-majors in the U.S. more than doubled during the first part of the past decade, The majors’ share of domestic onshore production has fallen while the Soviet Union/former Soviet Union’s production steadily since 1985, by about 25 percent or 300 million decreased by half. Table 2 shows the worldwide production barrels per year overall. Some of that production was taken of the 20 leading companies in 1972 and 1995, when they over by smaller operating firms that had lower overheads. respectively accounted for 74.6 and 63.1 percent of world The majors invested the proceeds from the sale of some of pr oduction. The change in the names and rankings of the top their onshore U.S. properties primarily in frontier exploration 20 firms reflects the spate of nationalizations or and development projects located abroad and in the deep expropriations that took place in the mid-1970s. water Gulf of Mexico.


# OPEC Leads Increase in International Production Over the past decade world crude oil production increased almost 14 percent to 64 million barrels per day in 1996. This 

# Oil Reserves Proved reserves are those volumes of oil that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from know reservoirs under existing economic and operating conditions.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 2 4 6 8 10 12 14 16Billion (1995 Dollars) 

# Domestic

Foreign 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 

# 0 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.001995 Dollars per Barrel of O il Equivalent



# U nited States

Foreign

Energy Information Administration / Petroleum 1996: Issues and Trends 53 

# Figure 39. Direct Oil and Gas Lifting Costs for FRS Companies, 1981-1995

Note: Includes expenditures for unproved acreage. Source: Energy Information Administration, Financial Reporting System (FRS), Form EIA-28. 

# Figure 40. Exploration Expenditures by FRS Firms, 1985-1995 Source: Energy Information Administration, Financial Reporting System (FRS), Performance Profiles of Major Energy Producers 1995

.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 2 4 6 8 10 12 14 16 18 20 22Billion (1995 Dollars) 

# Domestic

Foreign

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 200 400 600 800 1,000 1,200 1,400Million Barrels per Day 

# Lower 48 Majors Onshore Lower 48 Nonmajors O nshore Alaska (Majors) Lower 48 Majors Offshore Lower 48 Nonm ajors Offshore

54 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 41. Development Expenditures by FRS Firms, 1985-1995

Source: Energy Information Administration, Oil and Gas Development in the United States in the Early 1990's (October 1995), and Financial Reporting System. 

# Figure 42. Majors and Nonmajors, U.S. Oil Production by Region, 1985-1995 Note: Includes expenditures for proved acreage. Source: Energy Information Administration, Financial Reporting System (FRS), Form EIA-28.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 2 4 6 8 10 12 14Million Barrels per Day 

# Iran Saudi Arabia Russia United States Former U. S. S. R. W orld Tota l O P E C P ersian G ulf O P E C N on-O P E C 0 10 20 30 40 50 60 70M illion Barrels per Day 

# 1985 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 55 

# Figure 43. World, OPEC, and Persian Gulf Oil Production, 1985 and 1996

Source: Energy Information Administration, Monthly Energy Review (March 1997). 

# Figure 44. Leading World Oil Producers, 1985-1996 Source: Energy Information Administration, Monthly Energy Review (March 1997).

# 56 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Table 2. Worldwide Crude Oil Production of 20 Leading Companies, 1972 and 1995 (Thousand Barrels per Day) 1972 1995

Company Production Total Company Production Total Percent of Percent of Worldwide Worldwide
Exxon Corp. 4,968 10.8 Saudi Arabian Oil 8,585 13.8 British Petroleum 4,664 10.1 National Iranian Oil Co. 3,720 6.0 Royal Dutch/Shell 4,169 9.0 Petroleos de Venezuela 2,885 4.6 Texaco Inc. 3,777 8.2 China National Petroleum 2,796 4.5 Chevron Corp. 3,232 7.0 Petroleos Mexicanos 2,722 4.4 Gulf Oil 3,214 7.0 Royal Dutch/Shell 2,254 3.6 Mobil Corp. 2,316 5.0 Kuwait Petroleum Corp. 2,070 3.3 Communist Bloc 1,301 2.8 Exxon Corp. 1,726 2.8 a 

# CFP (Total - France) 977 2.1 Libya National Oil Company 1,345 2.2 Sonatrach (Algeria) 925 2.0 Abu Dhabi National Oil Co. 1,300 2.1 Amoco Corp. 815 1.8 Sonatrach (Algeria) 1,283 2.1 ARCO 652 1.4 British Petroleum 1,283 2.1 DuPont (Conoco) 594 1.3 Nigerian National Petroleum 1,200 1.9 USX Corp. (Marathon) 453 1.0 LUKoil (Russia) 1,116 1.8 Petroleos Mexicanos 440 1.0 Pertamina (Indonesia) 1,065 1.7 Occidental Petroleum 443 0.9 Chevron Corp. 1,001 1.6 Getty Oil 443 0.9 Mobil Corp. 810 1.3 Sun Co. 369 0.8 Elf Aquitaine (France) 764 1.2 Unocal Corp. 365 0.8 Texaco Inc. 762 1.2 Phillips Petroleum Co. 337 0.7 Yokos (Russia) 722 1.2 Top 20 Total 34,434 74.6 Top 20 Total 39,409 63.1 Worldwide Total 46,170 100.0 Worldwide Total 62,446 100.00 a 

# For 1972, only non-communist world oil production and communist bloc (i ncluding China) exports to the non-communist world are included, while a 

# 1995 includes total world production. Sum of components may not equal totals due to independent rounding. Shares were calculated based on unrounded data. Sources: Energy Information Administration (EIA). 1972: EIA, Performance Profiles of Major Energy Producers 1993

. 1995: EIA, Financial Reporting System.


# Domestic Reserves Declined Over the Past Decade In the past decade, the United States’ proved reserves of crude oil have fallen gradually, declining over 21 percent from 28.4 billion barrels in 1985 to 22.3 billion barrels in 1995 (Fi gure 45). The last inter-annual increase, amounting to about 400 million barrels, occurred between 1986 and 1987. As Figure 46 indicates, proved reserves of crude oil increased only in the offshore Gulf of Mexico during the decade. This reserves record is primarily attributable to the sharp decrease in drilling caused by the 1986 collapse of crude oil prices, which declined 49 percent worldwide and 51 percent in the domestic market (Figure 47). Domestic crude oil 14 

# well completions dropped 47 percent in 1986 alone, from 35,021 in 1985 to 18,701, while exploratory oil well completions similarly declined from 1,879 in 1985 to 988 (Figure 48). A secondary factor was the shift toward gas drilling that took p lace during the period. After 1992 natural gas rather than crude oil became the dominant domestic drilling target. Restrictions on oil exploration in many of the most prospective oil-prone places left in the United States, due to environmental considerations, also contributed to the decline of domestic proved crude oil reserves. Alaska on- and offshore, the Gulf of Mexico, and the far western United States are the only regions of the country in which 15 

# undiscovered conven tional oil and gas resources sufficiently large to be of long term national supply significance remain to be found and converted to supply at low levels of unit cost relative to other current and foreseeable oil and gas supply alternatives. This is consistently shown by:

Energy Information Administration, U.S. Crude Oil, Natural Gas, and 14 

# Natural Gas Liquids Reserves , Annual Report 1995, DOE/EIA-0216(95), Table 3, p. 10. offshore California, Idaho, Nevada, and parts of Utah and New Mexico. On- and offshore Washington, on- and offshore Oregon, on- and 15

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 5 10 15 20 25 30Billion Barrels 

# Lower 48 Onshore Lower 48 O ffshore Alaska U S Total

Alaska Gulf of M exico O ffshore 0 1 2 3 4 5 6 7 8Billion Barrels per Day 

# 1985 1996

Te xas C alifornia All Other Areas

Energy Information Administration / Petroleum 1996: Issues and Trends 57 

# Figure 45. Domestic Crude Oil Proved Reserves, 1985-1995

Source: Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, 1995

.


# Figure 46. Crude Oil Proved Reserves by Area, 1985 and 1996

Source: Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves 1995

.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 10 20 30 40Number of Wells (Thousands) 

# Oil Completions Gas Completions Dry Holes

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 400 800 1,200 1,600 2,000Well Completions



# 58 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 47. Domestic Oil and Gas Well Completions, 1985-1996

Source: Energy Information Administration, Monthly Energy Review (March 1997).


# Figure 48. Domestic Exploratory Oil Well Completions, 1985-1995

Source: Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, 1995

.

# Energy Information Administration / Petroleum 1996: Issues and Trends 59 

# ! periodic estimates of domestic undiscovered oil and gas end reserves to annual production (R/P) was 49.2. This resources produced by the United States Geological statistic, often inaccurately and misleadingly termed a Survey and the Minerals Management Service; “reserve life index,” does NOT imply that the world’s year- 16



# ! biennial estimates of natural gas resources prepared by the industry-based Potential Gas Committee; 17 

# and is demonstrated in the EIA publication Geologic Distributions of U.S. Oil and Gas . However, the most oil- prod uction and provides some location-specific R/P ratios. 18 

# prospective areas of onshore Alaska and offshore California have for years been administratively or legislatively declared off-limits to oil and gas exploration. A factor that prevented the Nation’s 1995 crude oil reserves situation from being worse was that discoveries per exploratory well completion generally increased over the decade (Figure 49). This occurred in part because the lower overall level of drilling permitted “high grading” of the portfolio of prospects available to the industry, and in part was due to the introduction of several new technologies that increased the drilling success rate or otherwise reduced either the risk or cost of upstream operations (see box, p. 61).


# International Reserves Are Much Larger Than U.S. Reserves
Crude oil resources and the reserves derived from them areunevenly distributed over the globe. Based on country-bycountry estimates of crude oil reserves and production compiled from multiple sources by DeGolyer and MacNaughton , the world’s reserves of crude oil were 19 

# 1,114.7 billion barrels at year-end 1994 while 1994 world production was 22.632 billion barrels. The distribution of these quantities is shown in Table 3 for the continents andthe Middle East region. The 1994 worldwide ratio of yearend 1994 reserves will be exhausted in 49.2 years. The 1994 reserves base will instead produce at generally decreasing levels to well beyond 2050. The R/P statistic is more useful for comparative purposes. Table 3 indicates the general worldwide 1994 distribution of crude oil reserves and The United States’ R/P of 9.3 was the lowest of any major oil- producing country or area. This reflects the fact that the United States is the most intensively explored country in the world, having been the first to achieve an annual production rate of a billion barrels per year.


# Oil Resources
Estimates of recoverable oil resources are subject to a greater degree of uncertainty than are estimates of proved reserves. They include, in addition to proved reserves, oil that is yet to be discovered and other classes of reserves that are generally less precisely quantifiable than proved reserves. Their eventual recovery is less assured.


# Domestic Based on year-end 1993 data for onshore and state jurisdiction offshore areas and year-end 1994 data for Federal jurisdiction offshore areas, the Department of the Interior’s 1995 mean (expected value) estimate of undiscovered recoverable plus infer red resources of domestic crude oil was 132 billion barrels. This volume includes 20 

# both anticipated new field discoveries and the expected appreciation of the ultimate recovery estimates of existing fields for both conventional and unconventional types of deposits. It is about 6 times larger than year-end 1995 proved reserves.


# International The Federal government’s estimates of world oil and gas resources are produced by the United States Geological Survey’s (USGS’s) World Energy Resources Program (WERP). The latest estimate, dated January 1, 1993, is that a mean (expected value) of 547 billion barrels of technically United States Geological Survey, Geological Estimates of Undiscovered 16 

# Recoverable Oil and Gas Resources in the United States , Circular 725 (Washington, DC, 1975); United States Geological Survey, Estimates of Undiscovered Recoverable Conventional Oil and Gas Resources in the United States , Circular 860 (Washington, DC, 1981); United States Department of the Interior, U.S. Geological Survey, and Minerals Management S ervice, Estimates of Undiscovered Conventional Oil and Gas Resources in the United States -- A Part of the Nation’s Energy Endowment (Washington, DC, 1989); United States Geological Survey, 1995 National Assessment of United States Oil and Gas Resources , Circular 1118 (Washington, DC, 1995); Minerals Management Service, An Assessment of the Undiscovered Hydrocarbon Potential of the Nation’s Outer Continental Shelf , OCS Report MMS 96-0034 (Washington, DC, 1996). Potential Gas Committee, Potential Supply of Natural Gas in the United 17 

# States , biennial series through 1996, (Golden, CO). Energy Information Administration, Geologic Distributions of U.S. Oil 18 

# and Gas , DOE/EIA-0557 (Washington, DC, July 1992). DeGolyer and MacNaughton, “Estimates of Petroleum Reserves in Minerals Management Service, An Assessment of the Undiscovered 19 

# Principal Producing Cou ntries and Crude Oil Production in 1994,” Twentieth Century Petroleum Statistics , (Dallas, TX, 1995), p. 1. United States Geological Survey, 1995 National Assessment of United 20 

# States Oil and Gas Resources , Circular 1118, (Washington, DC, 1995); Hydrocarbon Potential of the Nation’s Outer Continental Shelf , OCS Report MMS 96-0034 (Washington, DC, 1996).

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0.0 0.5 1.0 1.5 2.0M illion Barrels per Well



# 60 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 49. Domestic Crude Oil Discoveries per Exploratory Oil Well Completion, 1985-1995

Source: Energy Information Administration, U.S. Crude Oil, Natural Gas, and Natural Gas Liquids Reserves, 1995

.



# recoverable crude oil remains to be discovered worldwide ! 3-D seismic surveying technology has within the past (Table 4). There is a 19 in 20 chance that at least 43 billion d ecade made it possible to accurately image reservoirs barrels remain to be discovered, and a 1 in 20 chance that at located in the deep Gulf (i.e., in more than 1000 feet of least 945 billion barrels remain to be discovered. water) and beneath the extensive salt sheets that occur in 21 

# The geographic distribution of the mean estimate is as follows: 30.1 percent is expected to be located in the ! the development of new production technologies Americas, 22.3 percent in the Middle East, 18.5 percent in applicable to deep water, such as tethered floating the former Soviet Union, 14.8 percent in Asia-Oceania, 8.8 dr illing and production pla tforms (tension leg platforms), percent in Africa ex the Middle East, and just 5.5 percent in spar buoy-shaped production facilities, and sub-sea well Europe, Western, and Eastern. It should also be noted that those places with the highest current R/P ratios, as shown in Table 3, also usually have the highest estimated volumes of undiscovered oil resources. This reflects two facts about these places: they are very oilrich; and, in most instances, exploration and development began much later in them than in the United States. 

# Future Implications The United States’ proved crude oil reserves could exhibit a modest increase commencing this year or next given recent developments in the Gulf of Mexico where: the shallower portions of the Gulf;

completion and production systems, has made it profitable to develop large deep water fields. Also contributing to the possibility of a modest near-term increase in domestic oil reserves are the efforts now under way to find and/or develop the so-called “smaller” oil reservoirs and fields peripheral to the existing giant producing fields on the North Slope of Alaska, each of which is a big field by lower 48 States-standards. However, in view of the remaining undiscovered resource situation, the continued restrictions on oil exploration in many highly prospe ctive oil-prone areas, and the inexorable if slow growth of demand, this increase can only be temporary, lasting a few years at most. The industry is also engaged in a large effort to increase itsproved crude oil reserves in South America, which has shorthaul access to the United States market. Over the mid-term C.D. Masters, D.H. Root and E.D. Attanasi, Resource Constraints in 21 

# Petroleum Production Potential , Science, v. 253 (12 July 1991).

# Energy Information Administration / Petroleum 1996: Issues and Trends 61 

# New Upstream Technologies: What They Deliver
Three-Dimensional Seismic Surveying Three-dimensional seismic surveying (3-D), made possible by the computer revolution, improves the precision and content of geological interpretations of the earth’s subsurface far beyond what the traditional two dimensional (2-D) seismic surveying methods provided. Widespread implementation of 3-D in the past decade has led to a much higher ratio of successful wells to dry holes, particularly for exploratory wells. Horizontal Drilling, Measurement-While-Drilling, and Logging-While-Drilling Horizontally-oriented wells typically produce at 3 to 5 times the rates achieved by conventional vertical wells drilled into the same reservoir. While they are more difficult and expensive to drill, using them tends to approximately halve the average unit cost of development. They, along with other kinds of directional drilling, also allow the industry to have a much smaller surface “footprint” because areas up to several square miles can be tapped from a single drilling site. This characteristic of horizontal drilling is particularly important in frontier areas such as the Arctic and the deep offshore, and in environmentally sensitive areas. New downhole technologies which enabled the drilling of horizontal holes that stay within the target formation include measurement-while-drilling (MWD) and logging-while-drilling (LWD) systems. MWD systems allow real-t ime acquisition of previously unavailable data related to the drilling operation itself such as weight-on-bit, mud pressure, torque, vibration, and hole caliper, angle and direction. LWD systems allow real-time acquisition of downhole resistivity and sonic and gamma ray measu rements that rival those attainable via traditional progress-interrupting wireline logging. These geophysical measurements can be simultaneously interpreted to determine rock type (sandstone versus shale versus carbonates) and pore content (water versus hydrocarbons). Having this knowledge in real time allows path correction commands to be sent back down the hole to a steerable motor located just behind the drill bit and just in front of the MWD and LWD tools. Thus, the position of the bit can now often be controlled to within 2 feet of the intended (design) position. Slim Hole Drilling Slim hole drilling, the drilling of wells with smaller diameter bores than those drilled over the past several decades, is rapidly increasing. Major technological strides have been made in downsizing the traditional suite of downhole instruments and tools without loss of effectiveness during the last few years. The principal advantage of slim hole drilling is reduced cost. For example, steel is priced by the ton and 1,000 feet of conventional 12.25 inch hole casing weighs 59 tons, while the equivalent length of 8.5 inch casing weighs only 29 tons. Similarly, lower costs are associated with drill pipe, drill bits, fuel cos ts, mud chemicals, cement, cuttings cleaning and disposal, and elapsed drilling time to total depth. Drilling With Coiled Tubing Standard drill pipe comes in 30 foot lengths with threaded connections at the ends. It is typically stored on a drilling rig’s pipe rack in 90 foot stands made up of 3 joints, which must be sequentially added to the drill string while drilling. Similarly the stands must be sequentially decoupled to change the downhole tools and drill bit. “Tripping” to do so is a laborious, time consuming, expensive way to drill. Thanks to recent developments in the material sciences standard drill pipe is being replaced in many drilling applications with coiled tubing. This is a continuous length of pipe which is stored wrapped around a large reel. It is straightened off the reel over a curved guide to and through a motorized injector head mounted atop the well control stack, and thence down the well. Coiled tubing wall thickness ranges from 0.2 to 0.5 inches depending on the tubing’s diameter and the required load-bearing characteristics. Several thousand feet of coiled tubing can be run down or withdrawn from a hole in tens of minutes rather than the many hours required to “trip” with standard drill pipe, providing substantial cost savings. Another advantage over standard drilling technique is that fluid circulation in the hole can be maintained at all times, which helps to avoid a number of well control, drilling, and well completion problems. Nuclear Magnetic Resonance Borehole Imaging Downhole tools have recently been developed that perform n uclear magnetic resonance (NMR) analysis of the hydrogen-containing fluids located in near-borehole rock. NMR can quantitatively differentiate between (1) hydrogen atoms bound to clays, (2) hydrogen atoms included in water molecules, and (3) hydrogen atoms included in hydrocarbon molecules. This knowledge enables both better well completion design and the completion of thinner productive zones than before. Integrated Teams and Petroleum System Modeling Prior to the 1980s, most oil and gas firms were structured in such a way that their exploration geologists and their geophysicists had minimal contact with each other and neither group ta lked to the development geologists and production staff. Each had separate sets of data and there was little communication. This situation has radically changed, in most firms, for the better. Exploration and development teams consisting of all disciplines operate off the same computer-housed data base, thereby av oiding disconnects and bringing the best thinking of all involved in finding, developing and producing a field or reservoir to bear at the same time. Adjunct to this approach is the developing area of petroleum systems modeling, which has been made possible by the advent of fast computers capable of massive processing tasks. A petroleum system consists of the source rocks, migration pathways, traps, and seals required to generate, accumulate, and preserve oil or gas in the subsurface. These elements of a petroleum system have to have occurred in an appropriate time relationship for a commercially exploitable oil or gas reservoir to be present. It has now become possible to model the generation of oil and/or gas from the kerogen present in the source rocks, the formation of overlying traps and their seals, the expulsion of oil or gas from the s ource rocks, and migration to the traps. While such models are as yet fairly rudimentary, and much more data and therefore even faster computers are needed to improve them, only individual components had been modeled before. Integrated petroleum system modeling is a major improvement that helps to avoid technical disconnects in the analysis of the system. In several instances it has demonstrably reduced the required exploration expenditures and speeded the exploration process by accurately indicating what traps within the target system were likely to be commercially productive.

# 62 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Table 3. Distribution of Crude Oil Reserves and Production with Corresponding Local R/P Ratios, 1994 Area/Country Reserves Production R/P Ratio Percent of World Percent of World

North America 7.28 18.11 20.0

United States 2.01 10.74 9.3 South America 7.33 8.20 43.1

Venezuela 5.82 4.17 68.5 Europe 3.28 9.38 17.2

United Kingdom and 2.91 8.1 17.6 Norway Former Soviet Union 17.15 11.84 71.6 Africa 6.53 10.73 30.2

Nigeria 1.54 3.06 25.0 Middle East 53.69 30.69 86.0

Saudi Arabia 23.32 12.86 89.3 Asia-Oceania 4.75 11.04 21.0 Note: R/P = Year-end reserves divided by annual production. Source: Derived from DeGolyer and MacNaughton, “Estimates of Petroleum Reserves in Principal Producing Countries and Crude Oil Production in 1994," Twentieth Century Petroleum Statistics (Dallas, TX, 1995), p.1.


# this source of crude oil supply, particularly from Venezuela, limited long-term domestic capability to produce crude oil will be sign ificant for the United States. However, South and increasing demand, the United States will become America is estimated to have only about 7 percent of the increasingly reliant on imported crude oil. world’s undiscovered conventional crude oil resources. It is not therefore expected to be a major source of long-term There continues to be a lack of ec onomical substitutes for the supply unless and until means can be developed to the pr oducts derived from cr ude oil, most particularly motor economically tap its large known resources of heavy oil. gasoline. This, in concert with the anticipated rapid growth Regardless of what transpires in relation to exploitation of lead to increasing international competition for crude oil. the United States’ remaining domestic crude oil resources, it Future crude oil imports will therefore likely be obtained at is clear that the upstream sector of the petroleum industry increasing prices until such time as a cap is placed on worldhas increasingly focused on foreign opportunities over the crude oil prices by one or more of the emerging natural gaspast decade. As noted earlier and shown in Figure 39, the to-liquids, coal-to-liquids, or heavy oil recovery direct lifting costs of EIA’s Financial Reporting System technologies. (FRS) companies, which include all of the domestic majors, were lower abroad than they were in the United States from As a consequence of the natural distribution of petroleum 1983 to 1991. Since 1991 there has been no important resources, much of the United States’ out year-supply will distinction between foreign and domestic lifting costs, but have to be imported from the Persian Gulf region, which has there has been no change in the emphasis on foreign a history of supply disruptions induced by political events. operations. And, as shown in Figures 40 and 41, expenditures by the majors on foreign operations increased for b oth exploration and development from 1987 through 1990-1991, flattened out or declined slightly for two to three years, and then began to increase again slightly. The majors are simply following the available resource base on a world scale, enabled by the liberalization/rationalization of ownership, leasing, and tax policies that was initiated by many oil-prospective countries during the past decade. Over the long term — beyond 2020 or so — the United States will be increasingly unable to satisfy from domestic sources its requirements for crude oil. Considering the 22



# of petroleum product demand in developing countries, will 23



# Comparison of crude runs to domestic stills with domestic crude oil 22 

# production indicates that the U.S. has not come within 10 percent of being crude oil self-sufficient since 1957, and that there has been a pronounced reduction of self-sufficiency since 1982, to the point that 53 percent of 1995's crude runs were of a foreign origin. While it is highly improbable that the U.S. can attain crude oil self-sufficiency again, it remains possible to assert some control over the magnitude and timing of future insufficiencies. Energy Information Administration, International Energy Outlook 23 

# 1997 , DOE/EIA-0484(97), (Washington, DC, April 1997).

# Energy Information Administration / Petroleum 1996: Issues and Trends 63 

# Table 4. Estimates of Worldwide Cumulative Production, Identified Reserves, and Undiscovered Technically Recoverable Resources of Conventional Crude Oil (Billion Barrels)

Area 1/1/93 1/1/93 Resources Cumulative Production Identified Reserves Mean Undiscovered

North America 182.8 83.0 121

Canada 14.3 7.0 33 Mexico 15.7 27.4 37 United States 152.7 48.5 49 Other 0.1 0.1 1 South America 57.9 43.8 44

Argentina 4.9 2.3 2 Brazil 2.5 2.8 9 Venezuela-Trinidad 43.9 34.4 20 Other 6.7 4.3 14 Europe 22.5 28.9 30

Netherlands 0.5 0.2 0 Norway 3.1 11.0 13 United Kingdom 8.6 13.5 11 Other Western Europe 3.5 2.2 4 Eastern Europe 6.8 2.0 2 Former Soviet Union 103.6 80.0 101 Africa 46.4 58.7 48

Algeria 9.1 8.4 2 Angola 1.3 2.0 2 Egypt 4.4 4.6 5 Libya 15.9 22.4 8 Nigeria 12.4 16.0 9 Other 3.2 5.3 21 Middle East 160.2 584.8 122

Iran 36.1 63.0 22 Iraq 19.9 99.0 45 Kuwait 23.3 96.0 3 Saudi Arabia 55.8 255.0 41 United Arab Emirates 11.0 56.2 27 Other 14.2 15.6 4 Asia-Oceania 36.8 42.8 81

Australia-New Zealand 3.0 2.4 5 China 13.0 22.0 48 India 2.6 4.5 3 Indonesia 13.3 8.4 10 Malaysia-Brunei 3.9 4.6 6 Other 0.9 1.0 8 World 610.2 922.1 547

Source: From Masters, C.D., Root, D.H., and Attanasi, E.D., Resource Constraints in Petroleum Production Potential, Science, v. 253 (12 July 1991), p. 147.

# Energy Information Administration / Petroleum 1996: Issues and Trends 65 

# U.S. petroleum import dependency has almost doubled since the mid-1980’s, to 8.4 million barrels a day. Crude oil import dependency has risen even faster. By 1996, crude oil accounted for nearly 90 percent of net imports, and U.S. refiners were running over 1 million barrels a day more imported than domestic crude. This chapter examines the decade of growth in U.S. crude oil imports, and describes the role that factors such as the regional shifts in the U.S. and world supply/demand balances, the expanded capability of the U.S. refinery complex, and environmental legislation have played in changing the quality and sources of these imports. 

# 4. U.S. Crude Oil Imports: Growing U.S. Dependence

Introduction Total U.S. imports of crude oil and petroleum products have increased dramatically since the mid-1980’s, reaching a record 9.4 million barrels a day last year and accounting for over half the oil used domestically. Petroleum exports also increased over the same period, but only modestly. Thus, net U.S. petroleum import dependency has risen sharply, to 8.4 million barrels a day, and cost the U.S. nearly $60 billion last year. Both the country’s thirst for and dependence on imports are still growing. The majority of the imports – but the minority of exports – are crude oil. The U.S. has been a net importer of crude for almost half a century, but it was not until 1994 that it imported more than it produced. Since then, the gap has widened to almost 1.0 million barrels per day. Also since then, exports of Alaskan North Slope crude have been liberalized. This chapter looks at how crude oil imports have evolved over the last ten years, focusing not only on what has driven the volume growth but also on the role that crude quality, regional shifts in U.S. and global supply/demand balances, and environmental legislation have played in the changing mix of crude sources. It also considers some of the economic, logistical, and political implications of these changes. While the focus of this chapter is therefore on crude oil (rather than products) and on imports (rather than expor ts), the discussion must begin with a broader view of the import-export picture to provide the necessary context for understanding the relative role of crude oil imports. 

# U.S. Total Oil Imports The record 9.4 million barrels per day of crude oil and petroleum products imported by the U.S. last year keep it firmly at the top of the world importer rankings (Figure 50). In the mid-80’s, the U.S. was only importing 5.0 million barrels per day, barely half of today’s level. But the trend has not always been up. Gross imports had reached 8.8 millions of barrels per day back in 1977, before collapsing over the following six years. Because of the substantial growth in exports, net imports (imports mi nus exports) just failed to set a new record in 1996, averaging 70 thousand barrels a day less than in 1977. 

# Imports Driven by Increasing Demand and Declining Production U.S. gross import dependency has fluctuated broadly in line with the fluctuations in import volumes. It reached a peak of 48 percent back in 1977, dropped to 32-35 percent between 1982 and 1985, and then picked up fa irly steadily to reach 52 percent last year. While this was a new record, it was not the first time the politically sensitive 50 percent level had been exceeded. That also happened in both 1993 and 1994. Net imports dependency reached 46 percent of demand, nearly equaling the 1977 record. Net imports fill the gap b etween U.S. demand for oil and the country’s capability to produce it. These swings in import levels are therefore driven by the relative swings in U.S. supply and demand. 

# U.S. Demand: Approaching Its Late 1970's Record High Demand is the more variable of the two factors (Figure 51). It reached its all-time high of 18.8 million barrels per day almost 20 years ago, in 1978. By the early 1980’s, it had plunged to 15.2 million barrels per day, but by last year, it had rebounded to 18.2 million barrels per day. This represents an increase of 3.0 million barrels per day, or 20 percent, over the mid-1980's low point, and a new peak in this current growth phase. The primary driver for these oil demand swings over the last 20 years has been the level of economic activity, which is itself, in part, a function of oil prices. Each of the last three

# 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1996 0 2 4 6 8 10Million Barrels per Day



# 1995

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1996 

# 0 5 10 15 20

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAAM illion Barrels per Day (Cumulative)



# Supply

1995 

# All Other Net Imports

Domestic Field Production of Crude Oil and Natural Gas Plant Liquids

66 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 50. U.S. Gross Oil Imports, 1975-1995

Sources: 1975-1980: Energy Information Administration (EIA), Petroleum Supply Monthly (February 1993), Table S3. 1981 Forward: EIA, Petroleum Supply Monthly (February 1997), Table S3.



# Figure 51. U.S. Petroleum Supply and Demand

Note: All Other Supply includes refinery processing gain, unaccounted for crude, stock change, and field production of other hydrocarbons. Sources: 1975-1980: Energy Information Administration (EIA), Petroleum Supply Monthly (February 1993), Table S1. 1981 Forward: EIA, Petroleum Supply Monthly (February 1997), Table S1.

# Energy Information Administration / Petroleum 1996: Issues and Trends 67 

# U.S. recessions (1974-75, 1980, and 1991) was immediately Gasoline demand therefore recovered to a new record high preceded by a sharp increase in the price of oil that, in the of 7.6 million barrels per day last year, 40 percent of total oil latter two cases, was subsequently eroded. Oil use stumbled demand. as economic activity dipped, and then subsequently recovered as the economy picked up speed again. Each time, the recovery in demand for oil was only partial, resulting in a steady loss of market share to other fuels that was not reversed until quite recently. These earlier losses and the current gain can be understood by dividing markets for oil into two categories — captive and multi-fuel — according to their vulnerability to substitution. In the early 1980’s, after two oil price shocks and fears of more to come, and after the decontrol of domestic oil prices, newly attractive alternatives like coal and nuclear were not just gaining a major share of the new multi-fuel markets, like power generation, but were also rapidly displacing oil from many of the existing multi-fuel markets. This further amplified the demand losses triggered by the 1980-82 recession. Gradually, this displacement pendulum lost momentum. With the capital investment made and with low operating costs, coal and nuclear could not easily be dislodged from their newly won markets, even when oil prices fell. But they have been making few new inroads. The trickle of ongoing gains has been centered on natural gas. Captive markets are not immune to economic and price signals. However, devoid of ready alternatives, the oil demand elasticity of such markets is necessarily limited. For a period in the 70’s and 80’s, price signals and the introduction of more efficient vehicles significantly influenced the transportation sector (passenger cars, trucks, planes, trains, and buses) which currently accounts for over two-thirds of total consumption. This further contributed to the sharp downturn in oil demand in the early 1980’s. But prices and price expectations receded, and many of the older less efficient vehicles have been replaced. Growth in the captive markets has reemerged, as can be illustrated by looking at gasoline, and there are no longer significant losses in the multi-fuel markets to mask it. The CAFE (Corporate Average Fuel Efficiency) standardsinstitutionalized fuel efficiency improvements for onhighway vehicles, helping reduce gasoline demand from a peak of nearly 7.2 million barrels per day in 1977 to 6.3-6.4 in the first half of the 1980’s. But the momentum was not maintained. Today, Americans own more vehicles than ever, and with a greater proportion than ever being gas-guzzling sport utility vehicles and mini-vans. Since, headlines to the contrary, gasoline is cheap — 1996’s average pump price, adjusted for inflation, was one of the lowest of the post-war period, and only about one-third of the price in Europe — Americans are also driving their vehicles further and faster. 

# U.S. Supply: Gradual Decline from Its Early 1970's Peak U.S. production of crude oil and natural gas plant liquids has been declining since the early 1970’s from its 11.3 million barrel-per-day peak, despite temporary relief provided by the 1977 start-up of Alaskan North Slope production (centered on Prudhoe Bay, the largest field ever found in the U.S., with 12 billion barrels of recoverable reserves). The decline has occurred mainly because the U.S. is the most mature producing region in the world, with over three million oil and gas wells completed since the first was drilled in Pennsylvania in 1859. Given the declining resource base, domestic oil resources are in constant need of exploration and development to sustain production (see Chapter 3). Yet the U.S. has steadily been de-emphasized by many companies, as the rest of the world has opened up to upstream activity, providing more attractive investment opportunities. However, with production still averaging 8.3 million barrels per day, the U.S. remains a world leader, second only to Saudi Arabia. With the breakup of the Soviet Union, Russia has dropped to third, and is struggling to stay within 2.0 million barrels per day of the U.S. level. Oil production, which covers crude oil, condensate, and natural gas liquids, accounts for the vast majority (85 percent) of the 9.8 million barrels per day of domestic supply. The rest comes from a variety of sources, the most important of which is processing gain , the volume gain that occurs at refineries as crude is processed into a stream of products that have, on average, lower densities. The more complex the refining system is, i.e. the greater the proportion of light products it is able to make, the greater the processing gain. The U.S., with the largest and most complex refining system in the world, achieves a processing gain of 800 thousand barrels per day, which is over 8 percent of all domestic supply. Syn thetic hydrocarbons, such as ethanol or MTBE, are another supply source, averaging 300 thousand barrels per day. In total, these non-production sources of domestic supply averaged over 1.5 million barrels per day last year, more than three times their level in the mid-70’s and mid-80’s. Without this contribution, the decl ine in domestic supply and the growth in imports over the last decade would have been even more dramatic.

# 68 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Outlook For Imports: More Growth, More Records Now that substitution losses are offsetting so little of the growth in the captive markets, U.S. demand is moving back up toward its record high. By 1998, the EIA forecasts it will reach 18.6 million barrels per day, 0.4 million barrels per day higher than last year, and only 0.2 million barrels per day below the 1978 record. Over the next couple of years, the non-production sources of supply are expected to grow more slowly, largely because there is now little regulatory incentive either to continue expanding oxygenate production or to upgrade aggressively (and thus boost processing gain). However, despite the growth in Gulf of Mexico flows, the decline in domestic produc tion is expected to continue unchecked. Thus, the decline in total domestic supply will accelerate slightly, falling to 9.4 million barrels per day by 1998, the lowest level since 1965. In the near term, with the expectation that consumption will continue to grow and that supply will continue to decline, there is only one direction for imports to go: up, to new record highs in terms of both volume and dependency. By 1998, EIA expects gross crude oil and petroleum product imports to breach the 10 million barrel a day level for the first time ever. 

# U.S. Import Dependency Is Modest in Global Terms Figure 52 places the U.S. dependence on imports in a global context. Both world oil consumption and supply are displayed on a regional basis, with each region’s “gap” indicating whether it is a net importer or exporter. To simplify, the U.S. has been combined with its two NAFTA partners, Canada and Mexico, to comprise North America (while also still being separately identifiable). These partners are two of the top oil suppliers to the U.S. The net import dependence for North America is therefore very much less than for the U.S. alone. On a regional basis, North America is the number one consumer, as it has been for decades. Asia/Oceania has recently leapt into second place ahead of Europe, growing by 70 percent in ten years and even outstripping the U.S. in 1996. This alone would have pulled the center of gravity of world oil demand eastward, but this shift was given additional momentum by the unprecedented demand collapse in the Former Soviet Union (FSU). Demand there almost halved in the first half of the 1990’s, falling by over 4 million barrels per day. The picture for supply is in sharp contrast to that for consumption. North America is important, but the Middle East dominates the picture. The dominance would be even greater if the region’s major producers were to use all their production capacity, as every other producer in the world does. Iraq cannot, because of the U.N. imposed embargo; a few others choose not to, limiting their production to their OPEC quota level instead. The M iddle East’s dominance has increased significantly over the last ten years, not only because production there has nearly dou bled but also because of declines in both the U.S. and the Former Soviet Union (FSU). The latter is primarily one dramatic consequence of the delay in the FSU’s attempted transition to a new political, economic, and social order. All the other regions have enjoyed growth, particularly those that have made the greatest efforts to attract private and foreign investment. When the two parts of the regional balances are put together, it shows that all three main consuming regions are net oil importers, while all the major producing areas (except North America) are net exporters. The honor of being the largest regional importer falls to Asia/Oceania. This region’s net import requirement now exceeds over 10 million barrels per day, for an overall import dependency of over 60 percent. On both counts, it has greater import exposure than the U.S. However, the regional dependency is not really representative of any of the individual countries. A few, such as Indonesia, are net expor ters; others, such as China, have just become net importers; most are almost totally import dependent. This latter group includes J apan, a very distant second to the U.S. in the rankings of consuming countries, using almost 6 million barrels per day. Europe has the next highest need for imports. Unlike Asia/Oceania, its need has been declining, thanks to the tripling of Norway’s production and, to a minor degree, Eastern Europe’s demand collapse, and is now under 9 million barrels per day. But like Asia/Oceania, regional import dependency is an unrepresentative 60 percent. Most of Europe’s production comes from the North Sea, shared between the U.K. and Norway. That leaves most European countries in a position similar to Japan’s: almost entirely dependent on imports. Thus, although U.S. oil im ports are an important force in the world oil trade, they do not constitute an unprecedented regional flow. Also, U.S. oil import dependency is much less than that of most of its major allies, who tend to be less well endowed geologically.

# North America

Far East and Oceania

Oil Consum ption Soviet Union

Middle East

Oil Production Europe

Africa Central and South America CAN
MEX

U.S. CAN

U.S. MEX



# North Am erica

Far East and O ceania

O il C onsum ption Form er S oviet U nion

M iddle East Europe

Africa Central and South America CAN

MEX

U.S. CAN

U.S. MEX



# O il P roduction

Energy Information Administration / Petroleum 1996: Issues and Trends 69 

# Figure 52. Regional Supply and Demand Balance, 1985 and 1995
1985

Notes: Oil production includes crude oil, natural gas plant liquids, other liquids, and refinery processing gains. Oil consumption includes internal consumption of all refined products, refinery fuel and loss, and bunkering. Sources: 1985: Energy Information Administration (EIA), International Energy Annual 1986 (October 1987), pp. 30-31. 1995: EIA, International Energy Annual 1995 (December 1996), pp. 5-7 and 207-209. 

# 1995

# 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1996 0 2 4 6 8 10

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAAMillion Barrels per Day (Cumulative)



# 1995 U.S. Petroleum Product Imports

U.S. Crude Oil Imports

70 Energy Information Administration / Petroleum 1996: Issues and Trends Sources: 1975-1980: Energy Information Administration (EIA), Petroleum Supply Monthly (February 1993), Table S1. 1981 Forward: EIA, Petroleum Supply Monthly (February 1997), Table S1. 

# Figure 53. Crude Oil Dominates U.S. Imports 

# Crude Oil Dominates U.S. Imports The U.S. imports both crude oil and products. Crude oil has consistently dominated the flows (Figure 53). Last year, crude oil accounted for 80 percent of all U.S. oil imports, averaging 7.5 million barrels per day. This preference for crude oil in part reflects history. The domestic refining industry has long-e stablished roots because the U.S. was one of the pioneers of the modern oil era, with enough crude oil of its own to be a net exporter for the first one hundred of its one hund red and fifty years as a producer. It also reflects the basic economics of the industry worldwide: it is generally more cost-effective to refine products close to the point of consumpt ion. This is confirmed by the composition of world trade in petroleum: 80 percent by volume is crude (and the share is even larger in ton-mile terms). Governments also often intervene in the market to swing the economics even more in favor of domestic refining, justifying it as enhancing supply security. The growth of crude imports over the last decade sharply underscores the incentive for U.S. refiners to maximize runs, particular since there have been no new, “grassroots” refineries built in the Lower-48 during this period. Runs were raised through a combination of refinery restarts, expansions, debottlenecking, and improved operating practices such as extending the time between turnarounds. Product imp orts primarily play a balancing role in world oil markets, with their flows varying depending on factors like weather, refinery turnarounds, or accidents. They can also be the consequence of local resistance to refineries. The U.S. East Coast provides one of the clearest examples of this. It refines only one-third of the products it consumes. To fill the gap, it takes products from other regions while also importing three-quarters of all the finished products coming to the U.S. As would be expected from the foregoing, crude has borne the brunt of the swings in U.S. imports over the last twenty years, but its share has never dropped below 60 percent. Between the mid-1980’s low in total imports and last year, total crude oil imports increased by over 4.0 million barrels per day while product imports increased by less than 100 thousand barrels. Ranges better capture the volatility of imports, particularly of products. Even so, they show product flows varying between 1.6 and 2.3 million barrels per day during the last twenty years, while crude varied between 3.2 and 7.5 million. Crude’s variability has been six times that of products. Some of the main characteristics of product imports are highlighted in the box on p. 71. The rest of this chapter concentrates on crude oil.

# G ross

1985 1987 1989 1991 1993 1995 1996 

# -500 0 500 1 ,0 0 0 1 ,5 0 0 2 ,0 0 0 2 ,5 0 0

AA

A AA A AA AAAA AA A AA A AA A AA

A AA A AA A AAAAAA AA A AA A AA A AAA
AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA

AAA AA A AA A AAA AAA AAA AAA AAA
AAA AA A AA A AAA AAA AAA AAA AAA
AAA AA A AA A AAAAAA AAA AAA AAA AAAAAA AAA AAA AAA AAAAAA AAAAAAAAAAAA AAAAAA AAA AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAATh o usa n d B a rre ls p e r D a y 

# Net

1985 1987 1989 1991 1993 1995 1996 

# -500 0 500 1 ,0 0 0 1 ,5 0 0 2 ,0 0 0 2 ,5 0 0

AA A AA A AAA AAA AAAAAA AAA AAA AAAAA A AA A AA A AAA
AAAA AAA A A AA A AAAA
AAAA AAAA AAAA AAAA

AAAA AAA AAAA AAAA AAAA AAAA AAA AAAA AAAA AAAA

AAA AA A AA A AAA
AAA AAA AAA AAA AAAAAA AAA AAA AAAAA A AA A AA A AAA AAA A A AA A A AA A AAAA AAAA AAAA AAAA AAAA
AAAA AAA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AA A A AA A A AA A AAAA AAAA AAAA AAAA AAAA AAAA
AAAA AAA A A AA A A AA A AAAA AAA AA A AA A AA A AA A AA A AA A AA A AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAATh o usa nd B a rre ls p er D a y

AAAA AAAA AAAA 

# Tota l Mogas D istillate R esid ua l Fu e l O il P e tro le u m Coke Tota l O ther AAAA AAAA AAAA A AAA A AAA AAAA



# Energy Information Administration / Petroleum 1996: Issues and Trends 71 

# Product Imports Product imp orts have followed a very different trend from crude imports in the last decade. They rose to a peak of 2.3 million barrels per day in the late 1980’s as U.S. refiners struggled to keep up with the rapid growth in oil consumption, particularly of light products. They then slipped back, undermined first by the 1990/91 recession and then by the surge in refinery upgrading capacity that resulted largely from the requirements for cleaner fuels in the Clean Air Act Amendments (1990) and other environmental legislation. Aided also by steadily increasing refinery utilization rates and by the growth in production of synthetic hydrocarbons, like MTBE, domestic production has met a growing percentage of U.S. oil demand. The low point for product imports was reached in 1995, when imports dipped to 1.6 million barrels per day, undermined by the fierce inter-f uel competition that drove residual fuel oil demand to a post World War II low. In 1996, product imports recovered to 1.9 million barrels per day, in line with 1991-1994, but only slightly higher than 1985's level. 

# U.S. Gross and Net Product Imports, 1985-1996

Over the same period, product exports took another step up. Until the early 1980’s, they consisted primarily of petroleum coke, since most other products were tightly regulated. As export license requirements were eliminated, exports started to grow. Light product exports r eceived a particularly strong boost after Iraq’s destruction of Kuwait’s refining capacity in 1990 led to a significant shortfall of products into Asia, just as oil demand there started to soar. U.S. exports of both gasoline and distillate doubled. Even though Kuwait’s capacity has been fully restored, the higher export levels have been sustained. Having had a crash lesson in how to export such products successfully, and having experienced no political backl ash, U.S. refiners and marketers now move their surpluses to whichever overseas market is most attractive at a particular time. Thus, distillate exports to western Europe averaged less than 5 thousand barrels per day during the first eight months of 1996, but jumped to about 80 thousand barrels per day in the final four, when the trans-Atlantic arbitrage window was wide open. As a consequence of these two disparate trends, net product imports in 1995 were less than half their 1988 peak of 1.6 million barrels per day. Net imports have declined for all main products, but most notably for distillate where, in a break with the past, the U.S. has been theoretically self-sufficient in distillate since 1991, i.e. net imports have been approximately zero. The overall downtrend was reversed in 1996 when, aided by the exceptionally cold 1995-1996 winter and by the European gasoline glut, net product imports jumped back up over 1 million barrels per day. Capital investment in the refining sector is expected to slow, now there is a lull in environmentally-driven, mandated investment, leaving domestic refiners unable to keep pace with the expected growth in consumption. Thus, further increases in net product imports are expected over at least the next few years. The reduction in net imports has been another negative for the U.S. refining sector because it has undermined margins. Price in an importing region is the balancing market price plus transportation. In an exporting region, it is that price minus transportation. As imports shrink, their balancing, or price-setting, market moves closer; as exports grow, theirs moves further away. In each case, this reduces the relative price in the price-taking market. This is what has been happening in U.S. main product markets over the last few years. For example, in the late 1980’s, imports of distillate reached about 300 thousand barrels per day, and came from a wide variety of sources. Now, imports have dropped by about a third, to around 200 thousand barrels per day, with 90-95 percent coming from just three nearby locations: E. Canada, the Virgin Islands, and Venezuela. Simultaneously, exports have doubled, also to around 200 thousand barrels per day, with a significant proportion of Gulf Coast volumes having to go as far as Asia. Consequently, both Gulf coast and East Coast distillate prices are lower relative to the world market, and to crude, than they would have been if there had been no change in product flows.

# 72 Energy Information Administration / Petroleum 1996: Issues and Trends 

# An Overview of Crude Oil ImportsImports of crude oil have grown dramatically since the mid1980’s, when domestic crude production began its most recent decline phase. Crude oil now accounts for over 80 percent of total petroleum imports. 

# Imports Have Set Four Consecutive Record Highs... U.S. gross crude oil imports averaged 7.5 million barrels per day last year, the fourth consecutive record high (Figure 54), and the third consecutive year that they have exceeded domestic crude production. This puts crude imports more than 1.0 million barrels per day above the prior cycle’s 1977 peak of 6.6 million, and 4.5 million above its 1985 low. Back in the late 70’s and early 80’s, crude oil imports received a boost of about 150 thousand barrels per day from the building of the Strategic Petroleum Reserve (SPR). There have not been any imports for the SPR for nearly three years now. The government has recently started to sell limited volumes of SPR oil for both operational and fiscal reasons (see Chapter 5). U.S. crude flows are not entirely one way. Exports occur, but are just a fraction of imports because they are largely precluded by highly restrictive regulations. Exports mainly consist of Alaskan North Slope crude delivered to U.S. possessions and territories, particularly the Virgin Islands. Because of these expo rts, U.S. net dependency on the global crude oil market has been 1-2 percent lower than its gross dependency.


# ... And Will Continue to Increase Total U.S. imports will continue to grow in the near term, increasing by around 900 thousand barrels per day over the next two years. As in the past, most of this increase will be crude — o ver 80 percent for this period. Thus, the rate of growth of crude imports will be slower than over the last decade, but the average annual volume increment will be higher. Both gross and net crude oil imports will continue to set new record highs. As domestic crude production continues to decline, more questions are being asked about the appropriateness of existing marker crudes for the U.S., particularly inland ones 24 

# like West Texas Intermediate (WTI). Will rising imports present new alternatives? Many imported crudes, like those from Saudi Arabia, Mexico, and Venezuela, are hamstrung by resale restrictions, so growth in their flows will not increase liquidity in the Gulf Coast crude market. Colombia’s Cusiana crude seems a possibility on the face of it, with volumes expected to jump to 450 thousand barrels per day before the end of 1998, with the U.S. being its target market, and with the equity owners willing to trade. Cusiana’s big drawback is the proven vulnerability of its export pipeline to guerrilla attacks and, therefore, repeated force majeure. The best alternative may lie even closer to home in the rapidly rising flows from the Gulf of Mexico, typified by the sour Mars Blend stream.



# Sources Of U.S. Crude Oil Imports
Economics drive the flow of crude oil — unless there are political constraints such as embargoes. A crude flows first to its most profitable market, the one that nets back the best value. Then, as volumes grow, it spreads out to steadily less profitable markets. Logistics are one of the prime determinants of such profitability rankings. Thus, crude tends to be sold to nearby, or short-haul, markets first, andthen to progressively more distant, or medium- and longhaul, markets, other things being equal.


# Short-haul Crudes Now Dominate Figure 55 shows the main flows of crude into the U.S. in 1996, with the width of the arr ows proportional to the annual volume on any given route. All these flows move by tanker, with the exception of Canadian imports, which move by pipeline. Short-haul imports, defined here as those from Canada, Mexico, and Central and South America, clearly dominate, accounting for 4.0 million of the total 7.5 million barrels per day. This is the first time ever that the U.S. has obtained the majority of its crude from the Western Hemisphere.


# The Crude Mix Used To Be Different The mix of supply sources for U.S. crude oil imports has changed significantly as volumes have risen, shifting away from regions frequently cited as politically unstable (Figure 56). Some have concluded that this makes the U.S. less vulnerable to price shocks. It is important to understand, though, that it is not the degree of U.S. dependence that will determine the impact on price of any disruption in a A marker crude is one used as a basis for the pricing of other crudes. 24

# 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1996 -1 0 1 2 3 4 5 6 7 8

AAAA AAAAAAAA AAA AA A AAAA A

AAA AAA A A AA A AAAA A AA AAAA AAAAAAA AAAAAAAA A AAAAAAA AAAA AAA AA A AAAA A AA AAAAA A AA AA

AA A AAAAAA AAAAA AAAAAAAAAAA A AA AM illion Barrels per Day AAAA AAAA AAAA 

# Crude Oil Imports (excluding imports for SPR) Crude Oil Im ports for SPR Crude Oil Exports (shown as negative im port)

1995

Energy Information Administration / Petroleum 1996: Issues and Trends 73 

# Figure 54. U.S. Crude Oil Imports: Net and Gross

Sources: 1975-1980: Energy Information Administration (EIA), Petroleum Supply Monthly (February 1993), Tables S1 and S2. 1981 Forward: EIA, Petroleum Supply Monthly (February 1997), Tables S1 and S2. 

# Figure 55. Origin of U.S. Crude Oil Imports, 1996 (Thousands of Barrels per Day)

Source: Energy Information Administration (EIA), Form EIA-814 data.

# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 2 4 6 8

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AA AAMillion Barrels per Day (Cumulative) A AA A A AA A AAAA

AAAA A AA A AAAA AAA A AA AAA

AAAA A AA A A AA A
A AA A AA AAA 

# North Sea Africa Middle East Far East & Oceania Canada Mexico Central and South America

74 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 56. Changing Regional Patterns for U.S. Crude Oil Imports

Source: Energy Information Administration (EIA), derived from Form EIA-814 data.



# particular region. Rather, it is that region’s role in the global overemphasized. It has been subsidiary to the main issue, market. which is the establishment of a new paradigm for the Only one major region supplies less to the U.S. than it did in the mid-80’s: the Far East & Oceania. This reflects the Thanks to the aggressive implementation of new technology, increased refining flexibility that has made the West Coast the radical restructuring of operating practices, and the less reliant on the high quality crudes that are characteristic almost universal opening up of the upstream, the global of this regional source, together with the increased c rude oil supply curve has been shifted significantly to the willingness of integrated companies to optimize their crude right, i.e., the volume of crude that can be economically slates on a global basis, and not just within their own prod uced at a given price has risen. Hence, despite prices company systems. that have been lower than were expected from the viewpoint One of the most significant developments in the 1990’s has Middle Eastern members, have been called on to produce been the decline in importance of Middle East crudes to the much less in the 1990's than was then expected because U.S. market. They were the fastest growing import stream production almost everywhere else has soared.between 1985 and 1990, rising to account for nearly onethird of all U.S. crude oil imports. The consensus view was Therefore, the sources of short-haul crudes have enjoyed that this share would continue to grow. Not only has the rising pr oduc tion that has left them able to increase exports, share declined, to just 20 percent in 1996, but the absolute and their preferred target, logically, has been the U.S. Latin volume has declined too. America has been the star performer, with imports to the Politics have played a role in this. Since mid-1990, Iraqi the medium and l ong-haul exporters to the U.S. market have exports have been subject to a near total global embargo, lost gr ound to some degree. It has been particularly hard for only partially lifted in December 1996. Also, the U.S. has maintained a unilateral embargo on Iranian crude that dates back to October 1987. These limit the possibilities for Middle East crudes coming to the U.S. But the role of politics in determining the crude mix should not be upstream sector of the oil industry.

25



# at the end of the 1980’s, OPEC, and most particularly its

U.S. growing by 1.4 million barrels per day since 1990. All

Opening up of the upstream refers to the broad-ranging political, 25 

# economic, institutional, and contractual changes that have occurred in virtually every oil-producing nation making their oil resources increasingly accessible to world oil markets.

# Energy Information Administration / Petroleum 1996: Issues and Trends 75 

# the Middle East to compete because its crude is of the same ! the historic links between Saudi Arabia and the exquality, heavy sour, as the maj ority of short-haul grades. The Aramco partners: Mobil, Chevron, Exxon, and Texaco less voluminous, light, sweet, short-haul grades, such as (see also Figure 62); Olmeca (Mexico) and Cus iana (Colombia), have been partly responsible for the North Sea and Africa’s shrinking share of ! ongoing e mbargoes of two of its Middle East rivals, and U.S. crude imports in the last few years. These changes in the long-haul/short-haul mix of imported U.S. customers by using the Caribbean as a crudes tend to lower the volume of stocks held onshore in the transshipment center, and selling FOB out of there. U.S. Firstly, a just-in-time inventory strategy argues for lower stocks if a supply source is nearer – a somewhat This last strategy has two side benefits. Saudi Arabia benefits specious argument, perhaps, if those suppliers are already b ecause it raises the netback value of its sales in a producing at maximum, have no buffer stocks themselves, backwardated market, the prevailing condition of the last and have a history of interruptions. Secondly, parcel sizes for c ouple of years (see chapter on futures). Its customers benefit short-haul crudes are generally smaller than those for long- b ecause Saudi Arabia is, in effect, now holding some of their haul crudes, meaning more frequent deliveries and a lower operating stocks in the Caribbean, reducing their working average stock level (see Chapter 5). capital needs and reducing onshore U.S. stocks in the process 

# Six Countries Supply 80 Percent of U.S. Crude Imports
Not all countries in a region are the same, at least from the standpoint of being crude suppliers to the U.S. market. U.S. import dependency is much more concentrated than the regional analysis might suggest (Table 5). The U.S. gets almost two-thirds of its crude oil imports from just four countries, each of which supplied over 1.0 million barrels per day last year: Canada, Mexico, and Venezuela, all short-haul sources, and Saudi Arabia, a long-haul source. Adding in the next two in the rankings, Nigeria and the North Sea (really Norway and the UK, but generally counted The U.S. regional crude oil supply/demand balances are far together in oil supply terms), takes the proportion up to 80 from homogeneous (Figure 57). At one extreme is the East percent. The remaining 20 percent is split between 32 other Coast, the most supply deficient of all the regions, which countries. refines much less than it consumes. It is also dependent on It is more than just physical closeness and geology that has is the Gulf Coast, with substantially more refinery capacity made the three leading short-haul suppliers so dominant. than needed to meet its own consumption. It is the country’s Firstly, Canada has no viable export market other than the swing refining region, sending its surplus to fill in deficits U.S. Secondly, both PDVSA, and, more recently, Pemex elsewhere, mainly on the East Coast and in the Midwest. (respectively the Venezuelan and Mexican national oil companies) have shrewdly invested via joint ventures in One of the few common threads between the regions is that, increasing the complexity of U.S. refineries. By enlarging to a greater or lesser degree, they all import crude. The Gulf the nearby, higher valued market for their poor quality Coast imports the most, r eceiving 4.3 million barrels per day crudes — referred to as increasing their fungibility — last year, almost 60 percent of the total. Next comes the Venezuela and Mexico have leveraged the value of large Midwest, closely followed by the East Coast. Both take less segments of their crude production. than a third of the Gulf Coast volume. There are several reasons why Saudi Arabia, alone among The Gulf Coast’s role in crude oil imports is even larger than long-haul suppliers, has been able to remain a significant these data imply because, except for flows from Canada, all exporter to the U.S. market, including: of the Midwest’s imports move via the Gulf Coast, using the

! sheer size — the world’s largest importer and the world’s as the volumes that the Gulf Coast refines itself. Last year, largest exporter want to do business together; ! its transformation into a short-haul source for many of its

(see chapter on stocks).


# Where In The U.S. Does the Imported Crude Oil Go? Every region in the U.S. imports some crude oil, but the regional similarities tend to end there because the different regions have distinctly different crude oil needs and choices. 

# Crude Oil Import Dependency Varies Regionally

imports for almost all the crude it runs. At the other extreme

same ports and some of the same distribution infrastructure

# KY

NC GA

FL AL MS TN

AR MN WI

IL IN MI
OH

GA NY CT MA VT

NH ME



# RI

VA PA
MD DE DC CA

AZ NV OR WA

ID

WV

NM

TX OK

LA WY

UT CO NJ MT

NE IA

MO SD

KS ND 

# II

III I V IV

2,498 353 469 124 3,254 1,397

6,629 4,337 1,331 1,271 SC



# Regional Dependence on Crude Oil Imports (Thousands of Barrels per Day)

**By PADD where processed. 

# Crude Oil Demand* Crude Oil Imports** *Crude oil inputs to refinery.

76 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 57. U.S. Regional Dependence on Crude Oil Imports, 1996

Source: Energy Information Administration (EIA), derived from Form EIA-814 data. 

# Table 5. The Top Six Sources of U.S. Crude Oil Imports, 1996 (Thousand Barrels per Day) Year Venezuela Arabia Mexico Canada Nigeria North Sea of the World Total Saudi Rest
1985 306 132 715 468 280 309 991 3,201 1986 416 618 621 570 437 370 1,145 4,178 1987 488 642 602 608 529 374 1,432 4,674 1988 439 902 674 681 607 316 1,489 5,107 1989 495 1,116 716 630 800 278 1,808 5,843 1990 666 1,195 689 643 784 250 1,668 5,894 1991 668 1,703 759 743 683 180 1,044 5,782 1992 826 1,597 787 797 665 319 1,091 6,083 1993 1,010 1,282 863 900 722 449 1,561 6,787 1994 1,034 1,297 939 983 624 586 1,600 7,063 1995 1,151 1,260 1,027 1,040 621 599 1,533 7,230 1996 1,305 1,248 1,207 1,068 592 509 1,553 7,482 Source: Energy Information Administration, Petroleum Supply Monthly (February 1997), Table S3.

# Energy Information Administration / Petroleum 1996: Issues and Trends 77 

# almost 600 thousand barrels per day of crude moved to the ! Sulfur content, which measures a crude oil’s sulfur by Midwest this way. percent weight. A low sulfur crude is ‘sweet’, and a high 

# Crude Imports Have Shifted East and South Since the 1970's The pressure the record high U.S. crude import level puts on different regions varies (Figure 58). Three regions still lag their prior peaks, all of which were set in the late 1970’s. The West Coast has the most leeway; only importing one- A refiner is interested in a crude for the value of the products third of its 1977 pre-Prudhoe Bay level of 1.1 million barrels it y ields. His aim is to turn the crude into as much of the per day last year. Declining production and rising throughput lighter, higher priced products and as little of the heavier, have pushed the Midwest to within sight of its 1977 peak, lower priced products as is cost-effectively possible. In the while the restart of Tosco’s Trainer Refinery in Philadelphia U.S. market, that usually means maximizing gasoline while in mid-1997 could be enough to take the East Coast to new min imizing the residual fuel oils and other residues that sell highs. But it is PADD III, the Gulf Coast, and to a lesser for less than the price of the crude. degree PADD IV, the Rocky Mountains, that have already been presented with new challenges from record import Refineries, like crudes, differ. A simple refinery produces flows. pr oducts that reflect the natural characteristics of the crude. Well before even the current levels of crude oil imports were light ends and less residual oil, because the heavier materials reached in these two regions, concerns were being raised are reprocessed into feedstocks for additional, and generally about the adequacy of both the ports and the pipeline high capital investment, processing units. systems to handle the flows. The reality has been that the infrastructure has shown an unprecedented degree of The yi eld, or mix, of products a refiner produces therefore flexibility. Pipelines have been reversed (Mobil), depends on his choice of crude and the operating debottlenecked (Arco), exten ded (Diamond Shamrock), built configuration of his refinery. Thus, taking value as the (Express), newly connected (Amoco), or even switched from aggregate revenue from the products produced from the natural gas to crude oil service (Seaway). While getting c rude less the cost of refining it, different crudes can have sufficient crude supply to the U.S. might at times be a different values for the same refiner, while the same crude legitimate concern, handling it once it reaches the U.S. can have different values for different refiners. (Note: in should not be, barring accidents. choosing which crude to buy, a refiner would need to 

# Quality Issues
Crudes are not all alike. They differ considerably in their physical properties, with the important differences being the proportions of the various hydrocarbon fractions that can be turned into the different products and the levels of various contaminants, such as sulfur or metals. These properties affect the ease with which refiners can process various crude oils into the different products required by consumers. The two physical properties that are most often quoted for crude oil are:

! API gravity, which is a measure of a crude oil’s density or specific gravity. A high gravity crude is ‘light’ and a low gravity one is ‘heavy’. Other things being equal, a light crude yields more light products than a heavy crude. sulfur one is ‘sour’. Sulfur is a pollutant. Its level in finished products is increasingly being limited in the U.S., mostly by Clean Air Act regulations. 

# Crude Oil Values Vary Directly with Quality

As a refinery becomes more sophisticated, it produces more

compare this value with the delivered cost of the crude to calculate its marginal value, and rank the results.) In general, light crudes are more valuable than heavy ones, and sweet crudes more valuable than sour. These quality differentials, or differences in value between light and heavy, and between sweet and sour crudes, vary between refiners, between regions, and over time (see Chapter 7). Hence quality, like logis tics, is a prime determinant of crude flows. The demand curve for a particular crude therefore varies as both the transportation cost and the quality differential vary, making the curve non-linear with respect to logistics. In other words, to progressively place a crude, a producer can be moving back and forth between closer and more distant markets, depending on the relative trade off between the cost of transportation and the quality premium for the crude in each market at that time. The resultant market clearing price will not necessarily be set either in the same mar ket each time, or in the most distant market that takes the crude.

# 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1996 0 1 2 3 4 5 6 7 8

AA A AA A AA A AA A AA A AA A
AAAA AAAA A AAA A AAA A AAA A AAA A AAA AAAA

AAAA A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAA A

AA A AA A AA A AA A AA A AA A AA A AA A AA A AA AAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAA A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA

AAAA A AAA A AAA A AAA AAAAAA A AA A AA A AAAAAAA AAAA AAAA AAAA AAAAA AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AAA

A

AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAA AA A A A A A A A A A A A A A A A A A A A A A A A A A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAAA A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA AAA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA AAAAAAA AAAA AAAA AAA AAA

AAA AAA

AAAA

AAAA AAAAAAA AAA AAAA AAAAAAAA AAAA AAAA AAAA AAAA AAA AAA AAAAAAAA AAAAAAAA AAAAAAA AAA AAAA AAAAAAAA A AA A AAAA AAAA

AAA AA A AA A AA A AA A AA A AAA AAAA AAAA A AAA A AAA A AAA A AAA A AAA A AAA AAAAAAAA A AA A A AA A A AA A A AA A A AA A A AA A A AA A AAAA

AAAA A AA A A AA A A AA A A AA A A

AA A AA A AA A AA AAA

AAA AAA AAA AAA

AAAA A AA A A AA A

AAAA AAAA AAAAAAAA AAAA AAAAAAA AA AAAAA AAAAAAAA A AA A AAAA AAAA AAAAAAAA AAAA AA A AA A AAAAAAA A

AA A AAAAAAAA AAAAAAAA AAA A AAA AA A A A AAAAA AAAA AAAAAAAA A AA A A AA A AAAA AAAA AAA A A AA A AAAAMillion Barrels per Day (Cumulative) AAAA AAAA AAAA

AAAA AAAA AAAA

AAAA AAAA AAAA AAAA 

# PADD 1 PADD 2 PADD 3 PADD 4 PADD 5

1995

78 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 58. U.S. Regional Dependence on Crude Oil Imports Over Time, 1975-1996

Sources: 1975-1980: Energy Information Administration (EIA), Energy Data Reports, Petroleum Statement Annual. 1981-1995: EIA, Petroleum Supply Annual (February 1997), Table 34. 

# Imports Are Poorer In Quality Than Domestic Crudes Refiners aim to find the most cost effective way to meet demand within the constraints of their own facilities. As the U.S. refining system is the most complex in the world, and as U.S. crude quality is better than the world average, it is hardly surprising that imported crudes lower the quality of the crude slate that U.S. refiners run (Figure 59). This deterioration is particularly pronounced for sulfur, with imports having double the unusually low level in domestic crudes. The West Coast is the only region where imports do not reduce the quality of the crude slate. The quality of its own production is very much worse, at 24 degree API and 1.2 percent sulfur, than that in any other region in the U.S. It has therefore long imported crudes toward the high end of the quality spectrum, pulling its quality average closer to the U.S. norm. Historically, these crudes generally came from U.S. crude oil imports fall into two clear quality groups, Asia, particularly Indonesia and Malaysia. Over time, the sweet and sour (Figure 60). Canada, Mexico, Venezuela and West Coast refiners upgraded, lessening their need for such Saudi Arabia supply the poorer quality, sour, predominantly extremely light sweet crudes. An increasingly large heavy grades, while the North Sea, Africa, and the rest of proportion of their imports then gradually shifted toward Latin America supply the better quality, sweet, frequently Alaskan North Slope ‘look-alike’ grades, to give themselves light grades. purchasing leverage in an oligopolistic market for a crude whose production was steadily declining. There is str ong competition betw een suppliers within each of On a simultaneous gravity and sulfur ranking, PADD III imports the worst crudes. A major influence here are the joint venture investments that heavy crude producers like Venezuela and Mexico have been successfully pursuing to improve the fungibility of their c rudes in U.S. markets. Their main target has been the Gulf Coast. PADD IV, the Rocky Mountains, comes a surprisingly close second, considering it is a market dominated by smaller, niche refineries. Logistics make Western Canada its preferred — and, currently, its only nondomestic — crude supplier. As production there got heavier, the economic imperative to upgrade became overwhelming for the Rocky Mountain refiners accessing those crudes. 

# Different Regions Supply Different Quality Crudes

these two groups, with l ogistics generally being the deciding

# 22 24 26 28 30 32 34 36 38 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0



# API Gravity (Degrees)Sulfur (Percent) 

# Domestic Production and Stocks of Crude Oil

PADD 2 Imports of Crude Oil

PADD 1 PADD 5 PADD 3 PADD 4

PADD 4

PADD 1 PADD 3 PADD 5 PADD 2



# North Sea

24 26 28 30 32 34 36 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6



# Weighted Average API Gravity (Degrees)Weighted Average Sulfur (Percent)



# 22 Africa Other Latin America Canada Rest of the World Venezuela Saudi Arabia Mexico

Energy Information Administration / Petroleum 1996: Issues and Trends 79 

# Figure 59. A Comparison Between Imported and Domestic Crude Oil Quality in 1996

Sources: Energy Information Administration (EIA). Imports: derived from Form EIA-814 data. Domestic: derived from Forms EIA-810 and EIA814 data.


# Figure 60. The Quality of U.S. Crude Oil Imports by Supply Region, 1996

Source: Energy Information Administration (EIA). Form EIA-814, with imputed values for 1 to 4 percent of data.

# 80 Energy Information Administration / Petroleum 1996: Issues and Trends 

# factor between winners and losers. Saudi Arabia’s low. Venezuela and Mexico actively sought joint venture competitive disadvant age in the sour group has already been upgrading investments in the U.S. market. noted. In the light sweet group, the competitive disadvantage, vis-a-vis the U.S. market, lies with the African This upgrading allowed the short-haul suppliers to win an producers, particularly West African countries like Nigeria even larger share of the U.S. market, by allowing them to and Angola. Of course, these countries have a competitive compete successfully with suppliers of light sweet crudes, advantage over the North Sea vis-a-vis the Asian market. like Africa. Thus the observed swing in the U.S. from This has made them the swing source for the world light, medium and long-haul toward short-haul crudes was not sweet crude market, just as the Middle East is for the heavy, purely the result of logistics. sour market. West African crudes are now routinely pulled or pushed between the Americas and the Far East, depending Most of the deterioration in import quality had occurred by on the relative strengths of their respective markets. This the early 1990’s. The subsequent leveling off came about competition is reflected in the price of Asian quality crudes largely because the quality of the crude being produced relative to Brent, which depends on many factors, including worldwide improved, due to a major production shift by the time of the year, accidents at refineries or oil fields, and Saudi Arabia from its medium and heavy to its lighter the pace of tightening quality standards. grades, c oupled with the geologic coincidence that the surge There is also competition between the quality groups. This biased toward light sweet crudes. influences, and is influenced by, the level of the quality differentials. This competition has contributed to the changing quality of U.S. imports over time. 

# The Quality of U.S. Imports Has Deteriorated The quality of U.S. crude imports today is lower than it was in the mid-1980’s, as is the quality of U.S. refinery runs as a whole (Figure 61). This is mainly the result of aggressive capital investment by the U.S. refining sector that has raised the complexity of the whole system and made it capable of running a hi gher proportion of poorer quality crudes despite a lightening of the mix of products being consumed and a tightening of product quality standards. But why did U.S. refiners choose to do this?

! The U.S. is the world’s leading importer. Its refiners need flexibility if they are not to be held hostage by suppliers, particularly in the light of two trends that have long been expected to prevail: that U.S. imports will continue to grow, and that world crude quality will deteriorate (an expectation that has not always been fulfilled).

! U.S. demand is significantly more skewed to light produ cts, especially gasoline, and away from residual fuel oil, than the norm elsewhere in the world. Refiners therefore have a relatively greater economic incentive to invest aggressively in residual destruction units.

! Environmental legislation, such as the 1990 Clean Air Act Amendments, effectively forced investment in upgrading. The marginal cost of adding upgrading capability beyond that required by cutting edge U.S. environmental restrictions has been frequently relatively in non-OPEC production in the first half of the 1990’s was


# Crude Sources for the Largest Importers Nine U.S. refining companies each imported more than 300 thousand barrels per day of crude last year, accounting for almost two-thirds of all U.S. crude imports. Leading the pack was Citgo, closely followed by Mobil and Texaco. Beyond size, the top nine’s crude import slates had little in common (Figure 62). (Note: imports made by joint venture refining companies are combined with those of the U.S. based parent company most responsible for supply, i.e. Star with Texaco, Lyondell and Unoven with Citgo, the wholly-owned U.S. subsidiary of PDVSA, and Deer Park, a limited partnership of Pemex with Shell Oil, with Shell Oil.) Many, frequently interdependent, factors contributed to this lack of homogeneity. The most obvious one is ownership/vertical integration through a joint venture relati onship with a producer, because this resulted in importers that were especially single minded about their crude sources:

! Citgo : Last year, 85 percent of its crude imports were from Venezuela. Another 7 percent were from Mexico, indicating that Citgo was already capable of running an unusually heavy slate. This year, with Lyondell’s new coker up and running, the proportion of heavy, Latin American crudes could move even higher.

! Texaco : Its joint venture partner in Star is Saudi Arabia, which accounted for three quarters of Texaco’s imports in 1996. Such a strong link with a long-haul supplier

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 30.25 30.50 30.75 31.00 31.25 31.50 31.75 32.00 32.25 32.50 32.75



# 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60API Gravity in DegreesSulfur in Percent 

# Gravity Refinery Inputs Gravity Imports Sulfur Refinery Inputs Sulfur Imports

Citgo Mobil Texaco Amoco Exxon Chevron Sun Co Shell Koch 

# 0 100 200 300 400 500 600 700 800

AAAA A AAA A AAA AAAAAAA AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAA AAAAAAA AAA
AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAAAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAAA AAAA AA

A AAA AAAA AAAAAAA AAA

AAAA AAAA AAAAAAA AAA AAA

A AAA AAAA AA A AAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAAAAA

AAAAAA AAAAAAA

AAAA AAAAAAA AAA A AAA A AAA AAAA AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

A AAA AAAA AA A AAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A

AAAA AAAA AAAAAAA AAA AAA

AAAA AAAAAAA AAA

AAAA AAAA AAAA AAAA AAAA
AA A A A A A A AA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA AAAAAAA

AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA

A AAA A AAA AAAA AA A AA A AAA AAAA AAAA AAAA AAAAAAA AA A AA A AAA

AAAA AAAA AAAAAAA AAA AAA

AAAAAAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AA A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A A AA AAAA AAAA AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA

AAAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA A AAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA
AAA AA A AA A AA A AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA

A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AA A AAAA AAAA AA A A

AAAA AAAA AAAA AAAAAAA AA A AA A AAA AAAAAAA AAAAAAA
AAAAAAA

AAAAAA

AAAA AAAA AAAA AAAA AAAA
AAA AAA AAA AAA AAA

AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA AAAA

AAA AA A AA A AA A AA A AA A AA A AA A AA A AA A AAA

AAAA AAAAAAA AAA AAAAAAThousand Barrels per Day AAA AAA AAA

AAAA AAAA AAAA

AAAA AAAA AAAA AAAA

AAAA AAAA AAAA

AAAA AAAA AAAA

AAAA AAAA AAAA 

# Venezuela Mexico Other Latin America Canada Africa North Sea Saudi Arabia Rest of World

Energy Information Administration / Petroleum 1996: Issues and Trends 81 

# Figure 61. Quality Trends in U.S. Crude Oil Imports and Refinery Inputs

Sources: Import Data: Energy Information Administration (EIA), derived from Form EIA-814. Refinery Inputs: EIA, Petroleum Supply Annual (1986-1995) and EIA, Petroleum Supply Monthly (March 1996-February 1997).


# Figure 62. U.S. Crude Oil Imports by the Top Nine Importing Refiners and by Supply Region, 1996

Source: Energy Information Administration, Form EIA-814 data.

# 82 Energy Information Administration / Petroleum 1996: Issues and Trends 

# could be a competitive disadvantage in a U.S. market they lead or lag stock policy, and by how much, is a function dominated by short-haul imports. of price, particularly the inter-month spreads, as well as

! Shell Oil : Its joint venture arrangement with Pemex at its supply disruptions (see Chapters 5 and 6). Deer Park refinery included installation of a new coker. Last year, two thirds of its imports were from Mexico. The others on the Top Nine list have more diverse crude import portfolios, but the factors driving many of the choices are still frequ ently easy to determine. These factors include:

! Location is why Koch Industries took half its crude from Canada. Its main refinery in Minnesota has gained significant competitive advantage from maximizing its use of Canadian Heavy, which has frequently traded in a buyer’s market. Amoco and Mobil’s propensity for Canadian crude has the same derivation.

! Equity p roduction — either present or past — is why Amoco is the only significant importer of Trinidadian crude, and Chevron and Exxon are the largest importers from Saudi Arabia after Texaco/Star.

! Refinery configuration constraints mean Sun’s slate is dominated by West African and North Sea crudes because its refineries are relatively simple by U.S. standards. Sun adopted a policy last year of minimizing capital investment, dropping out of the asphalt market, and restricting its crude slate to quality crudes. Sun would probably have had the company of one other light sweet oriented importer on the Top Nine list if either British Petroleum had not sold its Marcus Hook, Pennsylvania, refinery to Tosco in February 1996, or Tosco had chosen to run it last year. But that would still place such importers in the distinct minority. If size is in any sense an indicator of success, then this analysis confirms a strong correlation between success and the ability to run significant proportions of poor quality, imported crudes. The list of the largest crude importers has changed over time as mergers and acquisitions have reshaped the downstream sector. With a new wave of restructuring sweeping through the industry, further changes are inevitable. In particular, the top nine importers, whoever they are, will become even more dominant. 

# Seasonality of Imports U.S. crude oil import requirements are seasonal (Figure 63), tied to, but not precisely in step with, the seasonality of U.S. oil consumption. Since imports are the marginal source of supply for the U.S. market, they can be thought of as an indicator of both refinery runs and consumption. Whether other factors, such as refinery turnarounds, accidents, and
In general, the volume of total and of the better quality, light sweet crude imports varies seasonally. U.S. consumption’s summer peak is driven primarily by gasoline, as people take to the road during the traditional vacation season. This peak consumption coincides with the tightest seasonal quality specifications for gasoline, and presents a challenge to the U.S. refining sector, for which its upgrading capacity for the cheaper, poorer quality crudes is inad equate, even when fully utilized and with no turnarounds. Refiners turn for their marginal barrel to grades with a naturally high gasoline fraction, which means they turn to the light sweet crudes. U.S. consumption is counter sea sonal to global consumption, which is strongly winter peaking, with a 3-4 million barrel a day swing from quarterly peak to trough. These regional differences cause crude flows to swing west into the Atlantic Basin in the spring and summer, and east into the Pacific Basin in the winter. Such flows are accompanied by, if not initiated by, swings in relative crude prices. This causes the relative strength in U.S. domestic crude prices that typically occurs in the spring and early summer. With the U.S. particularly dependent at that time of year on light sweet crudes, that relative strength is most pronounced for grades such as the U.S. marker crude, West Texas Intermediate (WTI). In years when mid-continent crude stocks are low, or pipeline capacity is tight, the result can be price spikes and disconnects with world prices. 

# Crude Oil Exports
Crude oil exports play a minor role in the U.S. crude oil balance, averaging just 100-200 thousand barrels per day since 1985 (Figure 64), because they have essentially been banned for most grades most of the time. However, even if there were no restrictions at all, the status of the U.S. as the world’s largest net importer of crude would ensure that exports would remain small in almost all circumstances. 

# Export Ban Diverted Alaskan Oil to East of the Rockies and the Virgin Islands This would not entirely have been the case when Alaskan North Slope (ANS) production was in its prime. Its substantial West Coast surplus would have moved primarily to Asia if normal supply economics had applied. Instead, an ANS-specific export ban meant effectively that it could only

# Jan Apr Oct DecJan Apr OctDecJan Apr OctDecJan Apr Oct DecJan Apr Oct Dec 

# 0 2,000 4,000 6,000 8,000 10,000



# 1996M illion Barrels per Day 

# Sweet Sour



# 1994 1993 1992 1995



# 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 50 100 150 200 250Thousand Barrels per Day 

# PADD 5 Other

Energy Information Administration / Petroleum 1996: Issues and Trends 83 

# Figure 63. Quarterly Volumes of U.S. Crude Oil Imports by Sulfur Content

Source: Energy Information Administration, Form EIA-814 data.


# Figure 64. U.S. Crude Oil Exports by Exporting Region, 1985-1996

Sources: Energy Information Administration (EIA), Petroleum Supply Monthly and EIA, Petroleum Supply Annual (various issues).

# 84 Energy Information Administration / Petroleum 1996: Issues and Trends 

# be moved either east of the Rockies or, under a special barrels per day in the previous three and a half years; and exemption for U.S. territories and possessions, to the Virgin significant parcels of ANS have moved to four Asian Islands or Puerto Rico –- with both the latter still counting as c ountries, altho ugh these movements have been intermittent exports in the statistics. None of these destinations would except for the 50 thousand barrels per day to Korea. have been natural choices in a free market because of the significant freight costs attached to such moves due to either The ongoing decline in the West C oast surplus of ANS crude Jones Act restrictions or sheer distance. For example, the was gradually eroding ANS in-transit stocks of this crude. voyage from Valdez, Alaska to the Virgin Islands is the Lifting the export ban has caused a further, sharp reduction longest regular voyage in the world oil market, covering since ANS in transit overseas to destinations other than the around 15,000 (nautical) m iles and taking up to 50 days. But Virgin Islands is not included in this calculation. This all these markets, particularly the Virgin Islands, helped at contributed to the exceptionally low crude stock levels seen times to incr ease the producers’ total net revenue relative to in the U.S. in 1996 (see Chapter 5). the alternatives of either swamping the West Coast or limiting ANS production. It was therefore ANS flows to the Virgin Islands that accounted for the overwhelming majority of U.S. crude oil exports o ver the last decade, which is also why almost all exports flowed out of the West Coast. And it was primarily the decline in both ANS and Californ ian production, together with the increased flexibility of West Coast refiners to run greater volumes of these poorer quality crudes, that led to the halving of exports in the second half of the 1980’s. 

# With the Ban Lifted, Alaskan Crude Is Moving to Asia After nearly twenty years of production, and with volumes only 70 percent of peak flows, a Bill lifting the ban on ANS exports was finally passed in November 1995 and implemented in July 1996. On the surface, nothing appears to have changed, with ANS e xports in 1996 equal to those in 1995. But the absence of any increase is due to the continuing decline in ANS production, which was down another 90 thousand barrels per day in 1996. The new reality is being reflected in the flows. Waterborne, and almost all pipeline, flows of ANS to the Gulf Coast have ceased; exports to the Virgin Islands have plunged to 10 thousand barrels per day in the last five months from over 90 thousand 

# Non-ANS Exports Are Minor The non-ANS component of U.S. exports has included intermittent, m inor flows from other special case sources on the West Coast, such as Cook Inlet production from Alaskan state waters and, since 1991, Californian heavy crude. There has also usually been some U.S. crude moving north by pipeline or truck into eastern Canada. The very modest baseload comes from production near the border, augmented, when the economics are favorable, by more widely traded crudes like West Texas Intermediate. (Note that crude oil in transit through the U.S. for Canada, such as via the Portland pipeline to Montreal, does not show up in these export statistics.) 

# U.S. Crude Exports Will Always Be Modest As Asian refiners adjust to ANS crude, become more comfortable with U.S. tanker legislation, and more market oriented as their markets become more open, then crude oil exports from the U.S. could temporarily grow modestly again. But U.S. exports will never be a significant force in world crude markets.

# Energy Information Administration / Petroleum 1996: Issues and Trends 85 

# Stocks are needed to keep petroleum supplies moving smoothly from wellhead to end user. As an immediate source of supply, stocks provide a cushion against normal and unexpected demand and supply fluctuations. Crude oil, d istillate, and total gasoline stocks dropped in 1995 and reached new lows in 1996, drawing attention to the long-term downward trend. This led to questions as to w hether the lower stocks caused greater price volatility, whether the stock cushion was adequate (particularly in light of more efficient industry operations), whether the reformulated gasoline program in 1995 influenced stock levels, and whether the decline in stocks is short lived or lasting. The following chapter reviews the trends in EIA's comprehensive survey data on petroleum stocks in conjunction with other information on prices and industry activity to provide the background required to begin answering these questions. This chapter also identifies and assesses the short and long term factors that influence stock levels. 

# 5. Petroleum Stocks: Causes and Effects of Lower Inventories

Introduction Total U.S. gasoline stocks have been shrinking since the early 1990s. Near the be ginning of 1995, stocks of crude oil, distillate, and gasoline started to decline so precipitously that, by May of that year, stocks fell below the 1991-1995 average level and have yet to recover (Figure 65). In March 26 

# 1996 crude oil, distill ate, and total gasoline inventories were 593 million barrels, the lowest recorded in more than 15 years. When stocks are low, demand surges or supply shortfalls cause buyers to turn to spot markets for immediate supplies while waiting for production and/or imports. During such times, buyers tend to bid up prices to assure supply in a tight market. This occurred in spring 1996 when low crude oil, distillate, and total gasoline inventories forced refiners and marketers to rely more heavily on spot markets to meet unexpected heating oil and seasonally rising gasoline demands. This event contributed to the rise in the price of crude oil. 27


# Table 6 shows the recent changes in petroleum stocks disaggregated by type (crude oil, distillate, and total gasoline), industry sector (mainly refineries, tank farms/bulk terminals, and pipelines), and Petroleum Administration for Defense District (PADD). Of the 64-million-barrel 1994 to 1996 decline in stocks, the greatest volumetric decrease occurred in crude oil (32 million barrels) while the greatest percentage decline occurred in distillate (15 percent). Much of the decline in crude oil, distillate, and total gasoline stocks occurred at bulk terminals/tank farms where more discretionary stocking takes place. The drop in stocks is most evident in PADD I (East Coast), where consumption is concentrated, and PADD III (Gulf Coast), a major refining area. Prior to 1995, it was refinery closures, caused in part by the decontrol of the oil industry, that had the most important impact on petroleum stocks. Between 1981 and 1986, 108 refineries closed and inventories declined as the storage capacity associated with these facilities was decommissioned. Since the beginning of 1995, price risk, where the commodity stored is expected to be less valuable in the future because prices are overvalued in the present, appears to be one of the most important factors behind the reduction in stocks. Poor profitability, driven by low gross refining margins, also contributed to the drop in inventories. The forces that influence petroleum inventory levels can be divided into two categories. The first category consists of short term forces that influence refiners’ (and to some extent, marketers’) day-to-day decisions concerning inventory levels. These forces include current and expected prices, refining margins, the cost of storage, and the risk of stockouts, along with seasonal changes in product demand levels. The second category includes long term forces such as increased offshore stocks, enhanced inventory management through improved information technology, consolidation of petroleum storage facilities, the shift to short- haul crude oil sources, the introduction of clean products, and the change in secondary stocks. 28



# Only crude oil, distillate, and total gasoline (finished gasoline plus 26 

# blending components) stocks are addressed in this analysis. Excluded are stocks of all other petroleum products including jet fuel, residual fuel oil, and propane. Stocks held in the Federally owned Strategic Petroleum Reserve (SPR) are discussed separately (see box, p. 87). U.S. Department of Energy, An Analysis of Gasoline Markets Spring 27 

# 1996, DOE/PO-0046 (Washington, DC, June 1996), p. 4. Primary stocks include crude oil or petroleum products held in storage 28 

# at leases, refineries, natural gas processing plants, pipelines, tank farms, and bulk terminals that can store at least 50,000 barrels of petroleum products or that can receive petroleum products by tanker, barge, or pipeline. Secondary stocks include stocks at facilities having less than 50,000 barrels capacity or supplied strictly by tanker truck. Tertiary stocks are stocks held by end users.

# 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 

# 0 600 650 700 750 800 850 900Million Barrels 

# Total

5-year Average

86 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 65. Aggregate Crude Oil, Distillate, and Total Gasoline Stocks , January 1981-December 1996 1 

# (Million Barrels)

Includes crude oil, distillate, and total gasoline (finished gasoline plus blending components) only. 1 

# Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” EIA-812 “Monthly Product Pipeline Report,” and EIA-813 “Monthly Crude Oil Report.”


# Table 6. Crude Oil, Distillate, and Total Gasoline Inventories by Industry Sector and PADD, 1994-1996 (Million Barrels)

1994 1995 1996 (1996-1994) Difference
Petroleum Type - Total 676 654 612 -64 Crude Oil 336 322 304 -32 Distillate 126 126 107 -19 Total Gasoline 214 206 201 -13 1 

# Crude Oil, Distillate and Total Gasoline Stocks by Industry Sector 2 

# Refineries 208 206 195 -13 Bulk Terminals 155 149 131 -24 Pipelines 77 78 77 0 Crude Oil Tank Farms and Pipelines 198 184 177 -21 Crude Oil Leases 18 17 17 -1 Alaska Crude Oil in Transit 20 21 15 -5 Crude Oil, Distillate and Total Gasoline Stocks by PADD East Coast (I) 128 124 106 -22 Midwest (II) 159 154 145 -14 Gulf Coast (III) 253 239 231 -22 Mountain (IV) 21 21 20 -1 Pacific (V) 115 115 110 -5 Finished gasoline plus blending components. 1 

# In other published EIA data, bulk t erminals that make finished gasoline by mixing blend stocks and/or oxygenates are included in the “Refinery” 2 

# category. In the following entries, EIA data for di stillate and gasoline were adjusted by removing the stocks these blenders report from the “Refinery” category and including the volumes in the “Bulk Terminals” category. Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” EIA-812 “Monthly Product Pipeline Report,” and EIA-813 “Monthly Crude Oil Report.”

# Energy Information Administration / Petroleum 1996: Issues and Trends 87 

# The Status of the U.S. Strategic Petroleum Reserve The Strategic Petroleum Reserve (SPR) was created pursuant to the Energy Policy and Conservation Act of 1975 to mitigate the impact of disruptions in petroleum supplies and to carry out obligations of the United States under the Agreement on an International Energy Program. The reserves can be drawn down when the President determines that an energy supply emergency exists or could exist, and is of significant enough nature to adversely affect the economy. The SPR facilities are designed to hold 680 million barrels of pet roleum in three storage complexes in Texas and Louisiana. The SPR crude can be delivered to refineries in the Gulf Coast and Midwest through various connections to the U.S. petroleum pipeline network. The SPR crude can also be delivered by tanker or barge. 

# Persian Gulf War On January 16, 1991, in conjunction with the beginning of Operation Desert Storm, President Bush ordered a drawdown and distribution of SPR petroleum as part of a coordinated plan agreed to by member countries of the International Energy Agency. The Department of Energy issued a Notice of Sale for 33.75 million barrels. 28 

# In total, 17.2 million barrels of oil was sold from the SPR to a total of 13 purchasers between January 17 and March 31, 1991. This event marked the first emergency draw down and sale of SPR oil. Even though the volumes sold were small, the use of the SPR at the onset of Operation Desert Storm provided an instantaneous counter force to expected market panic. 29 

# Current Sales and Stock Levels In 1996, under Congress ional direction, the U.S. Department of Energy sold 5.1 million barrels of petroleum from Weeks Island to 4 buyers between February 26 and March 21. The proceeds from the sale, totaling $97 million, were used to relocate oil from the geologically unstable Weeks Island facility. Again in May, pursuant to the Fiscal Year 1996 bu dget bill, the U.S. Department of Energy undertook an expedited release of up to 15 million barrels to raise an additional $227 million. The expedited nature of the sale was in response to the increase in petroleum prices in Spring 1996. Between April 29 and mid-May, the announcement of this sale along with other factors lowered petroleum prices by $1.60 per barrel. The last contract under this sales effort was awarded in August. In 30 

# total, the government sold 12.8 million barrels of petroleum from SPR at an average price of $17.77 per barrel to 9 companies. The Fiscal Year 1997 appropriations act directed the sale of SPR oil to raise $220 million to fund the Reserve’s facility requirements for that year. Sales pursuant to this act began in October and ended December 1996 with 10.2 million barrels sold for $220.6 million. Following these sales, the Reserve had an inventory of approximately 563 million barrels of oil, enough to cover 66 days of net U.S. oil imports. Commercial petroleum and product stocks add another 109 days. The total, 175 days, is well in excess of the 90 minimum required in the Agreement on an International Energy Program. The U.S. ability to cover its agreement is negatively affected by the expected growth in imports and the decline in commercial stocks, as well as sales from the SPR.

U.S. Department of Energy/Office of Fossil Energy, Strategic Petroleum Reserve Quarterly Report, DOE/FE-0220P-1 (Washington, DC, May 15, 1991), 28 

# p. 7. Petroleum Intelligence Weekly, “President Clinton and How Not to Use the SPR,” Vol. 35 #19 (May 6, 1996), p. 7.

29 

# U.S. Department of Energy, An Analysis of Gasoline Markets Spring 1996, DOE/PO-0046 (Washington, DC, June 1996), p. 7. 30

# 88 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Background Inventories are necessary to ensure the uninterrupted operation of each step of the petroleum supply system from wells and seaports through refineries to wholesalers and retailers and, ultimately, the consumer. Refiners use inventories as a means to improve production scheduling, and suppliers use inventories to buffer against expected and unexpected supply or demand variations. Inventories can also serve as a hedge against price fluctuations. The focus of this analysis is on primary stocks, the target of EIA data collection efforts. Stocks in secondary and tertiary (end user) storage facilities are excluded from this analysis. EIA collects data on crude oil stocks for four segments of the industry: refining, tank farms and pipelines, production lease sites, and Alaskan supplies in transit. Crude oil is first stored in tanks that accumulate oil from producing wells. The volumes held on the leased property awaiting transportation are included in EIA’s “leases” category. Small pipelines or tank trucks collect the crude oil and deliver it to intermediate storage for pooling before transport via major pipelines. Large diameter pipelines carry the crude oil to hubs, focal points for a number of pipelines, where the crude oil is collected for batching and redistribution to other pipelines. The volume of crude oil progressing through the pipeline system is included in EIA’s “pipeline fill” category. Tankers deliver crude oil imports to marine terminals and refineries. The volumes associated with this activity are included in EIA’s “tank farm” and “refinery” categories, along with domestic volumes. Storage is required at this juncture because tankers are off-loaded at a rate that differs from the rate of crude oil input to refineries. Also included 31 

# in EIA’s inventory statistics is Alaskan crude oil being shipped to the lower 48 states, Hawaii, and the U.S. Virgin Islands, referred to as “Alaska in Transit.” Segregation of crude oil by quality necessitates substantial storage capacity throughout the supply system. 32 

# EIA collects data on distill ate and gasoline stocks from three segments of the industry: refining, bulk terminals, and pipelines. Domestic supplies of distillate and gasoline are produced mainly in the Mid-Atlantic, upper Midwest, California and the Gulf Coast, with the Gulf Coast producers acting as the supplemental suppliers to the Northeast and Midwest. In 1996, Gulf Coast production accounted for around 60 percent of the distillate and gasoline consumed in PADD I and ar ound 15 percent of the distillate and gasoline consumed in PADD II. Depending on price incentives, imports can also supplement these supplies. Taken together, crude oil, gasoline, and distillate inventories are usually at an annual peak in November as the heating season gets underway. As indicated in Figure 66, distillate stocks show more seasonality than crude oil and gasoline. Much of the variation in distillate demand results from the demand for heating oil, which accounted for a little over one third of total distillate fuel oil demand in 1996. In particular, PADDs I and II increase their demand for heating oil considerably during the winter because central heating systems that use heating oil are concentrated in those regions. PADD I swings from about 30 percent of total U.S. distillate demand in the summer to as much as 50 percent of U.S. demand in the coldest months (usually January through March). Stocks are especially important to winter distillate supply. During the winter months, stocks represent 12 percent of demand. The remainder of distillate consumption is in the form of diesel fuel for transportation applications, which has a flatter usage pattern over the course of the year, but cycles that run counter to the heating oil consumption pattern. In total, distillate stocks usually peak in November in preparation for high winter demand. By contrast, all gasoline is consumed in the transportation sector. This fact introduces a different set of seasonalities. Gasoline consumption peaks during the summer vacation period and drops off in the winter as weather conditions inhibit travel. Therefore, gasoline stocks are high in January and February, when demand is low and supplies are produced as a by-product of distillate production. Gasoline stocks are normally depleted at the primary level in August, near the end of the driving season. Crude oil does not show as much seasonality as distillate and gasoline. Whatever seasonality is present is driven by combined gasoline and distillate demand. According to data for the 1991-1995 period, crude oil stocks peak in May to assure that enough feedstock is on hand during the busy "Very Large Crude Carriers” (VLCC’s) and “Ultra Large Cargo 31 

# Carriers” (ULCC’s) carry up to 4 million barrels of crude oil and can be offloaded at rates that exceed 500 thousand barrels per day. The average refinery processes about 100 thousand barrels per day. Storage is required due to the differences in these rates. National Petroleum Council, Petroleum Storage and Transportation, 32 

# Volume IV (Washington, DC, April 1989), p. 21-28.

# 1981198219831984198519861987198819891990199119921993199419951996 

# 0 100 200 300 400 500Million Barrels



# Distillate Total Gasoline

Crude Oil

Energy Information Administration / Petroleum 1996: Issues and Trends 89 

# Figure 66. Crude Oil, Distillate, and Total Gasoline Stocks, January 1981-December 1996 (Million Barrels)

Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” EIA-812 “Monthly Product Pipeline Report,” and EIA-813 “Monthly Crude Oil Report.”



# gasoline season. By December, crude oil stocks are depleted when it b ecame appa rent that other countries could make up for physical and operational reasons. the crude oil that would no l onger be supplied by Kuwait and


# Crude Oil A closer look at crude oil stocks reveals a generally declining trend in the early 1980's (Figure 66). This decline coincided with the permanent closure of 108 refineries between 1981 and 1986. In the ensuing nine years, crude oil stocks remained fairly constant with two notable exceptions. Crude oil stocks rose in July 1987 and stayed high for a year because of the bargain prices brought on by OPEC overproduction and discount pricing. A contributing factor may have been the rising political tensions in the Persian Gulf that portended a possible supply disruption and higher prices. In March 1990, U.S. crude oil inventories jumped 31 million barrels to a level 13.6 percent higher than the previous year, due to the expectation of rising crude oil prices. Stocks stayed at or above the average 1991-1995 level after the August 2, 1990 I raqi invasion of Kuwait until late fall 1990, Iraq. During 1995 and 1996, crude oil stocks dropped precipitously mainly due to high winter 1995-96 demand and relatively high crude oil prices combined with an expectation for price decreases in the future and low refining margins. The following sections describe where the declines in inventory occurred. Looking beyond seasonal ups and downs, days supply of 33 

# crude oil reveals a different pattern of near constant decline (Figure 67). Although crude oil input to refineries has increased by an average of almost 1 percent per year since 1981, days supply of crude oil in inventory has gradually decreased because stocks have failed to keep pace with the growth of inputs to refineries. In 1996, there were an average 22 days supply of crude oil resident at various segments of the industry compared to 24 at the end of 1994.

Days supply of crude oil is defined as end-of-month inventory divided 33 

# by the following month’s crude oil input to refineries. Not all of this volume is available as input to refineries.

# 1981198219831984198519861987198819891990199119921993199419951996 

# 0 20 40 60 80 100Days 

# C rude Oil D istillate To tal G as oline

90 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 67. Days Supply of Crude Oil, Distillate, and Total Gasoline (Days)

Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” EIA-812 “Monthly Product Pipeline Report,” and EIA-813 “Monthly Crude Oil Report.”



# Crude Oil Stocks Declined at Tank Farms Stocks in EIA’s tank farms and pipelines category represent almost 60 percent of all crude oil held in inventory (Table 7). These stocks declined 14 million barrels during 1995 and a further 7 million barrels in 1996. A considerable portion of the reduction was recorded in PADDs III and V, where crude oil is produced domestically. The decline in this category is more appropriately associated with tank farms. Stocks at pipelines represent pipeline fill and, therefore, are operational (rather than discretionary) in nature. As such, pipeline fill stays fairly stable from year to year. Almost a third of all crude oil stocks are maintained at refineries. These stocks were essentially unchanged during 1995, but then decreased 5 million barrels in 1996. The decline was spread fairly evenly across the PADD regions. This reduction translated into lower days supply of crude oil in inventory. Several big refiners pared back to 4 to 5 days of supply on hand. The average for all refiners was 6 days 34 

# at the end of 1996, down from 7 at the end of 1994. With the lower stocks, refiners risked cuts in refining runs when supply disruptions occur. In January 1996, a reduction in refinery runs was forced on a number of Gulf Coast refiners when imports from Mexico and the North Sea were briefly disrupted at the end of the previous year. 35 

# The crude oil stored on leases awaiting transportation is recorded in EIA’s “Leases” category. The drop in domestic production has resulted in less inventory being held at produc tion leases. These stocks decreased from 18 million barrels in 1994 to 17 million barrels in 1995, and remained at 17 million barrels in 1996. A drop-off in crude oil deliveries from Alaska to refiners in Hawaii, California, the Gulf Coast, and the U.S. Virgin Islands was evident in 1996, when a decline from 1994 of roughly 5 million barrels in stocks was recorded (Table 7). 36 

# Apart from the normal variation in this series, deliveries of Alaskan crude oil to the Far East started in July 1996 at a rate that averaged 73 thousand barrels per day through the end of the year, providing the basis for some of this decline.

Petroleum Intelligence Wee kly, “Refiners Test Limits of Lean Inventory 34 

# Strategy,” Vol. 35 #03, (January 15, 1996), p. 1. Petroleum Intelligence Wee kly, “Refiners Test Limits of Lean Inventory 35 

# Strategy,” p. 1. A company was added to the survey frame in 1994 resulting in a higher 36 

# estimate for Alaskan crude in transit compared to 1993.

# Energy Information Administration / Petroleum 1996: Issues and Trends 91 

# Table 7. Average Crude Oil Inventories by Industry Sector (Million Barrels)
Sector 1994 1995 1996 Difference (1996-1994) Refiners 100 100 95 -5 Tank Farms and Pipelines 198 184 177 -21 Leases 18 17 17 -1 Alaska in Transit 20 21 15 -5 Total 336 322 304 -32 Note: Totals may not equal sum of components due to independent rounding. Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,”and EIA-813 “Monthly Crude Oil Report.”


# Crude Oil Stocks Declined in Gulf Coast Area
Of the 32 million barrel decline in crude oil inventories from 1994 to 1996, 19 million barrels occurred in PADD III, the Gulf Coast area (Figure 68) where crude oil production and refining are concentrated. Some of the 7 million barrel drop in PADD II (Midwest) stocks may be related to a reduction in stocks in Cushing, Oklahoma, the spot market for sales of West Texas Intermediate crude oil. Days supply of crude oil varies from PADD to PADD. The regional difference can be traced as far back as 1981. In 1996, PADD I, the East Coast, had 11 days of crude oil supply, while PADD V (West Coast) had 28 days supply. The average for all PADDs was 21 days. One explanation for this difference is the lack of oil production (and the associated stocks at leases, tank farms and pipelines) in any significant volumes in PADD I. Furthermore, PADD I receives all of its supplies by tanker or barge that, unlike pipeline supplies, are unaccounted for in EIA’s data collection efforts while in transit. Over 90 percent of the 37 

# crude oil inventories in PADD I are stored directly at refineries, compared to less than a third in other PADDs.


# Distillate During the early- to mid-1980's, distillate stocks were on a prices. Average distillate stock levels for 1996 finished 19 generally declining path (Figure 66) due largely to petroleum million barrels below the 1994 level. industry downsizing. In the late 1980's, three consecutive winters with unusually cold weather produced unexpected In terms of days supply, inventories of distillate have 38 

# demand for distillate that was supplied largely through decreased slowly since 1981, due to an ever increasing inventory withdrawals and resulted in historically low demand for this pr oduct (Figure 67). This decline accelerated inventory levels. The following two winters were warmer than normal, causing a decline in demand and, thus, requiring less from inventory. By 1993, prices for distillate were expected to rise with the introduction of low sulfur diesel in October 1993. The incre ase in price induced a stock build at a time when environmental regulations imposed by the Clean Air Act Amendments of 1990 reduced the fungibility of diesel fuel and heating oil inventories. While the loss in fungibility may have increased stocks for a while after the introduction of the low sulfur diesel fuel, other market forces have acted to lower distillate stocks from levels seen before the introduction of the new product. The decline in inventories that started in 1995 accelerated in 1996 when cold weather in January and February forced refiners to place a huge call on distillate inventories, leaving those inventories well below the 1991-1995 average. A late cold spell in April 1996 drove distillate demand to relatively high levels at a time when gasoline production should have been rising and distillate production declining. Strong diesel demand in the summer of 1996, attributable in part to robust economic growth, slowed the normal seasonal rebuilding of distillate stocks. Distillate production and imports were strong but not strong enough to rebuild stocks to the 1991- 1995 a verage levels. The lack of normal storage replenishment in July, historically the biggest build month of the year, began to raise concerns. Through the end of the year replenishments were smaller than normal as prices for distillate in the future were expected to be less than current

in 1996. As Figure 67 illustrates, the days supply for distillate is higher than for either crude oil and gasoline, primarily due to the more seasonal nature of distillate consumption. Also, a large share of distillate consumption takes place away from the Gulf Coast refining center, The one exception is supplies from Alaska, referred to as “Alaska In 37 

# Transit”, which are included as such in totals for PADD V. The winters of 1987-1988 and 1988-1989 were colder than normal, and 38 

# a severe cold shock occurred during December of the winter of 1989-1990.

# 1994 1995 1996 1994 1995 1996 1994 1995 1996 0 20 40 60 80 100 120 140 160 180 200

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AA AA AA AA AA AA AA AA AAMillion Barrels AAAA AAAA AAAA AAAA

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# I II III IV V 

# PADDs Distillate Gasoline Crude Oil

92 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 68. Crude Oil, Distillate, and Total Gasoline Stocks by PADD Region, 1994-1996 (Million Barrels)

Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” EIA-812 “Monthly Product Pipeline Report,” and EIA-813 “Monthly Crude Oil Report.”



# necessitating proportionately more stocks in reserve. In little discretionary storage capacity in comparison to bulk 1996, the industry had an average of 33 days supply of terminals which are sized to accommodate large seasonal distillate on hand at various segments of the industry. swings in supply and demand. Furthermore, bulk terminal


# Distillate Stocks Declined at Bulk Terminals Looking at the distillate primary inventory series , several 39 

# things are clear (Table 8). Pipeline and refinery inventory levels changed very little compared to bulk terminal inventories. Due to the physical and operational requirements, pipeline fill rarely shows a significant change. Much of the stocking done at refineries is operational in nature, as well, with tanks collecting distillate production to create batches for shipping. As such, refineries have very operations seem to be the target of cost-cutting efforts because of the direct variable costs associated with storage in this segment of the logistics system. Unlike storage space at refineries or in pipelines, which is viewed as a sunk cost and does not represent either a direct expense or opportunity cost to refiners (apart from the interest costs of carrying working capital), storage at bulk terminals has a variable cost of about 1 cent per gallon per month. 40 

# Although not indicated in Table 8, U.S. distillate inventories were low in 1989, much of which can be attributed to a reduction in bulk terminal holdings. After that, bulk terminal inventories increased, perhaps in response to the shortages that occurred at the end of 1989. The overall distillate inventory decrease in 1996 occurred primarily at bulk terminals. EIA collects primary inventory data from three groups of petroleum 39 

# product inventory holders: refiners, pipelines, and bulk terminals. Included in the “Refinery” category are bulk terminals that make finished gasoline by mixing blend stocks and/or oxygenates. These facilities are required by EIA EIA calculation based on discussions with energy industry sources. to report their inventories as “Refinery” inventories using the EIA-810 Form, These costs are not completely variable in that each gallon not stored leads “Monthly Refinery Report.” Although blending operations do not affect the to a penny saved; some contract terms require a lease of multiple weeks or middle distillates, EIA data are adjusted in the following section so that the months regardless of whether the tankage is used. Furthermore, in order for distillate stocks these blenders report are included in the “Bulk Terminal” the facility to remain economically viable, sometimes fixed tankage costs category. The purpose of this is to more accurately reflect operations. have to be prorated to a smaller stored volume. 40

# Energy Information Administration / Petroleum 1996: Issues and Trends 93 

# Table 8. Average Distillate Inventories by Industry Sector (Million Barrels)

Sector 1994 1995 1996 (1996-1994) 1 

# Difference Refinery 34 32 31 -3 Bulk Terminal 67 68 51 -17 Pipeline 25 26 25 1 Total 126 126 107 -19 In other published EIA data, bulk terminals that make finished gasoline by mixing blend stocks and/or oxygenates are included in the “Refinery” 1 

# category. In the following entries, EIA data were adjusted by removing the gasoline stocks these blenders report from the “Refinery” category and including the volumes in the “Bulk Terminals” category. Note: Totals may not equal sum of components due to independent rounding.Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” and EIA812 “Monthly Product Pipeline Report.”


# Distillate Stocks Declined on the East Coast
Distillate inventories at bulk terminals did not decline uniformly throughout the U.S. Much of the change occurred in PADD I, the East Coast, where there is a concentration in bulk terminals (Figure 68). The seasonal swings in total U.S. distillate inventories are mainly due to the seasonal swings in PADD I. The annual U.S. inventory average had shown an increase from 123.2 million barrels in 1989 to 136.3 million barrels in 1990. The year-to-year change in PADD I, where these inventories increased by about 15 million barrels, alone accounted for more than the U.S. total build. In 1994, distillate stocks in PADD I (and the nation as a whole) were high, and a modest draw down occurred over the winter of 1994-95. With little need to build stocks, refiners drew off the excess and entered the winter of 1995- 96 slightly below average. A combination of extended cold weather in winter 1995-96, high diesel demand, high crude oil prices, and expectations that prices would be falling depleted stocks and discouraged rebuilding. The annual averages for U.S. distillate stocks declined from 126 million barrels in 1994 to 107 million barrels in 1996. Eighty percent of the change was recorded in PADD I. Days supply of distillate for the PADDs I, II, and III, which are integrated by the pipeline system that connects the refineries in PADD III with the cons umption areas in PADDs I, II, and III, averaged 33 days in 1996. In 1994, the eastern half of the country averaged 42 days supply and 41 days in 1995. The western half of the country had 27 days supply in 1996 compared to 29 days in 1994. This calculation is influenced by the close proximity of refining and consumption in California. 

# Motor Gasoline Like crude oil and distillate, gasoline stocks were on a generally declining path in the early 1980's (Figure 66) because of petroleum industry downsizing. This downward trend continued in the 1990's, with significant declines observed during the early 1990's and a gain in 1995 and 1996. Almost one-half of the decline between 1990 and 1996 in total domestic gasoline stocks occurred in 1990 and 1991 when crude oil and petroleum product prices rose and gasoline demand fell. Between July 1990, just before Iraq invaded Kuwait, and September 1990, the world price of crude oil climbed from about $16 per barrel to $36 per barrel. The wholesale price of gasoline rose from 70 cents 41 

# per gallon to almost $1 per gallon over this same period. The high product prices in the second half of 1990 and the economic recession that lasted through most of 1991 caused gasoline demand to decline from an average 7.3 million barrels per day in 1989 to an average 7.2 million barrels per day in 1992. Total gasoline inventories during 1991 averaged about 16 million barrels less than inventories during 1990. Between 1992 and 1993, inventories of total gasoline slowly recovered. This occurred despite a large drawdown of finished gasoline inventory during the third quarter of 1992 to prepare for the first winter season for oxygenated gasoline. Tanks of conventional unleaded gasoline were emptied to make room for oxygenated gasoline. The third quarter stock draw was quickly reversed in the fourth quarter of 1992 because of the extra oxygenates required during the winter months.

Energy Information Administration, The U.S. Petroleum Industry Past 41 

# as Prologue 1970-1992 , DOE/EIA-0572 ( Washington, DC, September 1993), p. 57.

# 94 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Although stocks were lower than normal in early 1995, following the startup of the reformulated gasoline program, inventories did not recover in late 1995 and early 1996 as they normally do following the end of the summer driving season. By that time, the industry was anticipating price declines in the crude oil feedstock as indicated by backwardation in the futures market (i.e., the price of crude oil several months in the future is less than in the current month). This provided an incentive to hold-off making 42 

# gasoline to stock. One cause for the anticipated lower crude oil prices was the possible sale of Iraqi crude oil. Gasoline stocks remained below average 1991-1995 levels throughout 1996. Days supply of total gasoline has decreased (Figure 67) since 1981 because stock levels have failed to keep pace with a 1.1 percent per year growth in gasoline consumption. The decline in the days supply accelerated after 1995. In 1996, the United States had 26 days supply of total gasoline stocks, compared to 29 in 1994. Inclusion of oxygenates increased the total days supply by 2 days at the end of 1996. Oxygenates — primarily methyl tertiary butyl ether (MTBE) and fuel ethanol — did not play a significant role in gasoline supply until late 1992, when the oxygen ated gasoline program started. In January 1993, EIA stepped up efforts to collect data on oxygenates stocks to suppl ement the information on gasoline and gasoline blending components already collected. Inventories of oxygenates reported by EIA increased by about 8 million barrels between December 1992 and January 1993, primarily because of the extension of EIA oxygenate surveys to pipelines, bulk terminals, and oxygenate producers. 43 

# Nevertheless, even with the inclusion of oxygenates in the acco unting of all gasoline stocks, these stocks still declined in 1995 and 1996. 

# Gasoline Stocks Declined at Refineries and Bulk Terminals In 1994, total gasoline stocks (finis hed gasoline plus gasoline blending components) averaged 214 million barrels. By 1996, the average dropped 6 percent to 201 million barrels. A comparison of annual average stock levels for the refining, pipeline, and bulk terminals segments of the industry indicates that a majority of the reduction in gasoline stocks has taken place at refineries and bulk terminals (Table 9). Refinery inventories of total gasoline stocks represent about a third of total domestic gasoline stocks. Refineries also account for about 35 percent of total oxygenate inventories. Large drops in refinery inventories occurred in late 1995, causing the average for the year to decline from 74 million barrels in 1994 to 69 million barrels in 1996. A reduction in gasoline stocks also occurred at the bulk terminal level, which accounts for about 40 percent of the total gasoline stocks. The reduction at bulk terminals represents an effort to lower direct variable costs associated with storage in this segment of the logistics system. In 1994, 88 million barrels of total gasoline stocks were stored in bulk terminals compared to 80 million barrels in 1996. As shown in Table 9, most of this reduction occurred in 1995. Between 50 and 60 million barrels of gasoline are required to fill the domestic pipeline system so that refineries can supply remote bulk terminals on an ongoing basis. Pipelinefill shows little variance from month-to-month and year-toyear and represents about a quarter of total gasoline inventories. For the most part, gasoline inventories in pipelines consist of finished product since blending components stocks are held mainly at refineries.


# Gasoline Stocks Declined in Eastern Half of Country The overall downward trend in total gasoline stocks appeared predominantly in PADDs I, II, and III, which account for over 80 percent of bulk terminal gasoline supplies (Figure 68). Clearly, the decline in stocks at the bulk terminals impacted the totals recorded in these PADDs. Days supply of total gasoline for the PADDs I, II, and III, averaged 32 days in 1996. In 1994, the eastern half of the country averaged 36 days supply and 34 days in 1995. The western half of the county had 26 days supply in 1996, unchanged from 1994. Energy Information Administration, “Summer 1996 Gasoline 42 

# Assessment,” Weekly Petroleum Status Report, DOE/EIA-0209(96/14) (Washington, DC, April 10, 1996), p. xi. Before January 1993, only refineries were required to report stocks of 43 

# oxygen ates. Refinery oxygenate stocks were reported by EIA in various publications under the category “Other Hydrocarbons/Alcohols.” Beginning in January 1993, the sample frame for oxygenate inventories was expanded to include pipelines, bulk terminals, and oxygenate producers. The inventory of “Other Hydrocarbons/Hydrogen/Oxygenates” on January 31, 1993, was 14,016 thousand barrels. By comparison, the inventory of other hydrocarbons/alcohol at refineries on December 31, 1992, was 6,876 thousand barrels. Sources: Energy Information Administration, Petroleum Supply Annual 1993, Volume 2 , DOE/EIA-0340(93)/2 (Washington DC, June 1994), pp. 26, 458 and Petroleum Supply Annual 1992, Volume 1 , DOE/EIA0340(92)/1 (Washington DC, May 1993), p. 69.

# Energy Information Administration / Petroleum 1996: Issues and Trends 95 

# Table 9. Average Gasoline Inventories by Industry Sector (Million Barrels)

Sector 1994 1995 1996 (1996-1994) 1 

# Difference Refinery 74 74 69 -5 Bulk Terminal 88 81 80 -7 Pipeline 52 52 51 -1 Total 214 206 201 -13 In other published EIA data, bulk terminals that make finished gasoline by mixing blend stocks and/or oxygenates are included in the “Refinery” 1 

# category. In the following entries, EIA data were adjusted by removing the gasoline stocks these blenders report from the “Refinery” category and including the volumes in the “Bulk Terminals” category. Note: Totals may not equal sum of components due to independent rounding. Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-811 “Monthly Bulk Terminal Report,” and EIA-812 “Monthly Product Pipeline Report.”


# Short-Term Influences on Petroleum Inventories The short-term influences of expected crude oil and product somewhat in the summer of 1996 when it became apparent prices, refining margins, the cost of inventories, and the risk that extra crude oil would not be supplied to the market, but of stockouts affect refinery managers’ day-to-day decisions persisted throughout 1996. about inventory levels. Some of these influence marketers’inventory decisions as well. The impact of the 1995-96 shortterm events on stock levels is discussed below. 

# Expected Price Drop Discouraged Stock Building Figure 69 shows the difference between prices for crude oil on the New York Mercantile Exchange for delivery three months into the future minus prices for crude oil for delivery one month into the future. Stock levels are also provided. Since prices for delivery one month in the future are similar to current prices, the difference highlighted in the figure is equivalent to the expected change in the price of crude oil. Figure 69 shows that, from the end of 1995 and through 1996, the decline in stocks followed the decline in the expected price of crude oil. In 1995, the ex pected price for crude oil never exceeded the current price and the market was “backward.” By December 1995, the petroleum suppl y/demand balance had grown tight as crude oil exports from Mexico were reduced by damage from Hurricane Roxanne. However, petroleum traders expected the supply situation to ease, causing prices to decline. With the expectation for significantly lower petroleum prices in the future, it appeared more cost effective to forego purchases until prices came down. This strategy minimized the price risk associated with purchasing a commodity that is overvalued in the present, only to have it become less valuable in the future. In February 1996, the U.N. opened discussion of Iraq’s oil-for-food proposal. The ongoing talks and other market developments drove the market into further backwardation. Backwardation eased

44 

# Low Margins and Poor Profitability Forced Industry to Trim Costs A barometer of the relative profitability of refining is the gross refining margin, i.e., the difference between the cost of the crude oil feedstocks and the price refiners receive for petroleum products produced. Gross refining margins are expected to cover not only refining costs but other costs as well, including logistics and marketing cost. While refiners may realize revenues from other activities, refining margins remain the most important source. Low margins forced refiners to trim costs in such areas as inventories. 45 

# In 1994, gross refining margins edged downwards as increases in product prices failed to match increases in crude

Chapter 6 provides a more detailed review of backwardation and the 44 

# futures market. Inventory cost reduction is frequently referred to as a “just-in-time” 45 

# inventory program. However, this does not correspond to the conventional use of the term in economic theory. Just-in-time inventory programs involve the sharing of both the benefits (i.e., lower inventory carrying costs) and the risks (e.g., running out of stocks) between suppliers and a manufacturer. Inventory reduction programs in the petroleum industry are generally not characterized by risk sharing but represent the recognition by individual firms that the benefits of carrying lower inventories are greater than the incremental risk assumed or that the risks of stocking out for a given inventory level are now lower.

# Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec 

# 0 100 200 300 400M illio n B arrels



# 1996 1995 1994 1993 1992

Sep Dec M ar Jun Sep Dec M ar Jun Sep Dec M ar Jun Sep Dec M ar Jun Sep Dec 

# -6.00 -5.00 -4.00 -3.00 -2.00 -1.00 0 1.00 2.00D o lla rs



# 1996 1995 1994 1993 1992



# 96 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Crude Oil Stock Levels 

# Figure 69. Crude Oil Stock Levels and Differential in Expected Future Prices (Dollars and Million Barrels)

Source: Energy Information Administration (EIA), Forms EIA-810 “Monthly Refinery Report,” EIA-813 “Monthly Crude Oil Report,” and Reuters News Service, various dates. 

# Differential in Expected Futures Prices

# Energy Information Administration / Petroleum 1996: Issues and Trends 97 

# oil prices. The 1995 refining margins were at their lowest 46 

# since 1987 and the industry turned to trimming inventories. Results for 1996 suggest refining margins were improved over 1995. 47 

# Cost of Maintaining Inventories Escalated In 1996 The cost of maintaining petroleum inventories is calculated by multiplying the current price of the material (crude oil, distillate, or gasoline) by the interest rate and adding the operating cost of tankage, about 30 cents per barrel for crude oil and 42 cents per barrel for product. The cost of

48 49 

# inventories has increased since the beginning of 1994, mainly due to increases in prices for both crude oil and refined products. In spring 1996, these prices were driven up by marketers purchasing petroleum products to fill imme diate needs. The price of crude oil (measured as the U.S. refiners average acquisition cost of imported and domestic crude) grew from $17.75 per b arrel in January 1996 to $21.60 per barrel in April 1996. Over the same time period, distillate heating oil spot prices rose from 50.73 cents per gallon to 80.00 cents per gallon, and (reformulated) gasoline spot prices rose from 51.05 cents per gallon to 77.54 cents per gallon. 50 

# Multiplying these prices by interest rates and adding tankage (operating) costs gave a figure of 42 cents per barrel per month for maintaining crude oil inventories in January 1995. The increase in the acquisition cost of crude oil pushed the inventory cost to as much as 45 cents per barrel in April 1996. The cost of d istillate and gasoline inventories were 57 cents and 60 cents per barrel, respectively, in January 1995. By April 1996, these costs went to 61 cents per barrel for distillate and 62 cents per barrel for gasoline. This upward trend in costs, while small in comparison to the influence of expected lower prices in the future, could only effect petroleum inventory levels negatively. 

# Risk of Stockouts Was Reassessed Refiners keep crude oil, distillate, and total gasoline stocks on hand to ensure a constant flow of product to consumers. The risks associated with supplies include embargoes and strikes as well as logistical problems in production, pipelines, and tanker/barge movements. Refiners and marketers informally assess risk of supply disruptions on an ongoing basis and prepare inventories accordingly. Demand surges, such as the one produced by the cold snap in January 1994, can also lead to stockouts if too little supply is in place. The lower number of days supply on hand may suggest that petroleum supplies are believed to be more secure than previously thought and the risk of a disruption is lower. It may be that information systems and operational changes allow refiners to work with lower inventories without increasing risk of stockouts. The lower days supply may also be indicative of a belief that, thus far, decrements to inventories have not been large enough to increase the probability of product stockouts appreciably. Refiners’ attitude toward risk is also a determinant of petroleum stock levels. Refiners may simply be willing to shoulder more risk than before, again leading to lower stocks. As previously documented, a policy of lower crude oil inventories has led to several reductions in runs at refineries. 

# Long-Term Influences on Petroleum Inventories There are a variety of long-term influences affecting inventory levels, including increased offshore stocks, enhanced inventory management through improved information technology, consolidation of storage facilities, the shift to short-haul crude oil, the introduction of clean products, and the increase in secondary stocks. These trends are subtle and have almost no impact on the day-to-day inventory level decisions, but do affect inventory levels over time. Some of these forces represent reactions to the persistently poor financial performance in the refining industry. 51


# Offshore Stocks Also Declined One explanation for some of the decline in petroleum stocks is the growth of stocks in facilities in the Caribbean. According to the Weekly Petroleum Argus , though, stocks at Energy Information Administration, U.S. Energy Industry Financial 46 

# Developments 1995 First Quarter , DOE/EIA-0543(95/1Q) (Washington, DC, June 1995), p. 9. A thorough discussion of the 1996 refining margin is contained in 47 

# Chapter 7. Energy Information Administration, Petroleum Supply Monthly , 48 

# DOE/EIA-0109(96/03) (Washington, DC, March 1996), p. xix. Estimated cost of leasing commercial storage space. Estimated cost of leasing commercial storage space, according to 49 

# discussions with industry sources. Reuters News Service, various dates. 50 

# U.S. Department of Energy, An Analysis of Gasoline Markets Spring 51 

# 1996, DOE/PO-0046 (Washington, DC, June 1996), p. 58-61.

# 98 Energy Information Administration / Petroleum 1996: Issues and Trends 

# independent storage terminals there went from 27.1 million to shorter transit times, short-haul crude oil allows refiners barrels at the end of 1994 to 17.1 million barrels at the end to reduce inventories b ecause of the s maller cargo sizes. Less of 1995 then 15.5 million barrels at the end of 1996. storage is required because the smaller vessels used are 52 

# Therefore, the activity in the Caribbean cannot substantiate offl oaded at slower rates that more closely approximate the decline in U.S. crude oil, distillate, and total gasoline refinery input rates. The ability for quick resupply also stocks. It appears that the same forces causing stocks to factors into a reduction in stocks. decline in the United States have affected Caribbean stocks as well. In order to have a negative impact on inventory levels, 

# Improved Information Systems May Have Facilitated Decline in Stocks Improved information technology has given managers better tools needed to optimize stock levels. Computer programs and tracking systems for monitoring sales, production and inventories have become more sophisticated in recent years. While the availability of more acc urate and more timely data may permit maintenance of lower inventories, the impact 53 

# of these technological improvements is difficult to quantify because of the presence of other trends in EIA data. 

# Closure of Storage Facilities May Have Reduced Stocks Information on specific tank farm and bulk terminal sites is scarce. In an effort to reduce reporting burden, EIA collects stock information on a PADD basis, not by individual terminal. Without site-specific data to monitor trends, it is difficult to determine to what extent the decline in stocks is attributable to the closure of terminals. Several industry publications have indicated that major oil companies are divesting their oil terminals and that independent terminal operators are buying some of these properties. However, it is unknown how much storage is being decommissioned by the new owners. 54


# Shift to Short-Haul Crude Oil Had Little Impact With the decline in domestic production, crude oil imports have been increasing, particularly imports from the Western Hemisphere, referred to as “short-haul” crudes. In addition imports from long-haul sources would have had to decline from one period to the next. Imports from outside the Western Hemisphere decreased only 190 thousand barrels per day in 1995 and another 124 thousand barrels per day in 1996. The reduction in stock requir ements attributable to this shift to short haul sources is small, particularly in comparison to what stocks should have been given the growth in demand and a decline in domestic sources of crude oil. 

# Product Quality Regulations Had Little Long-Term Influence Beginning in 1992, the introduction of various air quality regulations has had broad ranging impacts on the petroleum industry, including stor age management. These regulations 55 

# covered Reid vapor pressure of gasoline (June 1989 and January 1992), the oxygenated gasoline program in carbon monoxide nonattainment areas (November 1, 1992), low sulfur diesel fuel (October 1, 1993), and reformulated gasoline (January 1, 1995). Previously, distillate grades (heating oil and diesel fuel) could be stored together because of their similar specifications. Inventory planners could build total distillate inventories on the basis of demand expectations for heating oil and diesel fuel. Any unexpected demand for either product could be pulled from the other’s inventories and production streams. With segregation, a cushion against unexpected demand had to be maintained for each product, which led to an increase in inventories. The increase in 56 

# distillate stocks after the start of the low sulfur diesel program in October 1993 (4 percent rise in 1994) may, in part, be attributable to the inefficiencies introduced by the legislation. It is more likely, though, that this increase was related to the expectation that distillate prices would rise, thus making inventories more valuable. Since then, average

Weekly Petroleum Argus , various issues. 52 

# Fuel Technology and Management, “Lower Gasoline Inventories Do 53 

# Not Mean Higher Prices," (March/April 1996), p. 9. Energy Information Administration, Storage and Transportation 54 

# Changes Since 1989 , DOE/EIA-Draft Report (Washington, DC, June 1996), p. 5. Sidebar. A more thorough discussion of the i mpacts of environmental regulations 55 

# is contained in Energy Information Administration, “Recent Trends in Motor Gasoline Stock Levels” and “Recent Distillate Fuel Oil Inventory Trends, What EIA Data Show,” Petroleum Marketing Monthly , DOE/EIA0380(96/06) (Washington, DC, June 1996), pp. xxi-xxiv. Energy Information Administration, Petroleum Marketing Monthly , 56 

# “Distillate Fuel Oil Assessment for Winter 1995 - 1996,” November 1995,

# Energy Information Administration / Petroleum 1996: Issues and Trends 99 

# distillate stocks declined, me aning that other influences have outstripped the effects of environmental regulations. In some situations, suppliers have found it economical to substitute a clean fuel for a conventional fuel, rather than maintain additional stocks of the conventional fuel. Fuel specification regulations have had an even smaller influence on gasoline stocks. EIA survey data for both refineries and bulk terminals indicate that the oxygenated and reformulated gasoline programs, required by the Clean Air Act Amendments of 1990, have changed the seasonality of stocking patterns from a third quarter build to a draw. The third quarter draw is necessary to draw down stocks for oxyg enate blending in preparation for the start of the oxygenated season. Further research failed to identify any meaningful differences in stocking patterns between refineries that produce oxygenated and reformulated gasolines and refineries that produce only conventional gasolines, or between states that require the new clean gasoline and states that do not. The overall downward trend in inventories was apparently greater than any of the inefficiencies introduced by the Clean Air Act Amendments. Refiners and bulk terminal operators made operational changes to meet the challenge of providing the additional gasoline types required by the Clean Air Act Amendments while still reducing stocks. For example, some oxygenate was moved from refineries to terminals, and in-line blending was added at bulk terminals, allowing operators to eliminate mid-grade storage in some cases. (Bulk terminal operators are able to make midgrade gasoline by blending premium and regular grades.) The willingness of companies to participate in exchange agreements and shared storage also may have allowed suppliers to accommodate new, clean products without increasing storage requirements.


# Stocks Declined at Electric Utilities
An obvious cause of decline in distillate and gasoline stocks at the primary level may be an increase in stocks at the secondary and consumer levels. At the consumer level, EIA collects information on distillate stocks at electric utilities. Electric utilities accounted for less than 2 percent of distillate consumption in October 19 96. The pattern of stocks since 1992, though, shows a definite decline in 1996, when consumption increased (Table 10). Higher prices served as a disincentive to replenishing stocks. Although utility stocks declined, this cannot be ex tended to other consuming sectors since utilities have some flexibility regarding the fuels they burn. Information on other secondary and tertiary stock levels is sketchy, at best. 

# Conclusion/Outlook The 1995-96 decline in crude oil, distillate, and gasoline inventories occurred mostly at tank farms and bulk terminals, the point in the supply system most able to respond to changing supply economics. The declines in regional stocks, therefore, reflect the geographic distribution of these facilities, with the greatest reductions occurring in stocks of crude oil on the Gulf Coast and of products in the Northeast and Midwest. The main determinant of inventory levels over this period was expected to be the increasingly stringent environmental regulations, requiring industry to stock a growing number of grades, thereby putting upward pressure on inventories. But this was overwhelmed by the downward pressure exerted by two other factors: the lower expected prices for crude, gasoline, and distillate; and the ongoing, poor financial performance of the downstream industry. Many other factors, such as the shift to shorter-haul crudes, offshore storage, and the cost of borrowing, had a much more minor impact on the industry's stock policy, but generally encouraged further reductions. The net result was new record lows for stocks of crude oil, distillate, and gasoline, which, in turn, contributed to higher price volatility. Still, many questions concerning petroleum inventories remain unanswered. The most notable question is to what extent stock levels drive price volatility. The question of adequacy also persists, since the lower stock levels were untested during the mild 1996-97 winter. Lastly, the outlook for stocks brings into question the relative influences of expected prices and financial performance. Definitive answers to these questions must await quantitative analyses of the correlation between stock levels and prices, cost, and events such as the start of the clean fuels program. The downstream mergers recently announced (Texaco/Shell, Marathon/Ashland) give evidence that the industry expects low margins to continue, meaning that discretionary stocks will be minimized. From the standpoint of prices, changes in the supply situation are e xpected to stimulate stock building, since future prices are predicted to be equal to, or greater than, current prices. With the flow of Iraqi crude oil and the end of the world’s peak petroleum consumption season (winter), expected prices are already more in line with current prices for February 1997 (after adjusting for seasonal trends). The futures prices on the New York Mercantile Exchange provides evidence of this trend. EIA forecasts that as the 57 

# crude oil supply situation eases and current and expected prices remain comparable, crude oil inventories are expected

Reuters News Service, various dates. 57

# 100 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Table 10. U.S. Electric Utility Distillate Consumption and Ending Stocks - October (Million Barrels) 1992 1993 1994 1995 1996 Stocks 15.4 14.8 15.6 15.6 14.5 Daily Consumption 0.792 0.897 0.811 0.932 1.477 Source: Energy Information Administration (EIA), Form EIA-759 “Monthly Power Plant Report.”



# to go from 12 percent to within 3 percent of the 1991-1995 If the financial performance proves to be a more important average levels by the end of the of 1998 while gasoline will factor than shown historically, then stocks may not recover go from 9 percent to within 4 percent of the historic average. to the extent for ecast. Data for 1997 indicate the recovery in A continuing tightness in world distillate markets, however, stocks may have already started; EIA’s projections are may cause distillate inventories to remain low (about 10 predicated on normal weather. If the intervening heating percent below the 1991-1995 average at the end of 1998). seasons prove to be unusually cold or if logistical problems 58 

# occur, particularly with distillate, inventories could be tested and prices may go higher. Energy Information Administration, Short-Term Energy Outlook, 58 

# DOE/EIA-0202(97/Q2) (Washington, DC, April 997), p. 29.

# Energy Information Administration / Petroleum 1996: Issues and Trends 101 

# The development of futures markets in crude oil and petroleum products was one of the most important changes to oil and gas markets over the past two decades. As trading volume has grown, the ability of oil industry participants to hedge their price risk has improved since the increased volume has made it possible to take or liquidate a position without creating undue volatility in the fut ures price. But with the growth of futures trading, the same questi ons and concerns that pertain to futures markets for other commodities have arisen: Why and how do traders use the futures markets? Do large tr aders manipulate prices? This chapter examines these questions while focusing on an important trend: the end — at least for now — of the phenomenal growth in crude oil and petroleum product futures trading. 

# 6. Petroleum Futures Markets: Volatile Prices, Controversial Functions, Stagnant Volumes

The Uses of Futures Markets The Energy Information Administration is interested in futures markets because of the profound impacts that those markets have had on the marketing of crude oil and petroleum products. This chapter describes some fundamental investigations into the workings of the futures market that found that energy futures markets have performed as economic theory has predicted. The theory of how futures markets are used and prices determined was originally derived for agricultural commodities. That theory should also apply to any storable commodity, such as crude oil and petroleum products. Grain markets and petroleum markets are subject to similar types of empirical testing because they both have large variations in stock levels every year due to periods of stockbuilding followed by gradual stock depletions. In spite of the fact that the stocking pattern in energy markets is more complex than in grain markets, using the same type of stocking and price correlation analysis as are used in grain markets shows that energy futures markets behave similarly to agricultural commodities, in a manner consistent with economic theory. To understand this behavior, it is first necessary to understand the reasons for the existence of futures markets. To the casual observer, futures markets appear irrational and mysterious. However, the basic workings of futures markets are rational and easy to understand. Fundamental to understanding the futures markets is knowing how they are used in "hedging," to minimize the risk of price changes (see box, p. 102). Economic theory asserts that decisions to hedge depend 60 

# upon several factors:

! The futures contract should accurately reflect the product being hedged . If the futures contract specifies delivery of a commodity that differs greatly from the commodity being hedged, the futures price movements may not eventually converge to the corresponding spot market price, making the futures contract much less useful as a hedging device.

! There should be a close correlation between changes in the spot price and changes in the futures price

. Even if a futures contract gives a very close specification of the product being hedged, if the futures and spot prices do not change at approximately the same rate, the futures contract will not be an effective hedging instrument. For example, a newly listed futures contract may have such small trading volume that there can be a large jump in futures prices compared to spot prices. Only after volume gradually increases over time will the spot and futures price changes move closely together.

! The basis should be relatively stable . The "price basis" is the difference between the futures price and the spot price. The size of this difference is one measure of the risk of hedging. Noncommercial traders are almost solely interested in the expected direction of price movements. In contrast, commercial traders that have opposite positions in spot and futures prices are primarily interested in the stability of the basis.

See, for example, Working, H., "Hedging Reconsidered," Journal of 60 

# Farm Economics , 35, 1953, pp. 544-561, or Houthakker, H., "Normal Backwardation," Chapter 7, Wolfe, J. N., ed., Value, Capital, and Growth (Chicago: Aldine Publishing Co., 1968), pp. 193-214.

# 102 Energy Information Administration / Petroleum 1996: Issues and Trends 

# An Example of a Short, or Selling, Hedge Using Actual Prices Successful futures markets must have active participation by "hedgers," or "commercials," who use the futures market to offset an existing or anticipated physical position, in an attempt to limit risk or to lock in a cost or profit margin. For example, a jobber may buy 42,000 gallons of heating oil on July 15, 1996 at a price of 57.5 cents per gallon and put it into storage. He expects to sell it to customers during the winter and may want to protect himself from inventory devaluation. He might sell (put on a "short hedge") a heating oil futures contract for December delivery, for 42,000 gallons, on July 15 at a price of 58.79 cents per gallon. On, say, October 15, 1996 he will buy back his December futures contract at 71.20 cents per gallon. The price of the futures contract has risen while spot prices have also risen to 71.44 cents per gallon. The jobber's hedge has resulted in a loss of $5212.20 ($420 for each 1-cent per gallon rise) in the futures contract and a gain of $5854.80 in the spot market, for a net gain of $642.60. He would have had a much larger net gain if he had not used the futures market, but he was willing to forgo the extra gain to protect himself from a possible very large loss if prices had declined. Also, the loss on the futures contract may have been a speculator's gain (see next sidebar). There are several types of basis risk which can have effects on the riskiness of hedging. First, the key to minimizing risk is having a stable "price basis," which is the difference between the futures price and the spot price. The more stable the price basis is, the more likely the futures market position will result in small net gains or losses, thus minimizing the riskiness of the position. Second, besides price risk there is also "quality basis risk." If the futures contract does not exactly match the specifications of the product being hedged, then there may be an unstable relationship between the cost of the physical commodity being hedged and the futures price, increasing the riskiness of the position. Third, there is "location basis risk." The heating oil futures contract specifies delivery in New York Harbor. If the relationship between the price difference between New York and the price where the physical product being hedged is located is unstable, this would also increase the riskiness of the futures market position. It is import ant to note also that, while the futures contract itself could be used as a delivery mechanism, in practice deliveries occur very infrequently. Most short contracts, for delivery at a future date, are liquidated in a manner similar to this example, where the seller buys back a contract. Using futures contracts as delivery devices involves numerous complications. For example, when the December heating oil futures contr act expires at the end of November, the buyer then decides at what time during December he will call for delivery from the seller. The transaction then corresponds to what is called an "any" cash market price, referring to any time during the month. This contrasts with the "spot," or "prompt" price which refers to delivery within 1 to 10 days. The uncertainty of delivery times and confusion about what prices are actually being used causes most companies to liquidate their futures position before their contracts expire. While in pract ice the different types of basis risk, cash market prices and delivery possibilities complicate the hedging decision, they do not obscure one of the fundamental concepts of hedging, which is that a company will ask itself, "How much price risk are we willing to accept, and is it worthwhile to use the futures market to try to minimize that price risk?"

! Hedgers want more than to minimize price risks. This paper considers each of these factors below, and They want to use futures markets to maximize profits

. Most companies don't hedge their entire inventories. Even when they do hedge, they don't take all their futures positions at one time and simply hope that their risk will be exactly offset. Companies often take their total futures positions gradually. A profit-maximizing company may take a futures position by observing price trends. “Long hedgers," i.e., commercials who buy futures contracts, will buy futures during periods of declining prices and "short hedgers," i.e., commercials who sell futures contracts, will sell futures contracts during periods of extended price rallies. discusses how each factor might contribute to the slowdown in futures trading volume.



# Petroleum Futures Market Trading Volume Slowed in 1996 Energy futures were traded on at least 20 exchanges in the 19th century, and there were numerous attempts to trade them early in this century. Mainly due to relatively small price fluctuations through most of this century, energy

# Energy Information Administration / Petroleum 1996: Issues and Trends 103 

# futures markets were unsuccessful until 1978. Today, the gasoline futures went nowhere, even as the NYMEX largest energy futures market in the world is the New York enc ouraged traders to switch out of the leaded gasoline Mercantile Exchange (NYMEX). Their markets include contracts. Traders were willing to accept the leaded gasoline heating oil futures contracts since 1978, crude oil since 1983, specifications to hedge unleaded gasoline, because the and unleaded gasoline since 1984. As Figure 70 shows, trading volume in the leaded gasoline was so much greater petroleum and product futures market trading volume grew and the price differential between leaded and unleaded gas at a remarkably rapid rate in the 1980's. Crude oil futures was fairly stable over time. accounted for the bulk of the growth. Overall trading growth in petroleum and product futures has terminate trading in the leaded gasoline futures contract, and slowed considerably during the 1990's, as shown in Figure 6- the results were dramatic. As Figure 71 shows, early in 1986 1. One important reason is that commercial traders have trading volume in leaded gasoline dominated unleaded historically been attracted to futures markets as a device for gasoline, but after leaded gas futures were terminated hedging their price risk. But, the first factor above stresses unleaded gasoline trading volume took off. This is also an the importance of having a futures contract that closely example of why duplicative futures contracts have a high matches the commodity being hedged. Unleaded gasoline f ailure rate. Other examples abound. Gulf Coast gasoline 61 

# futures illustrate this point. Heating oil and propane futures futures on the NYMEX were unsuccessful. Although those contracts are used to hedge a fairly narrow range of product contracts were better specified than the New York Harbor specifications. In contrast, unleaded gasoline futures are delivery contracts for certain purposes, they couldn't specified in terms of reformulated gasoline but must serve as compete with the volume of the existing contracts. a hedging device for numerous types of reformulated, oxyge nated, and conventional gasolines, and which have been subject to changing regulatory requirements. The fragmented gasoline market causes great uncertainty as to how closely futures prices will follow the spot prices of the type of gasoline being hedged, which may have very unstable relationships with each other, reflecting regional Another important factor in hedging decisions is the supply and demand differences. That uncertainty has led to correlation of spot and futures price changes. Hedgers only a slowing in trading volume in unleaded gasoline futures. rarely hold futures contracts until their expiration date to use After annual increases in gasoline futures trading volume of them as a delivery mechanism. Most hedgers will buy or sell 60 percent as recently as 1988 and 36 percent in 1989, contracts and then subsequently liquidate their positions trading volume actually decreased by 5.3 percent in 1995 before the contracts expire, when they wish to complete their and another 0.5 percent in 1996. spot market transactions. Before a contract expires there Even as seemingly obvious a point as having a well-defined with no net price gains or losses, only if the basis is the same futures contract can be deceptive in futures markets. If a when the futures contract is liquidated as it was when the contract has become established, it may be extremely position was initiated. So it is important to both long difficult to start a similar contract, even if the new contract hedgers and short hedgers that spot and futures prices move unquestionably gives a better specification of the spot commodity. A good example of this again comes from the gasoline futures market. When trading in gasoline futures began on the New York Mercantile Exchange (NYMEX) in 1981, the contract specified leaded gasoline. As it became apparent that unleaded gasoline would eventually sell far more than leaded gasoline, the NYMEX in 1984 also listed 62 

# an unleaded gasoline futures contract. But, as sales of unleaded gasoline grew, trading volume in the new unleaded Eventually, the NYMEX announced that it would simply

63



# Futures and Spot Price Correlations May Be Highly Seasonal

64 

# will be a transfer of risk from the hedger to the speculator,

65



# The trade press has also attributed the drop in futures trading volume to 61 

# everything from small futures price movements to large futures price movements. See "Stable Prices Dull 'Interest' In NYMEX Crude Futures," Petroleum Intelligence Weekly (December 11, 1995), p. 5, and "Extreme Volatility Rattles In dustry's Trust In Futures," Petroleum Intelligence Weekly considered here, but all the same ideas still apply. (April 1, 1996), p. 1. In 1984 unleaded gasoline was a lready 59.6 percent of the total gasoline 62 

# market. (Washington, DC, September 1991), pp. 5-18. For a theoretical description of the growth in trading volume in new 63 

# futures contracts see Dale, C., "Brownian Motion in the Treasury Bill Futures Market," Business Economics (May 1981), pp. 47-54. The special case of an "exchange of futures for physicals" will not be 64 

# For detailed examples of this, see Dale, C., "Economics of Energy 65 

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# 1986 1988 1990 1992 1994 1996 0 10 20 30 40 50Contracts (Millions) 

# Crude Oil Heating Oil Unleaded Gas

AAA AAA



# Jan 

# 1986 May Jul Sep Nov Dec 0 20 40 60 80 100 120 140 160Thousands of Contracts Traded 

# Unleaded Gas Leaded Gas

Mar

104 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 70. Growth Slows in U.S. Oil Futures Trading - Annual Volume

Source: New York Mercantile Exchange.



# Figure 71. Established Contracts Are Hard to Beat - Leaded Versus Unleaded Gasoline Futures

Note: Leaded gasoline futures were terminated November 1986. Source: New York Mercantile Exchange.

# Energy Information Administration / Petroleum 1996: Issues and Trends 105 

# together. But spot and futures price correlations, like many calling for delivery during the same time period. other aspects of futures markets, depend upon stock levels. Nevertheless, the economic analysis from hedging prompt 66 

# Stocks of crude oil and petroleum products are shown in Figures 72, 73, 74, and 75. Stock levels for crude oil and petroleum products all exhibit seasonal patterns; however, these patterns are most pronounced in refined products — gasoline, heating oil, and propane — while crude oil shows a less pronounced seasonal pattern (see box, p. 108). As noted above, gasoline has problems during the year as a hedging device because of the fragmented marketplace and unstable price relationships between different types of gasoline. Heating oil and propane have the strictest definitions of deliverable grades of the commodity, so they provide the most stringent test of how stock levels affect the correlation of spot and futures prices. Traditionally, hedgers using NYMEX take advantage of the strong price correlation between cash market transactions calling for delivery during specified future months ( forward contracts ) and futures contracts calling for delivery during sidebar). The l onger comparisons are subject then to various the same time period. When cash market participants are highly confident as to the creditworthiness of their counterparts, and if the delivery point for their contracts is New York Harbor, similar to the NYMEX heating oil and unleaded gasoline futures contracts, in most instances there is no material difference between cash market prices and futures market prices. This holds because of the performance of arbitrage , i.e., taking advantages of price differentials in closely related markets, by participants who are active in both markets. If the price in one market is cheaper than in the other, these participants purchase the cheaper product and sell the more expensive product. This results in profits for the arbitragers and reduces any differences in price by increasing the lower price and decreasing the higher price. Arbitrage continues until any material differences between prices are eliminated. More recently, there has been increased interest in the levels of inventory for petroleum products, heating oil especially. It is possible to evaluate the effectiveness of hedging increases and decreases in inventory using NYMEX futures, focussing on the current prompt value of the commodity. This differs from more traditional hedging in that it does not protect against price risk associated with value determined by a future commitment to make or take delivery, but instead on fluctuations in value associated with immediate delivery obligations. Clearly, the price correlation between a futures contract calling for delivery in a future month, i.e., next month, and prompt prices calling for delivery now cannot be as strong as that between futures and forward contracts with futures gives interesting results that provide useful market insights. This type of analysis is discussed below. Large stocks improve spot and futures price correlations, which can decrease price volatility and make the futures market more effective as a hedging device. Figure 74 67 

# shows that, for 1995 and 1996, heating oil stocks were at their lowest levels in March and at their highest levels at the end of the year. Similarly, Figure 75 shows that, for both these years, propane stocks reached a low in February and peaked in September. Table 11 shows that these correlations were exactly as expected from hedging theory: the correlations are high when inventories are large and low when inventories are small. As noted above, the correlations used were the spot price and the nearby futures price. In 68 

# practice, the futures price would be measured against a more distant spot price, depending upon the length of the hedging period (for an example of an actual hedge, see the first seasonal and other complicating factors. For this reason, academic research fre quently analyzes these very short-term arbitrages for illustrative purposes, and this is done here in Tables 11 through 13. For heating oil, the squared correlation coefficient between the spot price and nearby futures contract price was 0.88 (perfect correlation would be 1.0) in the low stock month of March 1995 and 0.67 in March 1996, but improved to 0.95 in the high stock month of November 1995 and 0.99 in November 1996. The correlation is not quite as dramatic for propane. The squared price correlation in the low stock month of February was only 0.48 in 1995 and 0.27 in 1996, but improved in the high stock month of September to 0.52 in 1995 and 0.66 in 1996. A possible conclusion is that maintaining low stocks as part of what is loosely called "just-in-time inventory management" may lower inventory holding costs for an individual refiner, but when done on an industry-wide basis it can increase futures market hedging risks by lowering the correlation between spot and futures prices. 69



# Hedging theory states that spot and futures price correlations generally due to inventory management strategies. Large exports in September and 66 

# are proportional to the level of inventories, which has been empirically October caused by an unusually large price differential between New York verified for many agricultural commodity futures. and Northwest Europe also helped to draw down inventories. This paper follows the practice of using the broad term hedging to 67 

# include both typical hedging and short-term arbitrage. The "nearby" futures contract is the one with the earliest expiration date, 68 

# typically the next month. Of course, in 1996 low heating oil inventories weren't necessarily all 69

# Jan Jul Jan Jul Jan Jul 0 290 300 310 320 330 340 350 360M illions of Barrels



# 1995 1996 1994

Jan Jul Jan Jul Jan Jul 180 190 200 210 220 230 240M illions of Barrels



# 1995 1996 1994

106 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 72. Monthly Crude Oil Stocks

Source: Energy Information Administration, Petroleum Supply Monthly (various issues).


# Figure 73. Monthly Total Gasoline Stocks

Source: Energy Information Administration, Petroleum Supply Monthly (various issues).

# Jan Jul Jan Jul Jan Jul 0 80 90 100 110 120 130 140 150 160M illions of Barrels



# 1995 1996 1994

0 M i l l i o n s o f B a r r e l s



# 1995 10 20 30 40 50 60 70

Jul Jan Jul Jan Jul Jan 1996 1994

Energy Information Administration / Petroleum 1996: Issues and Trends 107 

# Figure 75. Monthly Propane Stocks Figure 74. Monthly Distillate Fuel Oil Stocks

Source: Energy Information Administration, Petroleum Supply Monthly (various issues).

Source: Energy Information Administration, Petroleum Supply Monthly (various issues).

# 108 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Making Money On Seasonal Price Movements -- How Easy Is It? The existence of an energy futures market provides companies and traders the theoretical opportunity to benefit from knowledge of recurring seasonal price movements. For example, gasoline prices are typically highest during the summer driving season, while heating oil prices typically reach their highest levels in the winter. Can the futures market be used to profit from these simple facts? In 1992, Bloomberg Oil Buyers Guide noted that the purchase of a December heating oil futures contract at the end of July, and its sale in mid-October, would have made a profit in 11 of the previous 13 years. That relationship still holds. Buying a contract at the end of July and selling in mid-October would have made a profit (ignoring commissions) in 12 of the 17 years from 1980 through 1996. The net gain over that period was 94.54 cents per gallon. Since each 1-cent gain represents a $420 gain on a contract that might have as little as a $1500 margin deposit, the potential gains from such trades are large indeed. In practice, the last business day of the month is the expiration of a futures contract, and there may be increased price volatility on those days, so many companies and traders are reluctant to take positions at the end of the month. So, examining the same years from 1980 through 1996, but with the purchase made in mid-July instead of the end of the month, the result is that there would have been a profit in 11 of the 17 years (1995 was a tiny loss of only .01 cent per gallon), for a net gain of 93.28 cents per gallon. Why, then, doesn't everyone in the industry make these trades? There are many reasons. First, most of the 93.28 cent per gallon gain was made in a few years, when there was a war or unusua lly cold weather, e.g., in 1990 the gain during the Gulf War was 44.92 cents per gallon. Companies may not want to tie up capital for extended periods waiting for infrequent gains, no matter how large. Second, and for similar reasons, the price doesn't move straight up even in profitable years. Futures contracts are "marked-to-the-market," or evaluated, on a daily basis, meaning that if the price drops it might be necessary to deposit additional hundreds or even thousands of dollars for each contract to maintain the position, tying up even more capital. T hird, simply buying without having an anticipated sale in the future would be pure speculation, which most companies want to avoid, regardless of how profitable a trade appears to be. This sample trade is a good illustration of informat ion that companies and traders use to decide how to use futures markets. Marketers with existing forward contracts to sell oil might use this kind of information to decide when to establish a long, or buying, hedge. Regardless of numerous other complicating factors, such as determining a company's cash flow needs, their accounting requirements, whether to use complex trades involving futures and options, etc., the concepts of futures market trading are not mysterious. Traders and companies use their knowledge of the industry combined with the amount of risk they are willing to take to determine how to use futures markets to maximize their profits.



# The Basis May Also Be Highly Seasonal Arbitrage trading ensures that spot prices and nearby futures contract prices converge at the expiration of the contracts. Table 12 shows that the basis for heating oil has a highly Since the price basis will therefore become zero at the seasonal pattern. The data are separated into pre-Gulf War, contract expiration, the size of the basis is a measure of the post-Gulf War, and Entire Period (including the war). As risk for a hedger. For example, a short hedger would prefer noted above, low stocks themselves discourage any type of to take a position when the basis (defined here as nearby hedging, so hedging theory predicts relatively low levels of futures price minus spot price) has a large positive value, hedging in heating oil futures in the late winter and early since the eventual convergence of spot and futures prices spring. The basis is highly negative (meaning market could result in a net profit on the short futures contract. As "backwardation"), in the late winter months, so short hedging the futures contract expires, the short futures contract will is discouraged at that time by the basis. As heating oil stock eventually fall faster or rise slower than the spot price, giving the hedger a trading profit in addition to transferring his price risk. The opposite is true for long hedgers, who would prefer to buy futures contracts when the basis is a large negative value.

# Energy Information Administration / Petroleum 1996: Issues and Trends 109 

# Table 11. Price Correlations for Spot and Futures Prices Squared Correlation Coefficients Heating Oil Propane Month March 1991- August 1992- 1995 1996 November 1996 1995 1996 November 1996 January .95 .92 .97 .80 .70 .88 February .91 .89 .87 .48 .27 .51 March .88 .67 .78 .79 .60 .78 April .94 .76 .85 .39 .36 .61 May .96 .67 .89 .80 .68 .77 June .99 .98 .97 .57 .19 .71 July .90 .97 .98 .44 .53 .76 August .82 .88 .97 .85 .84 .82 September .94 .92 .95 .52 .66 .80 October .90 .99 .98 .36 .85 .89 November .95 .99 .98 .73 .81 .89 December .82 .95 .68 .80 Source: Energy Information Administration calculations from Reuters and New York Mercantile Exchange data.



# Table 12. Price Basis for Heating Oil Futures, Monthly Average -- Nearby Futures Price Minus Spot Price, June 1986 - November 1996 (Cents Per Gallon) Month 1996 Pre-Gulf War Post-Gulf War Entire Period January -0.205 -2.452 0.334 -1.017 February -4.571 -0.686 -2.038 -1.904 March -7.182 -2.086 -2.736 -2.473 April -8.125 -2.062 -1.700 -1.844 May -3.357 -2.296 -0.415 -1.169 June 0.258 -0.322 0.282 0.005 July 0.322 0.325 0.361 0.345 August 0.110 0.738 0.534 0.659 September 0.070 0.734 0.623 0.766 October 0.023 0.729 0.614 0.726 November 0.237 0.342 0.798 0.650 December 0.103* -1.429 0.944 -0.138 * = December 1995. Notes: Pre-Gulf War = June 1986-July 1990. Post-Gulf War = Ma rch 1991-November 1996. Entire Period = June 1986-November 1996 (including war period. Source: Energy Information Administration calculations from Reuters and New York Mercantile Exchange data.



# levels become relatively larger and the basis becomes occurring in the fall. Thus, low stocks and backwardation positive, short hedging is encouraged. both discouraged short hedging in propane futures markets. Table 13 shows that propane futures also have a seasonal pattern. Volume in propane futures was very small through the Gulf War period, so results are only shown for 1996 and the period 1992 through 1996. There is again a clear seasonal pattern, with backwardation in the winter and early spring. It is important to note that 1996 was an exceptional year, since below normal stock levels led to backwardation also 70



# Before the war similar results held for gasoline futures, as the basis was 70 

# positive when stocks were built in the spring and negative as stocks fell during the summer driving season. Gasoline futures results are not shown here because the numerous changes in specifications to meet Clean Air requirements after the Gulf War make it technically very difficult to match the gasoline futures contract with the appropriate spot price.

# 110 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Table 13. Price Basis for Propane Futures, Monthly Average -- Nearby Futures Price Minus Spot Price (Cents per Gallon) Nearby Futures Price Minus Spot Price Month 1996 1992-1996 January -0.780 -0.528 February -3.622 -1.404 March -2.253 -1.006 April -0.710 -0.211 May -0.408 -0.011 June 0.124 0.238 July 0.033 0.196 August -0.069 0.250 September -0.593 0.191 October -0.092 0.205 November -0.713 0.113 December 0.523* 0.391 * = December 1995. Source: Energy Information Administration calculations from Reuters and New York Mercantile Exchange data.



# High Prices in 1996 Led to High

Visibility for Futures Markets Both crude oil prices and heating oil prices were strong in fall sharply in price. In early December 1996 the 1996. Spot pri ces of West Texas Intermediate crude oil rose backwardation decreased after Iraqi oil sales were finally from $1 7.33 per barrel in late January to $25.15 by mid- a nnounced. On December 10, 1996, crude oil futures were April. Spot heating oil prices rose steadily from 50.63 cents $24.42 per b arrel for January delivery and $23.92 per barrel per gallon at the end of May to 76.73 cents per gallon in for February delivery. The announcement of Iraqi oil sales early October The combination of low stocks of crude oil thus lessened the backwardation in the futures market and petroleum products and rising spot prices led to sharply from the April structure, because of changed questions about the influence futures markets were having on expectations. However, the overall price level was still much petroleum markets. higher than in October 1995, because of lower stocks. The futures markets reflected changing stock levels and The extended period of backwardation in crude oil futures is expectations of an increase in supply throughout 1996. As frequently given as another reason for the overall decline in shown in Figure 76, in late 1995 the crude oil market showed futures trading volume. A popular method of hedging longonly mild backwardation, in which crude oil for delivery in term inventory positions is called "stacking and rolling," in distant months is priced lower than crude oil for delivery in which hedgers would extend the length of a hedge by buying nearby months, a situation which is associated with a back short futures contracts in expiring months and 71 

# relatively low supply of stocks. On October 2, 1995, crude simultaneously short-selling new futures contracts in more oil for delivery in November was $17.64 per barrel, while distant months. If market backwardation continues for crude oil for December 1995 delivery was only 30 cents per extended periods, this will lead to numerous situations of barrel lower. But in 1996 crude oil stocks continued to fall s elling futures contracts at relatively low prices and being for a number of reasons: cold weather in the spring; strong forced later to buy them back at higher prices. Fears of the global oil demand; supply shortfalls from non-OPEC potentially huge unprofitability of stacking and rolling from sources; and strong gasoline demand. By April 1996, the market backwardation is thus given as a reason for the drop backwardation in the crude oil futures market had increased in energy futures trading volume in 1996. sharply. On April 15, 1996, crude oil for May delivery was $25.06 per barrel, but oil for June delivery was $2.58 per barrel lower, driven largely by expectations of imminent oil sales from Iraq. The industry did not want to increase stock holdings of crude oil that the futures market showed could

72



# "Contango," by contrast, is the case of distant futures contracts priced one of the primary reasons Germany's Metallgesellschaft lost nearly $2 71 

# higher than nearby futures contracts. billion in futures trading in 1993. Stacking and rolling, although with a long hedge, is frequently given as 72

# Nov Mar Jul Nov Mar Jul 0 16.00 18.00 20.00 22.00 24.00 26.00

2 Oct 1995 15 Apr 1996 1 Jul 1996 3 Sep 1996 10 Dec 1996Dollars Per Barrel



# 1997 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 111 

# Figure 76. Changing Term Structure for Crude Oil Futures

Source: New York Mercantile Exchange.


# While market backwardation seems at first to be a plausible side, end users like airlines could give up profits if they explanation for the drop in futures trading volume, in reality hedge fuel costs by buying heating oil futures as a proxy for this is not the case. While backwardation discourages short jet fuel, if fuel costs subsequently fall. But oil traders are hedging from those with existing positions in the physical involved in both buying and selling both crude oil and market, there is no reason for it to discourage long hedging, products, in contrast to refiners who are involved in buying from companies who are short in the cash market and want crude oil and se lling products, so traders are involved in both to hedge by buying distant futures contracts. In fact, the buying and selling side of futures markets. Their historically crude oil futures have been in backwardation decisions on how much to hedge will depend upon the more than 75 percent of the time, but it was only until current term structure of the futures markets. 73 

# recently that crude oil futures trading stopped its steady annual increases. Figures 77 and 78 show a variety of term structures for 74 

# So, who does most of the hedging in futures markets? David futures were in backwardation because of expectations Long argues that it is traders and refiners, who are involved regarding the resumption of sales of Iraqi crude oil, the 75 

# on both the buying and selling side of the market. On the heating oil futures market, which is closely tied to crude oil upstream side, producers who hedge could give up profits by futures, also was in backwardation for the first few delivery hedging and then having oil prices rise. On the downstream months. But the shape of the curve gradually switched to highly seasonal commodities. In April 1996, when crude oil

where more distant futures were priced higher than nearby futures, the situation called "contango." In July, the heating oil futures market was in contango in the first delivery months, reflecting ample supplies of heating oil stocks in the summer months, but it switched to backwardation in later months, reflecting the normal situation of lower inventories in the fall and winter months. The propane futures market also showed a varying pattern. There was very little market backwardation in this thinly traded futures market in April, reflecting little expected impact from Iraqi oil sales. But in December, with both crude oil and heating oil in mild backwardation, propane Litzenberger, R. H. and Rabinowitz, N., "Backwardation In Oil Futures 73 

# Markets: Theory And Empirical Evidence," Journal of Finance , Vol. L, No. 5 (December 1995), pp. 1517-1545. If backwardation alone caused drops in trading volume, it would be 74 

# because short hedgers primarily determine the volume of trading. But a simple correlation of monthly trading volume and stock levels for crude oil from 1983 to 1996 gave a correlation coefficient of only 0.01, showing that short hedgers do not determine the trading volume. Even a more stringent test of monthly volume changes and monthly stock changes gave a correlation coefficient of only 0.15, an indication of only a very small net influence on trading volume of short hedgers. Long, D., "Hedging Revisited," Global Oil Report , Vol. 8, No. 1, Centre 75 

# for Global Energy Studies (London, UK, January-February 1997), pp. 40-54.

# Nov Mar Jul Nov Mar Jul 0 0.45 0.50 0.55 0.60 0.65 0.70 0.75Cents Per Gallon 

# 2 Oct 1995 15 Apr 1996 1 Jul 1996 3 Sep 1996 10 Dec 1996



# 1997 1995 1996

Nov Mar Jul Nov Mar Jul 0 0.30 0.35 0.40 0.45 0.50 0.55 0.60 2 Oct 95 15 Apr 96 1 Jul 96 3 Sep 96 10 Dec 96Cents Per Gallon



# 1997 1995 1996

112 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 77. Changing Term Structure for Heating Oil Futures

Source: New York Mercantile Exchange.


# Figure 78. Changing Term Structure for Propane Futures

Source: New York Mercantile Exchange.

# Energy Information Administration / Petroleum 1996: Issues and Trends 113 

# futures were in steep backwardation because of very low seasonal propane stocks and the expectation of what bad weather in the U.S. and abroad would do to deplete those inventories. The steep backwardation on December 10 ended abruptly in contracts for delivery of propane during the Low stocks and high prices of heating oil generated spring and summer months of 1997. Clearly, the energy considerable attention in the fall of 1996. There were futures markets at any given time can give a great deal of questions about the role of low stocks and the possible role inform ation about the current state of stocks and market of futures markets in causing high prices. In response, the expectations. Commodity Futures Trading Commission compiled the data



# Maximizing Profits Means Hedgers Try to Follow Price Trends As noted in the section on the theory of hedging, hedgers try commercial traders bought during periods of declining to maximize profits by observing persistent price trends. prices. As the year progressed and prices rose, large They can then sell futures contracts as prices rise, or buy co mmercials sold into the price rise and became net short. futures contracts as prices fall. A good example is heating Noncommercials showed the opposite trading patterns. 76 

# oil futures which had some persistent price trends in 1995 and 1996, as shown on Figure 79. In 1996, low s tocks coincided with higher prices in the May To track the behavior of hedgers, it is necessary to use the prices, so that large commercial traders were never net long. Commitment of T rader reports compiled by the Commodity Again, however, they generally sold and became Futures Trading Commission. Figures 80, 81, 82, and 83 increasingly net short as prices rose into the fall of 1996. 77 

# show the percentage of the total number of long and short contracts held by large commercial traders for crude oil, Proponents of the view that refiners engaged in a low unleaded gasoline, heating oil and propane futures. These stoc kholding conspiracy and misused the heating oil futures graphs illustrate two points. First, large commercial traders market will have to explain carefully the message of hold the majority of energy futures contracts, averaging 60 Figures 79, 85, and 86. Those graphs show that large to 80 percent of the total number of contracts outstanding. commercial traders in general and refiners in particular were Second, there were significantly more large commercial heavy net sellers of heating oil futures at a time of rising holders of short contracts than long contracts during periods pr ices, which would have the effect of slowing the price of generally rising prices. For example, in Figure 82 shorts increases. For example, Figure 86, which shows total rather increased faster than longs during the 1995-1996 price rise than net pos itions, indicates that both long and short hedging in heating oil. These results are consistent with hedging were relatively small when stocks were low in the Spring of theory. Commercials were net sellers, not buyers, as prices 1996. Refiners held more short positions throughout the May rose, so their trading activities in 1995 and 1996 had a to October 1996 period, and they greatly increased their tendency to hold heating oil prices down. short positions as prices rose in the fall. This is exactly the 

# 1996 Brought Attention to Heating Oil

shown on Figures 84, 85, and 86. Figure 84 together with the prices on Figure 79 show typical hedging behavior. In the summer of 1995, the basis was very narrow and this had a minimal effect on hedging decisions. But prices in July were near seasonally low levels, so commercial net positions for large traders were net long in summer 1995, as large 78



# through October period that were never as low as the 1995

result that would be expected if the futures markets are functioning efficiently and refiners are behaving in accordance with well-established hedging theories.


# Announcement Effects Are Small and Short-Lived One other possibility for the decrease in the volume in energy futures trading is for traders to be wary of Noncommercial traders may also follow price trends, but with the 76 

# opposite trading behavior. They will buy price rallies and sell price dips. See Dale, C., and Zyren, J., "Noncommercial Trading in the Energy Futures Market," Petroleum Marketing Monthly , DOE/EIA-0380(96/05)(Washington, DC, May 1996), pp. xiii-xxiv. The CFTC requires traders to have their brokers report their holdings if 77 

# they have more than 300 futures contracts for any delivery month of crude oil, 250 contracts of heating oil, or 150 contracts of gasoline. Those reporting Net positions are total long contracts minus total short contracts, so a levels may change if total volume of trading in each type of contract changes. positive number on Figure 84 means a net long position. 78

# Jan Apr Jul Oct Jan Apr Jul Oct Long Short



# End of Month Data 0 20 40 60 80 100Percentage Share of Market



# 1995 1996 Jan Apr Jul Oct Jan Apr Jul Oct 0 40 45 50 55 60 65 70 75 80Cents per Gallon 

# Spot Heating Oil Futures Heating Oil



# 1995 1996

114 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 79. Spot and Futures Heating Oil Prices - End-of-Week Closing Prices

Sources: Futures Prices: New York Mercantile Exchange. Spot Prices: Reuters.



# Figure 80. Large Commercials Share of Open Interest - Crude Oil Futures

Source: Commodity Futures Trading Commission.

# Jan Apr Jul Oct Jan Apr Jul Oct


# End of Month Data 0 20 40 60 80 100Percentage Share of Market



# Long Short



# 1995 1996 Jan Apr Jul Oct Jan Apr Jul Oct



# End of Month Data 0 20 40 60 80 100Percentage Share of Market



# Long Short



# 1995 1996

Energy Information Administration / Petroleum 1996: Issues and Trends 115 

# Figure 81. Large Commercials Share of Open Interest - Unleaded Gasoline Futures

Source: Commodity Futures Trading Commission.


# Figure 82. Large Commercials Share of Open Interest - Heating Oil Futures

Source: Commodity Futures Trading Commission.

# Jan Apr Jul Oct Jan Apr Jul Oct



# End of Month Data 0 20 40 60 80 100Percentage Share of Market



# Long Short



# 1995 1996



# 1995 July Sep 0 20 40

-20

-40

-60Contracts (Thousands) 

# Noncom Com

May

116 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 83. Large Commercials Share of Open Interest - Propane Futures

Source: Commodity Futures Trading Commission.



# Figure 84. Heating Oil Net Futures Holdings - End-of-Week Large Positions, May - October 1995

Source: Commodity Futures Trading Commission.

# 1996 May Sep 0 10 20 30

-10

-20

-30

-40

-50Contracts (Thousands) 

# Noncom Com

July



# 1996 July Sep 0 20 40

-20

-40

-60Contracts (Thousands) 

# Refiners - Long Refiners - Short

May

Energy Information Administration / Petroleum 1996: Issues and Trends 117 

# Figure 85. Heating Oil Net Futures Holdings - End-of-Week Large Positions, May - October 1996

Source: Commodity Futures Trading Commission.



# Figure 86. Refiners Holdings of Heating Oil Futures - End-of-Week Large Positions, May - October 1996

Source: Commodity Futures Trading Commission.

# 118 Energy Information Administration / Petroleum 1996: Issues and Trends 

# "announcement effects." For example, every week the There are other reasons for unpredictable price movements, American Petroleum Institute (API) and the Energy esp ecially near the expiration of contracts. But none ofInformation Administration report stock levels of crude oil these effects has been shown to be either recurring or longand petroleum products. Traders might be wary of using the lived, so their effects on the overall drop in energy futures futures markets if these announcements were to cause a long trading volume has been minimal. lasting and sharp increase in price volatility. One-time 79 

# announcement effects are commonly reported in the trade press. EIA tested several years of daily energy futures data to see if the weekly stock announcements have a consistent effect on price volatility. There was a change in the reporting time of EIA stock data in 1994 that provided a convenient way to try to measure announcement effects. The American Petroleum Institute reports its data on Tuesdays at 5:00 p.m. Until February 1994, EIA reported stock levels at 5:00 p.m. Wednesday. After that time, EIA moved its reporting period earlier, to 9:00 a.m. Wednesday. These changes permitted a variety of statistical tests to compare the effects of each announcement on price volatility. Few consistent announcement effects were detected over the period January 1991 through May 1996, a period chosen to cover both EIA reporting times. Opening and closing prices were used to examine price volatility, day-to-day price changes, same day close versus open price changes, and opening price versus previous day’s closing price. The measurable statistical effects were very weak, and it was not possible to distinguish between effects caused by API and EIA. The announcement effects did not 80 

# last long enough to be detected by the use of only opening and closing, and sometimes high and low, prices. There is considerable anecdotal evidence in the trade press to indicate that traders do react to stock level r eports, but those reactions clearly subside very quickly and occur infrequently enough to be statistically undetectable as long-term consistent effects. Therefore, they can be dismissed as a possible 81 

# cause for the decrease in energy futures trading volume over the entire time period. 82



# Noncommercial Trading -- No Cause for Alarm Noncommercial trading is an important part of any futures market. Speculators provide liquidity for hedgers, i.e., they provide enough volume for hedgers to enter and leave the market without unduly disturbing the price. In 1996 there was much discussion in the trade press about how noncommercial traders might be disrupting the futures markets. Those ideas were debunked, however, by David Long and Dale and Zyren (see footnote 76). Long presented 83 

# a theory which showed why commercial traders would buy heavily during periods of price declines and sell during price rises, with noncommer cials behaving in exactly the opposite way. He hypothesizes this behavior because commercial traders change their price expectations more slowly than speculators. Dale and Zyren provided empirical support for Long's theory, by analyzing data for large traders collected by the Commodity Futures Trading Commission. They also drew the following conclusions: First, noncommercial traders follow price trends, they don't set them. Second, noncommercial trad ers are likely to switch between markets quickly, which may result in amplifications of existing price trends. Since these conclusions are to be expected from noncommercials in any futures market, there is no reason to believe that their behavior had anything to do with the slowing of overall trading volume in petroleum futures markets.


# The Future Could Become More Complicated This paper has concentrated only on futures markets. In practice there are a myriad of new and increasingly complex instruments available for hedgers and speculators, such as options on futures, crack spreads, and swaps. These devices are beyond the scope of this article. It is difficult to get data For example, in the Eurodollar market, volatility in the 5-minute interval 79 

# after the Government releases the monthly unemployment report is roughly 87 times the normal 5-minute volatility. See Ederington, L. H., and Lee, J. H., "How Markets Process Information: News Releases and Volatility," Journal of Finance 48 (September 1993), pp. 1161-1191. Regressions were used with time series of daily data over the time 80 

# period from 1991 thru May 1996, with the data subdivided when EIA changed its reporting time in February 1994. Various combinations of reported stock levels, differences between API and EIA stocks, and deviations from historical stock levels were used to describe different measures of volatility. Autoregressive conditional heteroskedasticity (ARCH) models were estimated when necessary. Even these sophisticated techniques produced only weak statistical evidence of announcement effects. This result is consistent with results for securities markets. Analyzing 81 

# data available every second, vola tility after scheduled announcements usually returned to normal after 30 minutes, and volatility after surprise announcements returned to normal after only 2 hours. See Ederington, L. H. and Lee, J. H., "The Short-Run Dynamics of the Price Adjustment to New Information," Journal of Financial and Quantitative Analysis 30 (March Oil Report , Vol. 7, No. 4, Centre for Global Energy Studies (London, UK, 1995), pp. 117-134. July-August 1996), pp. 36-50. For examples of end-of-contract effects for crude oil and heating oil, see 82 

# Dale, C., "The Effects of Energy Futures Markets on the Worldwide Marketing of Oil," in Proceedings of the Fourteenth Annual International Conference, International A ssociation For Energy Economics , Honolulu, HI, Vol. II (July 8-10, 1991), pp. 786-795. Long, D., "What Drives Oil Futures? Hedging or Speculation," Global 83

# Energy Information Administration / Petroleum 1996: Issues and Trends 119 

# on all of these new areas, and also difficult to analyze how market. Low stocks of crude oil and petroleum products some companies could use several of them at once. But to tend to discourage hedging because the relationship 84 

# the extent that these instruments are substitutes for futures between futures prices and spot prices becomes less contracts, their increasing acceptance could also result in a stable. slowing in the growth of petroleum futures trading volume.


# Conclusions This chapter has examined the fundamental behavior of energy futures markets and reached the following conclusions.

! The petroleum futures markets functioned normally and effectively in 1996. Commercial and noncommercial traders behaved as predicted by long-established hedging theory. There is no evidence that large funds of money from noncommercial traders have been setting the price of crude oil or petroleum product futures. In the memo rable phrase of analyst David Long (see footnote 83), "the forces which drive futures prices have more to do with the fundamentals than the funds."

! Trading volume in energy futures has fallen off for a variety of reasons. Unleaded gasoline futures are an imperfect hedge for the greatly segmented gasoline ! Steep backwardation in prices, where future month contracts have lower prices than nearby contracts, is not an explanation for the drop in futures trading volume. Historically, the crude oil futures market has been in backwardation more than 75 percent of the time and, until recently, crude oil futures continued to make new volume records.

! Commercial traders in general, and refiners in particular, were net sellers of heating oil as prices rose. This behavior does not support a theory of a conspiracy to keep stocks low and create price backwardation; contrarily, the additional selling pressure from refiners and other commercial traders would have the effect of mitigating price increases.

! Announcements of stock levels by the American Petroleum Institute and the Energy Information Administration do not have large and significant effects on futures prices, so those announcements did not contribute to the slowdown of trading volume in energy futures.
In fact, large integrated oil companies may increasingly decide that they 84 

# are "self-hedged," i.e., parts of the company may be long in physicals and other parts short in the physical market, so on a company wide basis the need to use futures markets might be minimal.

# Cash Margin ' j N
i 

# ( Price Product i 

# x Yield Product i 

# )

& Crude Cost

& Other Feedstock Cost

& Fuel plus Other Variable Costs

& Operating , Maintenance Cost

Energy Information Administration / Petroleum 1996: Issues and Trends 121 

# Gasoline prices rose rapidly in the spring of 1996, renewing interest in petroleum market dynamics. Since gasoline price has a major influence on refinery cash marg ins, these increases raised concerns about refiners earning excess profits. This chapter focuses on refinery cash margins over the past decade to determine what factors have influenced margin fluctuations. It concludes by looking at refinery cash margins in the spring of 1996 with an understanding of margin performance over the past decade to provide perspective.



# 7. U.S. Refining Cash Margin Trends: Factors Affecting the Margin Component of Price

Introduction
While there are different kinds of refining margins, this chapter focuses on cash margins. The refining cash margin per barrel of crude oil (Figure 87) represents all product revenues minus the costs of feedstocks (crude oil plus other feedstocks) and minus other operating costs per barrel of crude oil. Margins at U.S. refineries are affected over time The cash margin (dollars per barrel of crude oil processed) by crude oil and product markets. But they also vary is defined as: according to facility configuration (complexity), scale, and efficiency, the nature of the crude processed, and the region where the facility is located. In addition, margins can be affected by regulations such as the Clean Air Act Amendments of 1990 (CAAA) that required changes in product specifications to produce cleaner fuels. Three refinery types are used to explore the historical cash margin trends for the U.S. refining industry: two typical Gulf Coast refineries and one East Coast refinery. The two Gulf Coast refineries have complex configurations containing where, fluid catalytic cracking, coking and hydrotreating. One is designed to process light, sweet crude oil, and the second has ! N represents all products produced, including gasoline, a larger coking unit and more extensive hydrotreating than the first in order to process high sulfur (sour) crude oils. The East Coast refinery has a fluid catalytic cracking unit, but no coking capability, and is designed to process only low sulfur crude oils. 85 

# In this chapter, five margins are explored to explain historical refinery margin trends. Figure 88 shows how two of these margins, one each for an East Coast and a Gulf Coast refinery, have varied historically on a quarterly basis. This chapter uses the East Coast and Gulf Coast refinery configurations to unde rstand those variations, addressing the seasonal changes and underlying growth in margins from 1985 through the early 1990's and their subsequent decline. Finally, the chapter will discuss briefly the cash margins occurring early in 1996, as both crude oil and product prices rose sharply. 

# Refining Margin Definition

diesel fuel, heating fuel, residual fuel oil, petroleum coke and other products;

! Price product is the spot price per barrel of product i i 

# received by the refiner.

! The yield of product is the volume percent of product i i 

# per barrel of crude charge. It is a function of the refinery configuration, the crude type being used in the refinery, and refinery operating conditions;

! Crude cost is the price paid for a barrel of delivered crude oil;

! Other feedstock costs include costs for MTBE and purchased butane and iso-butane;

While West Coast refiners experienced the same types of underlying 85 

# economics, they also were preparing for unique California clean fuel specifications. As a result, they are not considered in this report.

# -2.00 -1.00 0 1.00 2.00 3.00 4.00 5.00 6.00D o lla rs p e r B a rre l



# E ast C oast (B o n n y L ig h t) G u lf C o a st (A ra b L ig h t)

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 5.00 10.00 15.00 20.00 25.00

AAAA AAAA AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAA AAAAAAAA AAAA AAAA AAAA AAA A AAAA AAAA AAAA



# $19.45D o lla rs pe r B arrel AAAA A AAA AAAA 

# C a sh M a rg in O p e ra tin g C o s ts C rude O il & F eedstock C osts $1.87 $1.56



# 122 Energy Information Administration / Petroleum 1996: Issues and Trends Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

. Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

. 

# Figure 88. Quarterly Margins East and Gulf Coasts (Based on Spot Product Prices) Figure 87. Cash Margin Component of Price (East Coast Refinery Running Brent Crude Oil, Summer 1995)

# Energy Information Administration / Petroleum 1996: Issues and Trends 123 

# ! Fuel and other variable operating costs include fuel affecting i ndustry margin trends. For example, this approach burned during processing, electricity, steam, cooling provides the information to explore: water, catalysts and chemicals required to process the crude oil; and ! how refinery complexity affects performance;

! Operating and maintenance costs include all personnel ! how light-heavy crude oil and product price differences (operations, engineering, maintenance, supervisory, impact margins; and laboratory, clerical), maintenance materials, property ! how variation in regional product demand and product taxes, insurance and corporate overhead. specifications affect margins. This margin represents the cash per barrel of crude oil charge While the refining cash margins presented in this chapter are remaining to recover refinery investment (i.e., depreciation), not actual cash margins for the entire industry, they reflect interest expense, taxes, extraordinary cash items, and return the variations and trends experienced by U.S. refineries in on investment (or financial profit) (see box, p. 124). Thus, general. The analysis uses realistic yield structures for major the cash margin is a key determinant of refining profitability refinery types on the East and Gulf Coasts, and cost (see Chapter 8). structures for each type that allow for accurate analysis of Refining cash margins are complex in that they involve a multi-product process. Given a particular quality crude oil, The East Coast refinery type is represented by a 170 a specific refinery produces many different products t housand barrel per day, sin gle train refinery with reforming, simultaneously from that crude oil. Table 14 illustrates some fluid catalytic cracking (FCC), alkylation, and hydrotreating of the major components of a refinery margin for an East of naphtha and middle distillate streams. The Gulf Coast Coast refinery running Brent crude oil. The revenues are a refineries are similar in size, but also include coking function of both the prices of different products and the capability. The Gulf Coast has two refinery variations, one refinery yields for those products. Yield varies with refinery allowing processing of light crude oils with low or configuration, operating decisions, and crude oil being used. moderate sulfur content, and a second allowing processing of Product prices vary according to their respective markets. more sour crude oils by having a larger coking unit and Operating and maintenance costs vary mainly with refinery add itional hydrotreating capability, including a vacuum-gasconfiguration, labor costs, and price of fuel required to oil hydrotreater for the FCC unit feedstock. produce the products. For the East Coast refinery in Table 14, gasoline contributed a larger financial investment than the East Coast refineries. 59 percent to total revenues, although it only made up 53 The larger investment is premised on the expectation that percent of the total product b arrel . Gasoline is an important larger cash margins will be obtained to provide funds for 86 

# determinant of refiners’ margin level in any given year. An capital recovery and an adequate return for the incremental entire year’s financial success can be made or broken with a investment. The additional investments are aimed at larger than normal variation in gasoline prices alone. increasing light product yields and/or running cheaper sour, Similarly, crude oil constitutes over 3/4 of all out-of-pocket heavy crude oils. The extra coking and sulfur removal refining costs. Relatively small swings in the price of crude capab ility of the more complex Gulf Coast refiner allows this oil, unless quickly passed through to the prices of petroleum fac ility to convert most of the heavy materials in crude oil to produ cts, can produce large changes in cash margins and, higher valued gasoline and distillate, thereby improving thus, in refiners’ profits. margins. Unfortunately, the price discount for these low 

# Background for Interpreting the Margin Calculation The refinery cash margins analyzed in this chapter provide the detail required to explore specific factors that may be ! how different crude types affect margin levels;

margin trends.

87



# The two Gulf Coast refineries are more complex and require

quality crude oils relative to light sweet crude oils is not always sufficient to allow these more complex refineries to earn competitive returns on the a dded conversion equipment, an issue that is discussed in detail in a later section of this chapter.

The yields in Table 14 are based on crude oil input, not product output. light, sweet crude oils are considered high quality crude oils, and they 86 

# As a result, the Table 14 product yields will be larger than yields based on command a price premium over the heavier, higher sulfur (sour) content total product produced. crude oils. Light, sweet (low sulfur) crude oils contain a higher percentage of low 87 

# boiling point materials than heavy crude oils and therefore more gasoline and distillate (high value products) can be produced from these crude oils without needing expensive upgrading equipment. In addition, the low sulfur content diminishes the need for expensive sulfur removing processes. As a result,

# 124 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Spread, Gross Margin, Cash Margin and Profit per Barrel
Four different variables are used in this Issues and Trends publication that are each sometimes described as “margins” by petroleum analysts: spread, gross margin, cash margin and profit per barrel. These variables all capture a measure of revenues minus costs on a “per barrel” basis. They vary in (1) what is included in the revenues (2) which costs are subtracted, and (3) the barrel basis, which usually is either barrel of product sold or barrel of crude oil input.
A spread is the difference between petroleum product price(s) and crude price. For example, gasoline spread is the difference between gasoline price and a specific crude oil price. In addition to single product spreads, there are multiple product sprea ds. For example, a 3-2-1 crack spread assumes 3 barrels of crude oil can be used to produce 2 barrels of gasoline and 1 barrel of distillate. Thus: 3-2-1 Crack Spread ($/Bbl) = (2 x Gasoline Price +1 x Distillate Price -3 x Crude Oil Price)/3 Note that spread does not take into consideration all product revenues and excludes refining costs other than the cost of crude oil. Gross refining margin is similar to a crack spread, but takes into consideration all product revenues and all raw material input costs (i.e., crude oil, oxygenates, butanes, catalysts, etc.). In this publication, the unit basis for the gross margin is barrel of product sold, rather than barrel of crude oil input. The gross margin is calculated on an individual refinery level, on a company level, or on an industry level. Gross margin is used on a company level in this document. It represents all product revenues received by a company per barrel of product sold minus all raw material costs and products purchased per barrel of product sold. Revenues reported by refining and market ing companies are mainly derived from wholesale sales (branded and unbranded rack, dealer tank wagon, and bulk commercial sales), but they generally would include some spot and retail sales as well. Refining cash margin considers all product revenues and cash operating costs to produce the products. Like gross margins, cash margins can be calculated at a refinery level, company level or industry level. Refining cash margins are calculated both at a company level and at a refinery level in this document.

! The company level cash margin is all refining and marketing revenues per barrel of product sold minus all cash operating costs per barrel of product sold. As in the case of gross margins, revenues are derived mainly from wholesale sales with some spot and retail sales. The costs include all raw material inputs, and other cash operating costs such as fuel, electricity, labor, and general and administrative costs including corporate overhead. While most retail outlets are not owned by refining and marketing companies, some marketing and distribution costs are incurred by these companies and are included in the cash margin calculation. Costs do not include non-cash items such as depreciation.

! Refinery level cash margins in this report are calculated per barrel of crude oil input to the facility. The refinery cash margin represents revenues generated by an individual refinery selling its product at the refinery gate minus its individual cash refining costs. The revenues and raw material costs were generated from spot prices, and were calculated per barrel of crude oil charged to the refinery. The other cash operating costs are limited to refining costs (i.e., no distribution or marketing costs) and include fuel, electricity, maintenance materials and labor. Downstream profits are also sometimes estimated on a per barrel of product sold or per barrel of crude oil input. Operating net income includes both cash costs and non cash costs such as depreciation, and downstream “net income” includes financing costs, income taxes and other non operating costs as well as non-operating revenues.

# Energy Information Administration / Petroleum 1996: Issues and Trends 125 

# Table 14. Refinery Cash Margin Calculation East Coast Refinery Using Brent Crude Oil Summer 1995

Price ($/Barrel) Volume Revenues (Fraction of ($/Barrel Crude Charge) Crude Charge)REVENUES 

# LPG 14.12 .061 0.86 Naphtha 19.31 .026 0.50 Premium Gasoline Conventional 23.27 .065 1.52 Regular Gasoline Conventional 21.28 .131 2.78 Premium Gasoline RFG 24.58 .131 3.21 Regular Gasoline RFG 22.90 .261 5.98 Jet Fuel 20.56 .090 1.85 No. 2 Heating Fuel 19.55 .055 1.08 Diesel Fuel - Low Sulfur 20.35 .111 2.26 No. 6 Fuel Oil - 1.0% S 15.39 .156 2.40 Total NA 1.115 22.87COST 

# Crude Oil FOB Cost 16.05 Crude Transportation Cost 0.92 Other Feedstock Cost 2.48 Revenues minus Feedstock Cost 3.42VARIABLE COST 

# Steam Cost 0.05 Cooling Water Cost 0.11 Electric Power Cost 0.22 Catalyst, Chemicals Cost 0.14 Total Fuel Burned 0.61 Total Variable Cost 1.13 Other Operating Cost 0.43 Net Margin 1.87 Note: Total yield is greater than crude input alone due to additional feedstocks (e.g., MTBE and butanes) and processing gain. Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

.

# 126 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Each of the refinery types represented is a single train ! Seasonal: Margins peak frequently in the second or third refinery (i.e., with no unit duplication), and thus has a reasonably efficient cost structure that probably represents better-than-average real-world margin performance. Nevertheless, these representations effectively illustrate margin trends over time and allow exploration of the major factors influencing their rise and fall. Operating cost data for actual individual refineries can vary considerably, even for refineries of comparable complexity. The operating costs used in the margin calculation are process-unit based, and were derived from a variety of industry and reference economic source documents. Crude oil throughput, other feedstock volumes, such as butanes, and product yields were varied quarterly to reflect the seasonal transitions between the high distillate demand and high gasoline demand seasons and to meet seasonal product quality specification requirements (e.g., gasoline Reid vapor pressure). Regulatory compliance costs were captured by making appropriate configuration, operating, and cost adjustments as regulations affecting product specifications changed. In order to reflect the effect of different reformulated gasoline (RFG) market requirements after 1995, different mixes of gasoline formulations were used for the East Coast refinery calculations than for the Gulf Coast. The East Coast refineries produced 2/3 RFG and 1/3 conventional gasoline, while the Gulf Coast refineries produced 1/3 RFG and 2/3 conventional gasoline. Spot prices (both crude oil and product) were used in deriving the Gulf Coast and East Coast refinery margins discussed and displayed throughout this chapter. Spot prices represent marginal product and crude oil being bought and sold on the market. Spot prices can vary significantly with short-term supply/demand fluctuations, and therefore probably reflect more variation in price than a company might actually experience. Most companies use a mix of contract and spot markets for both feedstock purchases and product sales. Contract market prices are usually more stable, even though many contracts use spot prices in their pricing formula. 

# Margin Variations Figure 88 displays the margin calculation for the Gulf Coast refinery running a sour, moderately heavy crude oil (Arab Light) and for the East Coast refinery running a light sweet crude oil (Nigerian Bonny Light). These margins exhibit several typical variations: quarters and hit their low points during the winter (fourth or first quarters);

! Long-term: A general upward trend unde rlies the margins from 1985 through 1990, followed by a subsequent weakening in margins from 1990 through 1995, with the possibility of a turnaround in 1996;

! Regional: The Gulf Coast refinery margins exhibit a larger variation in the underlying long-term trend than East Coast refinery margins, rising faster and overshooting the East Coast margin, then reversing and falling back below the East Coast margin by 1993. This section discusses market factors that explain these variations, including product and crude supply/demand balances, the interactions of light versus heavy product demand, light versus heavy crude availability, the availability of conversion capacity, and changing product specifications brought about by the need for cleaner fuels. 

# Seasonal Margin Variations Stem Mainly From Gasoline Market U.S. refining margins are highest in the spring and summer months (second and third quarters) because they are heavily influenced by gasoline markets. Gasoline provides the highest contribution to cash margin of any single product. For the East Coast refinery processing Brent crude oil, in the example of Table 14, gasoline comprises about 53 percent of the total product slate produced and contributes about 59 percent of total revenues. The gasoline market is highly seasonal, with price spreads (spot gasoline minus crude oil prices) generally cresting in late spring or early summer as the industry prepares to meet peak driving demand, which usually occurs around June (see Chapter 2). The rising gasoline spreads are reflected in rising cash margins. Consequently, the seasonal swings of refinery margins correspond to price variation in the gasoline market (Figure 89). In fact, the spring margin increase is a primary determinant of a refiner’s performance for an entire year. Distillate has a counter-cyclical demand and price pattern from gas oline. The distillate price rise in the fall tends to moderate the margin’s seasonal pattern, but it does not counterbalance the gasoline market’s strong seasonal influence on refining margins. Distillate’s smaller influence is primarily a result of its small volume relative to gasoline. (Distillat e’s share of the product barrel produced by an East Coast refinery using Brent crude oil is about 23 percent, while gasoline’s share is about 53 percent.)

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -1.00 0 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00Dollars per Barrel 

# Gasoline Spread

Gulf Coast (Arab Light)

Energy Information Administration / Petroleum 1996: Issues and Trends 127 

# Figure 89. Quarterly Gulf Coast Refining Margin and Gasoline Spread (Based on Spot Product Prices)

Sources: Crude Oil, Natural Gas Liquid, Prod uct Prices, and Spot Spreads: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

.


# Refining margins are generally lowest during the winter gasoline prices relative to crude oil. The weak gasoline quarters (fourth and first quarters) when gasoline demand spreads in those years contributed to the low seasonal swings and prices have fallen and inventories are building. The in margins and to lower a nnual refi ning margins. The longerweather’s impact on distillate pri ces tends to determine if the term variation in world crude oil supply/demand balance first quarter or the fourth quarter is the lowest margin s eems to play a role in the strength or weakness of the quarter. Early cold weather can drive distillate prices up in pr oduct market seasonal variat ion, which is discussed below. the fourth quarter, pushing fourth quarter margins higher than first quarter, and vice versa (e.g., fourth quarter 1988 margins were higher than first quarter 1989 margins, but fourth quarter 1993 margins were lower than first quarter 1994.) Seasonal swings vary in magnitude. For example, the spring seasonal increase in margins was low in 1992 and 1993. Again, the strong influence of gasoline markets on refinery cash margins can partially explain the margin behavior. Gasoline spreads also showed little seasonal climb in 1992 and 1993. In the United States, the slow growth of gasoline demand in the early 1990's coupled with strong supply kept gasoline stocks relatively high throughout the summers of 1992 and 1993 (Figure 90). The market responded with weak 

# Long-Term Margin Trends Driven By Multiple Factors In addition to seasonal factors, several long-term factors can affect margins. Such factors include crude market tightness which sometimes influences product market tightness for extended periods, the light-heavy crude oil and product supply demand balance, refining capacity utilization, and implementing the reformulated gasoline (RFG) program. However, not all of these factors had a significant effect on margins over the past decade.

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 190,000 200,000 210,000 220,000 230,000 240,000 250,000 260,000Thousand Barrels



# 128 Energy Information Administration / Petroleum 1996: Issues and Trends Sources: Energy Information Administration (EIA), 1986-1995: Petroleum Supply Annual , Vol. 2, Table 2. 1996: Petroleum Supply Monthly (various issues), Table 2. 

# Figure 90. Total Gasoline Stocks



# Product Market Tightness Can Be Related to World Crude Market Tightness The weak seasonal increases in margins and gasoline spreads in 1992 and 1993 can be related to crude market supply /demand balance. During 1992 and 1993, the world experienced an oversupply of crude oil and products as demand worldwide languished from a recession. Petroleum demand recovered and grew substantially in 1994, but crude oil supply grew strongly as well, keeping markets from tightening very rapidly, and preventing a strong price The underly ing upward movement in refining margins from resurgence. During periods when crude markets are loose the mid-1980's until the early 1990's, and their subsequent 88 

# (excess supply re lative to demand), product markets are less decline, can be explained in part by the changing light-heavy likely to tighten. The wide surplus availability of crude oil to b alance for both crude oil supply and product demand and respond to any product demand requirements can keep the availability of conversion capacity to upgrade heavy product price spreads relatively weak. Conversely, tight materials to light products. Over the last decade, the lightcrude markets can be accompa nied by tight product markets. heavy price difference for both crude (Figure 91) and When crude markets are tight, crude oil prices can be pulled product (Figure 92) have tracked the increase and decrease higher by tightening product markets as happened in early in refinery margins. 1996 when distillate demand pulled crude oil prices up at the end of winter. However, in either case, product markets do not necessarily follow in lock step. Both crude and product markets were tight in 1996, but in early 1997, crude markets loosened while product markets remained tight. If crude markets remain loose, product markets will likely follow. 

# Light Versus Heavy Balances for Crude and Products Affect Margins

The price differences between light and heavy crude oils and light and heavy products are among the most important variables affecting refinery margins. These differentials are the incentives for installing expensive processing facilities in a refinery, including fluid catalytic cracking (FCC), hydrocracking, coking and other residual conversion The increasing, light-to-heavy crude oil supply ratio had a depressing 88

# effect on margins during the 1990's, as discussed in more detail under longterm trends. Light sweet crude supply was especially abundant during this time, and the light-heavy crude price difference continued to drop substantially, with Bonny Light crude oil falling to near parity with Arab Light crude oil in early 1995. (Des pite its name, Arab Light is an intermediate crude oil based on bottoms content.)

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 1.00 2.00 3.00 4.00 5.00 6.00Dollars per Barrel



# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

0 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00Dollars per Barrel



# Energy Information Administration / Petroleum 1996: Issues and Trends 129 

# Figure 91. Light Minus Heavy Crude Price Difference Spot Bonny Light - Arab Light

Source: Standard & Poor’s Platts.

Source: Standard & Poor’s Platts. 

# Figure 92. Light Minus Heavy Product Price Difference (Spot Gulf Regular Conventional Gasoline - 1 Percent S Residual Fuel)

# 130 Energy Information Administration / Petroleum 1996: Issues and Trends 

# facilities that convert the heavy material in crude oil to covering the added variable operating cost of refineries lighter, higher-valued products such as gasoline and diesel. newly equipped to run heavy sour crude oil. During the first Crude oils vary in quality primarily based on how much small light-heavy price differentials allowed virtually no heavy material they contain. In Table 15, a light, high added margin for heavy crude refiners to generate return on quality crude oil, Nigerian Bonny Light, is compared with a their recently installed conversion facilities. heavier, lower quality Saudi Arabian crude oil. The Bonny Light crude oil contains only 3.4 percent of heavy bottoms After the crude oil prices dropped below $20 per barrel in fraction compared to 27.2 percent heavy bottoms fraction for 1986, demand for crude oil began to g row again. Demand for Arab Heavy. The heavy material in crude oil can be made heavy products continued to decline in the United States as into heavy product or can be converted into light product if well as in other major world oil markets (Figure 94), but at a refinery has the conversion facilities. The price of heavy a slower rate. Addition of new residual oil conversionoil products is determined in lower valued market projects fell drastically. As Figures 91 and 92 show, lightapplications where residual fuel oils compete with coal and heavy crude and product differentials began to increase in natural gas. When demand and price of residual oil decline the late 1980's and grew until 1991 with corresponding relative to other refined products, light crude oils become improvements in refinery margins. more attractive. Light-heavy product and crude price differentials increase. As the differentials increase, the In the early 1990's, light-heavy differentials again declined. incentive for refiners to install more heavy crude conversion In part, excess world conversion capacity contributed to the equipment increases. But markets move in both directions. decline. Two major sour crude processing facilities were Over time, the relative demand for light and heavy products begun in the United States. These projects were joint may shift, more light crude oil may become available, or ventures of U.S. refiners and heavy crude oil exporting refiners may install too much conversion equipment. Each of countries. When complete, a Lyondell/PDVSA project will these circumstances will tend to push the light and heavy increase heavy crude processing at its Houston refinery from prices closer together, reducing the differential. The impact 120 thousand barrels per day to 200 tho usand barrels per day, on refinery margins of variations in light-heavy differentials and a Shell/Pemex project will allow its Deer Park refinery have had profound impacts on U.S. refiner margins over the to run 100 thousand barrels per day of heavy Mexican Maya past two decades. A brief review of this time period provides crude. Conversion capacity in Europe has also grown, but at an illustration of these important margin variables. a much more modest rate in the 1990's compared to the mid In the late 1970's, widening light-heavy crude oil price differentials and forecasts of crude oil supply becoming In the 1990's, conversion capacity was only part of the heavier as product demand grew sp urred a serious movement downward pressure on light-heavy differentials. The primary to install heavy crude oil processing facilities. At this time, factor driving the decline was a substantial increase in light, domestic crude oil production was rela tively constant and the sw eet c rude oil production in the Atlantic Basin market mix was growing heavier (Figure 93). Crude oil prices had region. The largest part of the increase came from the North risen dramatically, but demand growth was still strong. Sea, where production increased by 60 percent (2160 Light-heavy crude oil price differentials increased, rising thousand barrels per day) from 1990 to 1995. West African each t ime crude supply tightened. Many U.S. refiners c ountries and the new light sweet Cusiana area in Colombia expected import levels to grow, and they thought that also contributed increased supplies of light sweet crude oil. additional imports would probably come increasingly from Saudi Arabia added to the growing differential by limiting the larger world producing areas, which supplied mostly produc tion of its heavy crude (Arab Heavy) and raising its heavy sour crude. Thus, as the 1980's began, many U.S. price to encourage use of Arab Super Light. This policy refiners were engaged in adding residual conversion added increased downward pressure on the light-heavy capabilities. differentials in 1994. The Saudi limitations on their heavy But from 1981 to 1986, oil markets did not evolve as Atlantic Basin drove the price differential down to the point forecasted. Product demand fell, and crude import in 1994 that the West African c rude oils became attractive to requirements diminished. Product demand also fell the Asian market, despite the long freight haul. The trade worldwide, so the supply of light crude oil was ample at the press reported that movements from West Africa to Asia in resulting reduced crude oil demand levels. Conversion the summer 1996 reached 800 thousand barrels per day. capacity planned in the late seventies was now coming on Since 1994, in fact, the demand pull from the Asian markets stream in the United States and Europe. Consequently, the has prov ided some price support for the value of Atlantic light-heavy differentials dropped dramatically, barely Basin light-sweet crudes, in effect providing a price floor. half of the 1980's, total refining margins were low, and the

1980's (Figures 95 and 96).

crude together with the glut of light-sweet crude in the

# 1975 1980 1985 1990 1995 0 4 8 12 16 20

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# C rude Oil Imports Product Im ports and Other

C rude Oil and NGL Production

Energy Information Administration / Petroleum 1996: Issues and Trends 131 

# Figure 93. U.S. Petroleum Supply

Note: NGL = Natural gas liquids. Sources: Energy Information Administration (EIA), 1975-1995: Annual Energy Review (1995), Table 5.1. 1996: Petroleum Supply Monthly (February 1997), Table 5. 

# Table 15. Distillation Volume Percent Yields
Fuel Type Arab Heavy Arab Light Bonny Light Nigerian
Light Ends 6.3 7.7 6.6 Gasoline 15.5 18.6 20.7 Kerosene 7.2 8.6 9.5 Diesel 16.2 20.3 30.6 Heavy Atmospheric Gas Oil 27.6 28.9 29.2 Bottoms (1,050 E F+) 27.2 15.9 3.4 Source: Energy Information Administration, estimates based on crude assays from company sources.



# Before showing the full margin impact of similar refineries heavy. The price spread is lowest for the highest valued, processing light versus heavy crude oils, the link between the light, sweet crude oil (Bonny Light), and is highest for the light-heavy differential and average refinery margins can be lower valued, heavy, sour crude oil (Arab Heavy). Markets explored by observing the simple spread between gasoline weakened in 1992 when world crude oil supply outstripped prices and light and heavy crude prices. Due to gasoline’s petroleum demand, and both gasoline price spreads fell, but strong influence over cash marg ins, the gasoline price spread the heavier crude spread fell more than the lighter crude should provide an indication of margin performance. Both spread. As the 1990's progressed, the supply of light, sweet the full margin and gasoline spread observations will crude oils in the Atlantic Basin increased, and the heavy illu strate the small premiums received by those processing crude oil-gasoline price spread fell closer to the light crude heavier crude oils. Figure 97 shows the difference between oil-gasoline price spread. In 1995, the Arab Heavy spread gasoline price and two crude oil prices, one light and one was almost at parity with the Bonny Light gasoline price

# 1975 1980 1985 1990 1995 0 10 20 30 40 50 60(Percent of Total Consumption)



# Japan
Europe

United StatesHeavy Fuel Oil Weight



# 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 

# 0 5 10 15 20 25 30 35 40Prim ary Distillation Capacity (Percent) 

# Cat C racking

Reform ing

Thermal

132 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 94. Decline in Heavy Fuel Oil Consumption (Percent of Total Petroleum Products Consumed in Each Country or Region)

Source: British Petroleum, Statistical Review of World Energy, 1996

.

Sources: 1981-1995: Energy Information Administration (EIA), Form EIA-820 "Annual Refinery Report." 1995: The stream day capacities are projected capacities reported on Form EIA-820 "Annual Refinery Report” (1995)." 1996: Number of refineries and crude distillation capacity from Form EIA-810 "Monthly Refinery Report" (January 1996). 

# Figure 95. U.S. Downstream Processing Capacity

# 1980 1982 1984 1986 1988 1990 1992 1994 1996 0 2 4 6 8 10 12 14 16 18Primary Distillation Capacity (Percent)



# Cat Cracking Reform ing
Thermal

1991 1992 1993 1994 1995 1996 

# 0 2 4 6 8 10 12 14 16 18Dollars per Barrel



# Nigerian Bonny Light Arab Heavy

Energy Information Administration / Petroleum 1996: Issues and Trends 133 Source: Energy Information Administration (EIA). Calendar Day Capacity as of January 1 of Each Year: EIA, International Energy Annual (various issues), Table 3.6. 

# Figure 96. Western European Downstream Processing Capacity

Source: Standard & Poor’s Platts. 

# Figure 97. Gasoline Spread Comparisons (Spot Gulf Regular Conventional - Spot Crude)

# 134 Energy Information Administration / Petroleum 1996: Issues and Trends 

# spread. Because of gasoline’s strong effect on refining boiling materials that can be upgraded to lighter, higher margins, one might expect to find that, as light-heavy crude valued products. This type of investment is driven only by differentials decline, the less complex refiners running light- light-heavy pr oduct price differentia ls; however, as discussed sweet crude oils would see little c hange in margins, but more above, light-heavy product price differences are intimately complex refiners running heavy-sour crudes would tied to light-heavy crude price differentials. From 1986 to experience a decline. Hence, average industry margins would 1990, the Brent coking refinery earns an increasing margin decline. premium over the non- coking refinery. However, the coking Now consider the full margin variation seen over the past decade as a result of light/heavy crude and product market variations. Two cases are used to explore the impacts. The first case compares two similar refineries processing different crude oils, one light and one heavy. This case illustrates the advantage to refiners of investing so as to be able to use lower priced, heavier crude oils without much change in product slate. The second illustration compares two refineries processing the same crude oil to produce different product slates, thus showing the advantage gained by investing to produce a lighter product slate. The first case (Figure 98) compares the margins for Arab Light and West Texas Intermediate (WTI) crude oils processed in a cracking and coking refinery on the Gulf Coast. The figure shows the difference between the two margins. While both of these crude oils are being run through similar refineries, the Arab Light crude oil has a higher percent of heavy residual boiling range material than WTI, and therefore requires a substantially larger coking unit and also added hydrotrea ting to remove sulfur from the fluid catalytic cracking unit feedstock. The extra investment in equipment needed to process Arab Light requires a higher margin to make that investment economically viable. However, in 1986 and 1987, and a gain in 1994 and 1995, the margins for processing Arab Light in the more expensive refinery were smaller than those for processing WTI in the same r efinery. From 1986 to 1990, Arab Light margins increased relative to WTI because the light-heavy crude price difference grew, providing increased contributions to the upgrading investment. But then the Arab Light margins declined relative to WTI until 1995, as the light-heavy crude oil price differences narrowed again. Over the last decade, refiners serving the same markets but using heavier crude oils have not earned a significant premium over refiners with less capital invested and using lighter crude oils. The second case, which shows the historical advantage to refiners of investing to produce a lighter product slate, looks at two refineries producing different product slates from the same crude oil. A comparison of the margins for processing Brent crude oil in a Gulf Coast refinery with a coker and in an East Coast refinery containing no coking unit shows some of the benefits of upgrading to achieve a higher mix of lighter, higher-valued products (Figure 99). Although refinery upgrading is norma lly discussed in conjunction with heavy, sour crude oils, lighter crude oils also contain residual refinery’s premium falls from 1990 to 1995

. This difference also is affected by other factors such as regional product price di fferences, but the influence of the rise and fall in light-heavy crude oil and light-heavy product price differences is clearly evident. In summary, the market dynamics surrounding the interactions of light versus heavy product demand, light versus heavy crude availability, and availability of convers ion capacity all contributed to the long-term margin variations over the past decade. These market dynamics affected not only those refiners who installed heavy material conversion capacity, but all refiners in the industry. 

# Refining Capacity Utilization’s Influence on Margins Not Always Evident Apart from product and crude prices, refinery capacity utili zation is another variable that potentially can affect margin behavior as discussed above. In the United States, capacity utilization has increased significantly, averaging well over 90 percent since 1992, for the atmospheric distillation units. Utilization also increased for conversion units downstream of the distillations units, such as cokers and catalytic cracking units. Generally, as production levels 89 

# in any manufacturing industry approach capacity limits, marginal costs to produce a product increase. For example, idle capacity with high variable costs may be brought online to help meet rising demand. As marginal costs per unit of product increase, prices increase, and the manufacturing industry can experience an increase in average margin (price minus cost). In refining, costs per unit of product may increase at high utilization be cause downstream units can be fully loaded before distillation inputs reach maximum levels. (At this point, the refiner is getting hydroskimming yields on the last increments of capacity.) But refiners don’t suddenly hit a capacity constraint. They have flexibility to avoid constraint-driven fast cost increases at high utilizations by changing operations, by using lighter crude oil mixes that don’t require as much downstream unit capacity, and by purchasing product from other world refining areas. As a result, the importance of utilization only becomes apparent when refiners push to the last few increments of capacity, and then the results can be dramatic. California has

Lidderdale, Tancred, Nancy Masterson, Nicholas Dazzo, “U.S. Refining 89 

# Capacity Utilization,” En ergy Information Administration, Petroleum Supply Monthly , DOE/EIA-0109 (95/10) (October 1995), pp. xxxiii-xxxix.

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -2.50 -2.00 -1.50 -1.00 -0.50 0 0.50 1.00 1.50D o lla rs p e r B a rre l



# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -0.50 0.00 0.50 1.00 1.50 2.00D o lla rs p e r B a rre l



# Energy Information Administration / Petroleum 1996: Issues and Trends 135 

# Figure 98. Value of Upgrading: Heavy Crude Margin - Light Crude Margin (Arab Light (Heavy) and WTI (Light) Crude Processed in Complex Refinery)

Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

. 

# Figure 99. Value of Upgrading: Margin with Coker Minus Margin Without Coker

Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

.

# 136 Energy Information Administration / Petroleum 1996: Issues and Trends 

# experienced this problem with the introduction of its unique RFG that few other refiners outside of the area can produce in large quantities. With the exception of California, the U.S. refining industry has not exhibited increases in margin with corresponding increases in capacity utilization. While distillation capacity utili zation and capacity utilization for downstream units grew strongly throughout the 1990's, margins declined (Figure 100). From an economic viewpoint, this observation implies the industry is not hitting capacity constraints where the downstream units are fully loaded, or at least any effects of capacity utilization are relatively small and masked by other, more dominant margin drivers. In recent years, analysts have begun to focus on the U.S. refinery utilization must also be viewed in the context utilization of downstream capacity, which represents a far of world refining capacity. In the future, even if U.S. larger investment per barrel than distillation capacity, to refineries begin to feel capacity constraints, other countries explain margin behavior. Demand increased and distillation may be able to pr oduce products in exc ess of their own needs capacity utilization increased in the 1990's, and downstream and ship them to the United States more cheaply than U.S. units were added and improved to be able to increase refiners can produce the products. In this case, the U.S. will produ ction of light products and to respond to changing not see much of an increase in operating costs until world environmental regulations. The underlying cost structure of industry excess capacity diminishes. the industry changed. While more expensive units were being expanded, efficiencies were also being incorporated. Eventually, world petroleum demand likely will grow until This change resulted in debottlenecking and, in some cases, capacity bo ttlenecks are experienced. If the industry reaches improvements in variable costs. But here again, it has proven a point where the most expensive downstream units are fully difficult to establish a good quant itative relationship between loaded, refiners w ill begin using m ore light crude oils that do capacity utilization and margins. Regardless, we cannot not require as much downstream capacity to produce the conclude from lack of a simple correlation that capacity higher valued products if light crude oil supplies are utilization is not an important variable. In the future it could av aila ble. The increase in light crude oil demand will, in have a significant impact on margins. turn, drive up the light crude oil price relative to heavy crude A better understanding of the capacity utilization/margin relationship can be gained by reviewing how refiners operate residual conversion facilities. Once refiners install cokers or heavy oil crackers, they tend to operate these units near full capacity, seemingly without regard to crude or product price variation. But full utilization is generally a rational economic decision. Most of the cost of the facilities are fixed costs, such as the sunk investment cost and labor used to run and maintain the units. Fuel, utilities, catalysts and chemical costs are functions of throughput. Thus, based on variable costs, the refiner may find it more economic to buy heavier crude oils and run the conversion units at full utilization most of the time, even though the difference between light and heavy crude prices may have contracted significantly. The smaller price differences diminish the ability of the refiner to recoup the investment in the conversion equipment and earn a competitive return. The result is that downstream units may be run at high utilizations both when margins are rising and when they are falling. The measures of the need for more or less bottoms conversion capacity are the light-heavy crude and product price differentials. There is no fixed demand volume for residual fuel oil, and when bottom conversion capacity is short and light crude availability is tight, residual fuel production is large. To clear the market, residual fuel producers must drop the price and sell into less attractive markets. The economics during such situations favor installing more conversion equipment to reduce residual fuel production. But if too many refiners install conversion equipment, or the quality balance of available supply changes, prices will shift. In all these cases, capacity utilization will not indicate if a capacity surplus exists or more is needed, but the light-heavy price differences are clear indicators.

oil and the light product prices relative to heavy products. Margins would be expected to increase as well. That increase in margins will provide the incentive to build new capacity. 

# Reformulated Gasoline Margin Impacts Were Overwhelmed By Other Factors One of the most significant regulatory factors affecting refining costs was the implementation of the Clean Air Act Amendments of 1990 (CAAA). Investments were made to lower the sulfur content of diesel fuel and to comply with the specifications of reformulated gasoline. Many of the refining facility improvements made during the 1990's were prompted by the need to meet the new clean fuel requirements. (The oxygenated gasoline requirement only required refiners to add oxygenates to the gasoline and adjust how some units were run in order to correct for the additional octane provided by the oxygenates.)

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 

# 0 80 85 90 95 100Percent



# Energy Information Administration / Petroleum 1996: Issues and Trends 137 

# Figure 100. Atmospheric Distillation Unit Capacity Utilization

Sources: Distillation Capacity: Energy Information Administration (EIA), 1981-1995— Petroleum Supply Annual (Vol. 1), Table 16. 1996— Petroleum Supply Monthly (February 1997), Table 28.



# EIA previously analyzed the effect of RFG on refiners and containing benzene for sale as naphtha product. Arab Light reported the results in the Petroleum Marketing Monthly . crude oil, on the other hand, benefits from the RFG oxygen 90 

# The result of the current analysis is similar to the earlier EIA study in that the margins are based on specific crude oils used in specific U.S. regions. Yield and cost data pre-RFG and post-RFG introduction were developed, which allowed for separation of RFG cost impacts from market changes that occurred simultaneously. Not all refiners were equally affected by the regulatory change. Bonny Light crude oil was considered a very good crude oil for producing gasoline in the pre-RFG era. It contains high yields of good quality naphtha, which is reformed to produce gasoline. Unfortunately, the naphtha derived from many light crude oils also contains relatively high levels of benzene and material that yields benzene when the naphtha is processed. While benzene has a high octane value, it is also carcinogenic and RFG specifications limit its level in gasoline. In order to meet RFG specifications, refiners historically using only Bonny Light or Brent had to invest in new processes such as isomerization to remove benzene from the naphtha or to separate some of the naphtha requirement. Arab Light naphtha has a low aromatic content, including low benzene content, so benzene removal is less problematic than with Bonny Light. However, Arab Light’s low aromatic content results in a relatively poor octane gasoline pool. Fortunately, the oxygenates required in RFG not only improve fuel cleanliness, but also boost octane, countering the lack of aromatics. WTI sits in the middle between Bonny Light or Brent and Arab Light. A close examination reveals that the change in refining costs attributable to RFG had no major impact on margin behavior between 1993 and 1995. In fact other market factors overwhelmed any impact of the introduction of RFG. For example, Arab Light margins fell much more between 1993 and 1995 than either Bonny Light or WTI, in spite of its RFG benefit (Figure 98). The rapidly declining light-heavy crude difference had more influence over the relative margin changes than did RFG. When gasoline margin contributions were broken out separately, Arab Light crude processors showed slightly higher contributions to margins from this product, as expected, but this advantage is overwhelmed by factors affecting costs. As stated in the earlier study, across the spectrum of refineries, very little additional margin appears to have been generated to cover the increased John Zyren, Charles Dale, and Charles Riner, “1995 Reformulated 90 

# Gasoline Market Affected Refiners Differently,” Energy Information Administration, Petroleum Marketing Monthly , DOE/EIA-0380(96/01) (January 1996), pp. xiii-xxxi.

# 138 Energy Information Administration / Petroleum 1996: Issues and Trends 

# facility investment or any return on RFG investment in the time since RFG production began through 1996. 

# Gulf Coast Margins Have Been Generally Higher Than Those on the East Coast The last factor contributing to margin variation is the regional differences in refineries. This chapter explores only East Coast and Gulf Coast refineries, leaving the unique aspects of California refineries for a future discussion. Table 16 shows the margins calculated for typical refineries in each area using several crude oils. Figure 101 compares the margins for the East Coast refinery running B rent crude oil and the Gulf Coast refinery running Brent and WTI. The Gulf Coast refinery margins are generally higher than the East Coast margins. The extra conversion equipment contained in the Gulf Coast refinery allowed the refiner to improve the yields of the lighter, higher valued products over the East Coast refiner, even when using lighter crude oils. Yet the interesting point is that the improvement is fairly small. Very little premium is available to cover the costs and returns on this extra conversion equipment. However, the East Coast refinery used to generate these margins is as cost efficient as the Gulf Coast refinery for the same processing equipment. In reality, some East Coast refineries are not very cost efficient, so Gulf Coast refiners likely experienced larger margin premiums over East Coast refiners than shown here. Seasonal variations are slightly different between the Gulf Coast and the East Coast refineries. The Gulf Coast refineries exhibit large second quarter margins, which fall again in the third quarter. Up until 1992, the East Coast refinery margins were similar. However, beginning in 1992, a slightly different pattern began emerging. While East Coast margins rise in the second quarter, they don’t fall back as much in the third quarter as they do on the Gulf Coast margins. The reasons for this shift are not clear. Since 1990, the margins of Gulf Coast refiners processing either Brent crude oil or WTI moved together fairly closely, with East Coast refiners using Brent trailing somewhat behind. Since 1994, though, the East Coast refiners using Brent improved their position. Part of this shift may be due to a shift in relative gasoline spot prices between the East and Gulf Coasts that occurred during 1994 and 1995. Since 1990, New York Harbor spot gasoline prices frequently exhibited a stronger premium over Gulf Coast prices during the second half of the year. But in 1994 and 1995, this premium was much larger than usual, boosting the margin for East Coast refiners using lighter crude oils. 

# Spring 1996 and Future Trends As was discussed in Chapter 1, gasoline and distillate prices rose rapidly in April of 1996. Were these price increases reflected in unusually high margins? As shown in Figure 88 and other margin figures throughout this chapter, the answer is no. The first and second quarter margins in 1996 were not unusually high compared to those experienced over the last decade. Two factors contributed to cash margin increases since 1994. The first was a mild widening of the light-heavy price differences for both crude and product. While this increase was not very significant, it reversed the decline in this price difference. As discussed above, the t urnaround in light-heavy price differences should have a positive effect on margins. The second factor that caused stronger margin performance was a tight petroleum supply/demand balance. In 1996, this latter factor probably had a greater influence on margin increases. Recall from earlier discussion in this chapter that from 1992 through 1993 markets weakened:

! petroleum production exceeded petroleum demand worldwide as well as in the United States; ! worldwide stock builds in the second and third quarters exceeded stock dr aws in the high demand fourth and first winter quarters; ! market prices for crude oil and products weakened; ! seasonal product price s pread increases were smaller than usual; and ! overall price levels drifted downward, causing lackluster margin performance. The supply/demand balance began to tighten in 1994, but record low light-heavy price differences kept margins depressed. In 1995 and 1996, the supply/demand balance pattern is the reverse of 1992 and 1993:

! product demand outpaced crude supply increases; ! winter stock draw downs exceeded summer stock builds, causing overall inventory levels to drop; ! this tight balance caused crude prices to increase; and ! in the summer quarters (second and third), U.S. refiners’ margins benefitted from the tight supply/demand balance reflected in low inventories. The margins for the second quarter 1996 were similar to those second quarter 1995, and both second quarter margins showed stronger seasonal upturns than were experienced in 1992 and 1993. If the light-heavy price differences had also been high, the overall margin levels would have been higher.

# Energy Information Administration / Petroleum 1996: Issues and Trends 139Table 16. Quarterly MarginsRefinery 85Q1 Q2 Q3 Q4 86Q1 Q2 Q3 Q4 87Q1 Q2 Q3 Q4 88Q1 Q2 Q3 Q4 89Q1 Q2 Q3 Q4BONNY LT -EC 1.33 2.99 1.09 0.53 0.14 0.68 0.33 1.25 1.18 2.26 2.76 4.02 1.45 3.15 2.38 2.24BRENT-EC-0.20 0.48 0.13 0.58 0.66 1.95 2.28 3.71 1.28 3.72 2.06 1.54BRENT-GC0.33 0.69 0.40 0.43 0.83 2.36 3.20 3.98 2.00 4.53 2.50 2.03WTI-GC 1.13 2.33 1.23 0.65 2.23 2.70 0.61 0.28 0.20 0.25 -0.50 0.21 0.30 1.69 3.17 3.39 1.38 3.19 1.21 1.66ARAB LT-GC -2.34 -0.08 -1.17 -0.48 0.25 3.26 0.84 -0.67 -0.95 0.03 -0.15 -0.12 0.27 1.69 2.90 4.07 2.05 3.83 2.15 2.33Refinery 90Q1 Q2 Q3 Q4 91Q1 Q2 Q3 Q4 92Q1 Q2 Q3 Q4 93Q1 Q2 Q3 Q4 94Q1 Q2 Q3 Q4BONNY LT -EC 1.96 4.56 3.47 -1.41 1.42 3.32 2.66 1.05 0.62 1.69 1.72 1.06 0.62 1.63 1.73 1.40 2.60 2.10 1.97 0.37BRENT-EC 1.91 4.30 2.29 -1.62 1.99 2.81 2.27 0.92 0.25 1.35 1.46 1.10 0.43 1.52 1.60 1.14 2.48 1.44 1.30 1.08BRENT-GC 3.07 6.19 3.26 -0.98 2.88 4.50 3.39 1.72 1.59 3.25 2.29 1.72 1.46 3.08 2.34 2.00 3.05 2.73 2.25 0.72WTI-GC 1.80 5.39 4.40 0.19 2.72 3.53 2.38 1.07 1.13 2.59 1.13 0.91 0.51 2.16 1.57 1.10 2.46 1.54 1.19 -0.07ARAB LT-GC 3.01 5.36 4.29 0.84 3.33 4.46 3.47 1.88 1.58 2.73 1.50 1.17 1.58 2.77 2.16 1.59 2.12 2.02 0.76 -0.58Refinery 95Q1 Q2 Q3 Q4 96Q1 Q2 Q3 Q4BONNY LT -EC 0.05 1.83 2.08 1.23 1.01 1.96 1.17 1.08BRENT-EC 0.75 2.41 2.30 1.47 1.70 2.63 1.17 1.49BRENT-GC 0.80 3.15 2.36 1.13 1.57 3.22 1.83 1.86WTI-GC -0.26 2.56 1.20 0.32 0.56 1.50 0.64 0.97ARAB LT-GC -0.96 1.62 0.58 -0.06 0.38 1.31 0.95 1.31Note: EC=East Coast Refinery. GC=Gulf Coast Refinery.Sources:Crude Oil, Natural Gas Liquid, and Product Prices:Standard & Poor’s Platts.Spot MTBE Price: 

# Oxy-Fuel News, Hart/IRI Fuels Information Services (Arlington, VA).Crude OilTransportation Costs: Average spot freight rates reported in 

# Weekly Petroleum Argus, Petroleum Argus Limited (New York, NY), 

# International Crude Oil and Product Prices, Middle East Petroleumand Economic Publications (Nicosia, Cyprus)and 

# Oil and Energy Trends, Blackwell Publishers (Oxford, UK).Refinery Yields:EIA estimates based on crude assays from company sources anddownstream process unit yields based on proprietary correlations.Operating Costs:EIA estimates based on company data and various public literature sources.Cost Escalation:Based onNelson Farrar Index published in first issue ofeach month of 

# Oil and Gas Journal, Pennwell Publishing Co. (Tulsa, OK).Purchased Natural Gas Price:Energy Information Administration (EIA),price delivered to industrial customers in Louisiana and Texas, 

# Natural Gas Annual.Electric Power Cost:EIA, large industrial customer price, 

# Electric Power Annual.

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -2.00 -1.00 0 1.00 2.00 3.00 4.00 5.00 6.00 7.00Dollars per Barrel



# East Coast (Brent) Gulf Coast (Brent) Gulf Coast (W TI)

140 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 101. East Versus Gulf Coast Margins Running Brent and WTI (Based on Spot Product Prices)

Sources: Crude Oil, Natural Gas Liquid, and Product Prices: Standard & Poor’s Platts. Spot MTBE Price : Oxy-Fuel News , Hart/IRI Fuels Information Services (Arlington, VA). Crude Oil Transportation Costs : Average spot freight rates reported in Weekly Petroleum Argus , Petroleum Argus Limited (New York, NY), International Crude Oil and Product Prices , Middle East Petroleum and Economic Publications (Nicosia, Cyprus) and Oil and Energy Trends , Blackwell Publishers (Oxford, UK). Refinery Yields: EIA estimates based on crude assays from company sources and downstream process unit yields based on proprietary correlations. Operating Costs: EIA estimates based on company data and various public literature sources. Cost Escalation: Based on Nelson Farrar Index published in first issue of each month of Oil and Gas Journal , Pennwell Publishing Co. (Tulsa, OK). Purchased Natural Gas Price: Energy Information Administration (EIA), price delivered to industrial customers in Louisiana and Texas, Natural Gas Annual

. Electric Power Cost: EIA, large industrial customer price, Electric Power Annual

.



# What does the future hold? The turnaround in light-heavy and refrain from overpr oduction. These changes happen over price differences indicates increasing margin strength. But many months. The tight supply/demand balance will not the light-heavy differentials are widening slowly, and by the reverse in time to sign ificantly affect margin performance in end of 1996, the associated margin changes were small. 1997. However, the balance is expected to begin changing in Suppl y/demand balances will again move into a supply 1998. The promises of increased light sweet crude oil surplus following typical economic cycles, but such production in the North Sea and in Colombia will continue movements do not happen quickly. The roots of the surplus to keep light-heavy differentials low, dampening margin lie in increased Iraqi production, increasing non-OPEC growth. Thus, 1997 may not see significant improvement in prod uction in the North Sea and Latin America, and any refinery margins, even if the supply/demand balance remains decline in OPEC discipline to maintain production quotas relatively tight all year.

# Energy Information Administration / Petroleum 1996: Issues and Trends 141 

# The profitability of U.S. re fining and marketing has been volatile. In the past 10 years or so, the rate of return to the major petroleum companies’ U.S. refining and marketing assets ranged from the most profitable of their lines of business to near zero. In the 1990s, the profitability of U.S. refining and marketing was frequently lower than that of U.S. industry generally. The following chapter reviews the factors underlying the volatility of U.S. refining and m arketing profitability and the sources of depressed rates of return in the 1990s. The chapter concludes with an exami nation of refining profits in the context of the rises in gasoline and distillate prices in the first half of 1996.



# 8. Financial Performance: Low Profitability in U.S. Refining and Marketing

An industry’s standing in the capi tal markets largely depends industrial corporations (excluding energy companies). The on its profit prospects and the perceived risks associated with petroleum companies include the majors (as represented by them. Nevertheless, analysis of past profit performance of an the FRS companies), publicly-traded independent oil and gas industry can yield insights as to fundamental sources of pr oducers, and publicly-traded refiners other than the majors. profitability and the consequent course of investment. The For most of the past 10 years, petroleum company profi tability of the U.S. refining industry over the past 10 profit ability has not kept pace with that of other large years or so has been volatile and, in the 1990's, frequently i ndustrial corporations. In 1995, independent refiners and oil lower than U.S. industry generally. In order to understand and gas producers registered very poor financial this volatility and to assess the prospects for this industry, performances. But the FRS majors registered an uptick in this chapter reviews the sources of U.S. refining profitability. overall profitability, largely due to an upswing in chemical The analysis utilizes information reported annually to the U.S. refining and marketing profitability has been below the Energy Information Administration’s (EIA’s) Financial overall profitab ility of their other businesses, except for 1988 Reporting System (FRS) by the two dozen or so U.S.-based and 1989 (Figure 103). However, in the first six months of major energy-producing companies. The FRS contains 1996, all segments of the petroleum industry made 91 

# financial data and associated measures of energy-related noticeable gains in profitability. operations by line of business, including U.S. refining/ marketing. Over the past ten years, the FRS companies Income from refining operations primarily depends on the accounted for 72 pe rcent of U.S. refinery capacity. The FRS spread between refined pr oduct prices and raw material input data are complemented by financial information drawn from prices (termed, the gross refining margin), operating costs, annual reports for non-major domestic refiners. and volumes processed and sold. The gross refining margin 

# Margins, Operating Costs, and Profitability More often than not, petroleum industry profitability has been lower than the profitability of overall U.S. industry. In the l onger term, th ough, the relationship between refining Figure 102 shows the return on equity (net income as a profitability and the gross refining margin attenuates. For percent of stockholders’ equity), an often-used measure of example, the correlation between the FRS companies’ annual corporate profitability, for petroleum companies and the U.S. refining/marketing profitab ility and a somewhat broader Standard and Poor’s (S&P) group of 400 of the largest U.S. defin ition of the gross refining margin is not significant by profits. Also, over the past 10 years, the FRS companies’

is an important determinant of short-term refining profit ability. For example, an examination of the gross refining margin reveals the sources of increased U.S. refining profits in the context of the gasoline price runup in the First Half of 1996 (see the section “Petroleum Price Rises Yield Profit Gains in First Half of 1996").

92



# For a detailed description of the FRS and analyses of financial issues 91 

# and trends among U.S. based major energy companies, see Energy Information Administration, Performance Profiles of Major Energy Producers 1995 , DOE/EIA-0206 (Washington, DC, January 1997). Return on investment was measured as contribution to net income/net 92 

# investment in place. The FRS gross ref ined product margin consists of refined product revenues less raw material and product purchases divided by refined product sales volume.

# 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 1 0 2 0 3 0 4 0

-10

-20P ercent R eturn on E quity 

# S&P Industrials Nonenergy

FRS Com panies

Independent Producers Independent R efiners

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 0 2 4 6 8 1 0 1 2 1 4 1 6

-2 P e r c e n t R e t u r n o n I n v e s t m e n t



# All O ther Businesses

U.S. Refining/M arketing

142 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 102. Annual Return on Equity for Petroleum Companies and U.S. Industry

Return on Investment = Net income divided by net investment in place. Source: Energy Information Administration (EIA), Form EIA-28. 

# Figure 103. FRS Companies’ Return on Investment in U.S. Refining/Marketing and All Other Lines of Business Return on Equity = Net income as a percent of shareholders equity. Source: Standard & Poor’s Compustat and fourth quarter press releases.

# Energy Information Administration / Petroleum 1996: Issues and Trends 143 

# the usual statistical conventions. The reason for this weak The FRS companies’ return on U.S. refining and marketing 93 

# relationship is that the gross margin excludes operating costs investment fell from its post-embargo peak in 1988 to zero such as refinery energy expense and maintenance of in 1992. Demand for the FRS companies’ refined products marketing networks. Operating costs may not typically vary fell 7 percent over this period. Unlike the 1980's when gross much from quarter to quarter, but in a longer term context margins held fairly steady, weak demand squeezed the they are a key component of profit change. Of particular spread between product prices and the prices of crude oil importance is the strong relationship between U.S. i nputs. Overall operating costs also increased owing to a rise refining/marketing profitability and the net refining margin in marketing costs. The increase in marketing costs was based on FRS data (i.e., the gross margin less out-of-pocket widespread, with 16 of 18 FRS refiners reporting higher unit operating costs) (Figure 104). Thus, examination of the mark eting costs between 1988 and 1992. The reasons for 94 

# components of the net refining margin should provide higher marketing costs are not altogether clear. Advertising insights as to the level and volatility of U.S. refining outlays were up, reflecting a resurgence of growth in profita bility. Table 17 presents the components of the net gasoline marketing in the wake of the oil price collapse of refining margin and measures of U.S. demand for the FRS 1986. A lso, the added costs of complying with leaking companies’ refined products, and refinery utilization for the underground storage tank requirements were a contributing peak and trough years of refining profitability. factor to higher marketing costs. The profitability story in the 1980's is largely told by the The profitability of the FRS companies’ U.S. refining dynamics of demand, capacity rationaliz ation, and reductions operations recovered slightly in 1993 and 1994, but remained in operating costs, as gross margins were fairly stable over low by historical standards (Figure 102). This recovery is the period. Following full deregulation of petroleum prices remarkable since it occurred while the gross margin fell by in 1981, refining profitability in the United States reached its nearly $1.30 per barrel. Growth in demand of about 2 lowest point in 1984. The U.S. refining industry was plagued percent helped the bottom line but most of the improvement by a falloff in demand and massive amounts of excess crude in earnings came from operating cost reductions, mainly oil distillation capacity. The net margin on the FRS marketing costs. Nearly all of the FRS refiners reported companies’ U.S. refining and marketing operations was only lower marketing costs between 1992 and 1994, citing 1 penny per barrel in 1984. However, the gross margin restructuring and efficiencies gained through greater retail changed little from the previous peak profitability year of outlet productivity. Also, the FRS companies reduced their 1979. What did change was demand (down 19 percent), advertising outlays, at least for television. On the refining capacity utilization (down 9 percentage points), and side, cost cutting by the companies and higher capacity operating costs (up $1.80 ($1995) per barrel). Moving to the utilization contributed to improved profits. peak profitability year of 1988, most of the factors that devastated the bottom line in 1984 turned around: demand In 1995, increases in refined product prices did not match the was up 17 percent, capacity utilization noticeably improved, rise in crude oil costs. The consequent squeeze on margins and operating costs declined by more than $2 per barrel. was in part due to the effects of unusually warm winter Again, the gross margin changed little. w eather on first-quarter heating fuel demand and to complications arising from the introduction of reformulated gasolines. As a result, the FRS companies reported a 1.0- percent return on their U.S. refining/marketing investment base, the third poorest financial performance in nearly two decades. Despite jumps in distillate and gasoline prices in 1996, U.S. refining operations fared only slightly better in terms of financial performance than they did in 1995. For example, major petroleum companies that separately disclosed quarterly financial results for their U.S. refining and marketing operations reported that income from these operations in 1996 was 15 percent above the comparable total in 1995. 95


# Examination of the FRS companies’ U.S. refined product margins is thus seen to reveal the sources of volatility in The regression of the FRS U.S. refining/marketing return on investment 93 

# (ROI) on the FRS gross margin (constant dollars) for 1977 to 1995 yielded the following results: ROI = -0.068 + 0.737 (FRS Gross Margin) R = 0.059. 2 

# The t-statistic for the coefficient of the FRS Gross Margin was 1.00, which is far below the conventional thresholds of statistical significance. To demonstrate the relationship between refining returns and the net 94 

# refining margin, a regression was run using FRS U.S. refining/marketing return on investment (ROI) against the FRS net refined product margin (constant dollars) for the years 1977 to 1994. The regression results for 1977-1995 were: ROI = -1.3 + 6.2 (FRS Net Margin) R = 0.852. 2 

# The regression produced a t-statistic of 9.90 for the independent variable, Based on fourth quarter 1996 press releases. Data for 1996 to update indicating that the probability of the above association between ROI and the most of the figures and tables in this chapter were not available at the time FRS net margin occurring by chance is nearly nil. this report went to press. 95

# 0 0.5 1 1.5 2 2.5Return on Investm ent (percent)



# 0 5 10 15

-5

(1995 Dollars per Barrel) Net Refined Product Margin

144 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 104. U.S. Refining/Marketing Return on Investment and Refined Product Margins for FRS Companies, 1977-1995

Source: Energy Information Administration (EIA), Form EIA-28.



# Table 17. U.S. Refined Product Margins and Costs per Barrel Sold for FRS Companies, Selected Years, 1979 - 1995 (1995 Dollars per Barrel) 1979 1984 1988 1992 1994 1995 Gross Margin

............................ a 

# 8.21 8.37 8.52 7.39 6.11 5.53 less Marketing Costs

........................... 1.95 2.63 1.96 2.90 1.85 1.75 Energy Costs

............................. 2.04 2.78 1.33 1.21 0.98 0.82 Other Operating Expense

................... 2.57 2.95 3.02 2.88 2.56 2.47 equals Net Refined Product Margin

................ b 

# 1.63 0.01 2.22 0.41 0.72 0.49 Refined Product Sales (mbd)`

............... 14,868 12,088 14,114 13,089 13,455 13,641 Refinery Capacity Utilization Rate (percent) . . . . 89 80 86 89 92 92 Refined product revenues less raw material and product purchases divided by refined product sales volumes. a 

# Calculated from unrounded data. b 

# Note: Years shown prior to 1994 are successive peak and trough years of U.S. refining/marketing profitability. Source: Energy Information Administration (EIA), Form EIA-28.

# Energy Information Administration / Petroleum 1996: Issues and Trends 145 

# rates of return to U.S. refining and marketing. The volatility many U.S. refiners invested in specialized plant and of U.S. refining/marketing profitability over the past decade equipment in order to profit from the expected growth in the or so reflects a combination of swings both in the spread wedge in prices favoring lower quality crudes. Also, market between refined product prices and crude oil input prices and adjustments made in the context of the crude oil price in marketing costs, which, despite the massive restructuring es calations of the 1974-1981 period signaled a shift in the of marketing networks, have shown a varying pattern over composition of petroleum demand toward gasoline and time with a tendency toward long-term decline only recently distillates and away from heavier products. Domestic evident. Further, the low level of refining/marketing refiners, again led by the FRS companies, added light profitability in the 1990's is largely traceable to lower gross product capacity to accommodate this shift. margins which were only partly offset by reductions in operating costs. However, there are other developments that Increased environmental standards further heightened the have contributed importantly to the longer term course of capital intensity of U.S. refining during this period. U.S. refining/marketing profitability. These developments Implementation of major Federal environmental quality are not directly observable in the data on margins, but, legislation in the 1970's confronted refiners with stringent instead, are best understood in the context of capital standards for airborne emissions and effluents discharged deployment. into waterways. Compliance resulted in added capital



# Investment and Capital Intensity in U.S. Refining and Marketing The capital intensity of a process generally refers to the together with the deregulation of U.S. petroleum prices in amount of capital used to produce a unit of output from the early 1981, made much of U.S. refining capacity process. Profitability and capital intensity are closely related. uneconomic. While petroleum price regulations were in Simply put, if a process becomes more capital intensive, then force, U.S. refining operations yielded moderate rates of unless there is an increase in profit per unit of output, return. However, starting in 1981, profitability declined profitability will decline. sharply. Narrowing of the price differential between high and In the 1990's, U.S. refining was hit by lower gross margins eroded rates of return. Investments for upgrading refinery following the peak years of 1988 and 1989. Also, over the i nput capabilities were premised on a widening of this same period, the capital intensity of U.S. refining increased differential. Therefore, a narrowing tended to impair rates of 96 

# by 50 percent or so after remaining nearly unchanged for return. several years (Figure 105). Together, these developments underlie the generally low rates of return to U.S. refining and By 1986, U.S. refiners had shut down or otherwise disposed marketing in the 1990's. Examination of investment patterns of plant and equipment representing over 3 million barrels a in U.S. refining proves useful for understanding why capital day of refining capacity. The FRS companies accounted for intensity rose in some periods and was unchanged in other 75 percent of this reduction. Investment fell off in part periods. b ecause upgrad ing projects were completed, in part because The past 20 years saw several distinct phases of capital the capital markets were repelled by the poor returns to deployment in U.S. refining. Investment patterns during this refining investments. The winding down of pollution span had the effect of increasing the capital intensity of these abatement expenditures and redeployment of assets gained operations. Beginning in the late 1970's and continuing in the mega-mergers among the FRS companies in the 1981 through the early 1980's, the FRS companies led U.S. thr ough 1984 time period also c ontributed to a falloff in U.S. refiners in making investments to upgrade their capability to refining investments. All of these developments flattened the utilize heavier, more sulfurous crude oils. The companies growth in capital intensity. premised these investments on expectations that the composition of world supplies would shift toward lower Capital intensity remained level through most of the 1980's. quality, lower pr iced crude oils. Led by the FRS companies, During this period, net refining margins improved, as did expenditures for U.S. refiners (Figure 106). Upgrading and environmental quality measures led to a surge in capital expenditures for U.S. refining over the 1978 through 1983 time span with an attendant rise in capital intensity. Responses by energy consumers to oil price escalations,

low quality crudes during the first half of the 1980's further

refiners massively consolidated capacity, and in part because

petroleum product demand, le ading to increased profitability for U.S. refining and marketing. A widening of the price spread between crude oil qualities also contributed to higher earnings (see Figure 91 in Chapter 7). The capital intensity is represented by the ratio of net property, plant, 96 

# and equipment (PP&E) to barrels per day of crude oil distillation capacity. PP&E is the book value of fixed assets carried on company balance sheets.

# 1974 1977 1980 1983 1986 1989 1992 1995 0Dollars per Barrel of Daily Capacity



# 500.00 1,000.00 2,000.00 2,500.00 3,000.00 3,500.00

1,500.00

1974 1977 1980 1983 1986 1989 1992 1995 0 2.00 4.00 6.00 8.00Billion Dollars ($1995)



# Pollution Abatem ent To ta l

146 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Figure 105. Net PP&E per Unit of U.S. Refinery Capacity for FRS Companies

Source: Energy Information Administration (EIA), Form EIA-28.



# Figure 106. U.S. Refining Capital Expenditures for FRS Companies

Note: Excludes effects of intra-FRS mergers in 1982 and 1984. Source: Energy Information Administration (EIA), Form EIA-28. U.S. Department of Commerce, Bureau of the Census, Pollution Abatement Costs and Expenditures (various issues) (Washington, DC).

# Energy Information Administration / Petroleum 1996: Issues and Trends 147 

# The buoyant rates of return in U.S. refining during the latter 1996 (Q196), major integrated refiners (the “majors”) half of the 1980's were short lived. In the 1990's, lower reported income from their U.S. refining operations of $223 margins, due in part to the narrowing of the crude oil price- million (Table 18), which was a turnaround from losses in quality differential, eroded U.S. refining and marketing the first quarter of 1995 (Q195) their worst first-quarter profits. The adverse effects on profitability were exacerbated performance in the past 10 years (Figure 107). Similarly, by a renewed rise in capital intensity beginning in 1990. smaller, non-int egrated refiners (the “independent refiners”) Refinery upgrading, in part undertaken to satisfy mandates made a substantial recovery from a very poor first quarter the for r eformulated fuels, was the major source of this most year before. The majors registered a $0.5 billion gain in their recent upswing in capital intensity. Expenditures for U.S. refining profits in the second quarter of 1996 (Q296) pollution abatement played a key role as well. wh ile the independent refiners’ net income was up 55 Growth in motor fuel demand, spurred by the low level of more than doubled their earnings compared with the very petroleum prices following the oil price collapse in 1986, poor results in the first half of 1995. encouraged investment in light-product capability. The earlier shift in the price-quality spread favoring the use of heavier crude oils encouraged investments in processing capabilities. What differed in the 1990's from the earlier surge in U.S. refining investment was the role of environmentally-related capital expenditures. Starting in the mid-1970's, refiners’ environmentally-related capital expenditures trended downwards as the requirements of theClean Water Act and Clean Air Act were met. By the mid1980's, environmentally-related outlays were less than 10 percent of overall capital expenditures of U.S. refiners. In 1990, the Clean Air Act Amendments were enacted by Congress and signed into law. This le gislation presented U.S. refiners with added requirements for motor fuels to be met by the end of the decade, including the production of oxygenated gasolines by late 1992, lower sulfur diesel fuels by late 1993, and reformulated gasoline by January 1, 1995. To comply with these measures, FRS refiners stepped up their capital expenditures for the necessary facilities. Environmentally-related capital expenditures quadrupled, accounting for nearly 40 percent of U.S. refining capital expenditures by 1994. The additional capital expenditures raised the capital intensity of U.S. refining. Examination of the path of capital intensity thus completes the story of U.S. refining profitability over the past 20 years or so (see box, p. 148). For the 1990's in particular, capital intensity grew but refining margins diminished while growth in refined product demand was nearly flat. As a result, the returns to investment in U.S. refining have been low, compared with the rest of U.S. industry.



# Petroleum Price Rises Yield Profit Gains in First Half of 1996 Higher petroleum prices in the first half of 1996, particularly gasoline prices, raised concerns about the profits of petroleum companies. In fact, profits from U.S. refining and marketing operations were up sharply. In the first quarter of 97



# percent. For the first half of 1996, both groups of companies



# Distillate Prices Lift Refining Margins Based on price and demand patterns, gasoline market developments had a small role in the turnaround in refining profits between Q195 and Q196. Gasoline prices rises were important in the surge in second-quarter profits, but increases in distillate prices contributed more heavily. The spread between product prices received by refiners and the cost of raw material inputs for their refineries (termed, the gross refining margin) is an important determinant of refining profits, in the short term. For example, there is a strong positive relationship between second-quarter U.S. refining/marketing income and the second-quarter gross refining margin. Although the gross refining margin in 98 

# Q196 was low in comparison with the general level of margins in the 1990's, it was well above the first-quarter

Quarterly financial results are available for a consistent group of 13 97 

# specialized refiner/marketers and 13 major integrated petroleum companies that separately report data for their U.S. refining/marketing line of business. Integrated major petroleum companies include Amoco, Atlantic Richfield, Chevron, Exxon, Mobil, Murphy Oil, Pennzoil, Phillips, Shell Oil, Sun, Texaco, Unocal, and USX (Marathon). Independent refiners include Ashland, Clark USA, Crown Central Petroleum, Diamond Shamrock, Louisiana Land & Exploration, Mapco, Quaker State, Tesoro Petroleum, Tosco, Total Petroleum, Ultramar, Valero Energy, and Witco. Beginning in the fourth quarter of 1996, due to a merger, Ultramar-Diamond Shamrock replaced the two formerly separate companies. For the majors, the regression of second-quarter U.S. refining/marketing 98 

# income per company (Y) on the second- quarter gross refining margin (X) and a dummy variable which is equal to one for 1991-1995 and zero otherwise (DUM), for the years 1987-1995, yielded
Y = -35.17 - 34.57 DUM + 14.37X with R =0.769 and a t-value of 3.54 2 

# for the X-coefficient. For the independent refiners’ second-quarter net income per company (Y), the regression analysis yielded
Y = -9.38 - 5.41 DUM + 3.73X with R = 0.942 and a t-value of 9.07 for 2 

# the X-coefficient.

# 1977 1980 1983 1986 1989 1992 1995 0 5 10 15 20 25Percent Return on Investment 

# Nonpetroleum Businesses (combined)
Refining, Marketing, and Transport

Oil & Gas Production

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# 1977 1980 1983 1986 1989 1992 1995 0 25 50 75 100Percent Distribution (Cumulative) 

# Nonpetroleum Businesses (combined)

Oil & Gas Production Refining, Marketing, and Transport



# 148 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Return on Investment by Lines of Business for FRS Companies

Note: Return on investment = net income contribution divided by net investment in place. Source: Energy Information Administration (EIA), Form EIA-28.



# Shares of Allocated Income by Lines of Business for FRS Companies

Source: Energy Information Administration (EIA), Form EIA-28. 

# Perspectives on Petroleum Profitability Over the past 20 years or so, downstream petroleum operations have rarely been the most profitable of the majors’ lines of business. The figure to the right shows annual returns on investment for the FRS companies’ worldwide oil and gas production operations, downstream petroleum (refining, marketing, and transport) operations, and the aggregate of their operations outside petroleum and natural gas (the share of these latter operations accounted for by chemicals, based on value of assets, ranged from 29 percent in 1984 to 59 percent in 1992). Three periods are distinguishable from the figure to the right. The period of high oil prices. From 1974 through early 1981, oil prices sporadically escalated. Dollar-denominated crude oil prices peaked in the first quarter of 1981 at close to $40 per barrel, a tenfold rise from 1973's oil prices. Accordingly, the rate of return to oil and gas investments rose sharply and was, by far, the majors’ most profitable line of activity as well as the source of the major share of net income (figure below, right), even as oil prices gradually declined from 1981 through 1985. Downstream profitability also rose sharply in the late 1970's, in significant part reflecting the rising value of petroleum inventories, but never came close to upstream rates of return. Downstream profits plunged after peaking in 1980. Thereafter, refiners both in the United States and abroad shutdown or otherwise divested massive amounts of refining capacity which had become uneconomic. The declining returns to downstream operations in the early 1980's reflected the financial difficulties of that period. The 1986 oil price collapse and aftermath . Oil prices collapsed in early 1986, and, by mid-year, fell to levels not seen since 1974. On an inflation-adjusted basis, oil prices for the remainder of the 1980's were generally below the levels of the 1974-1985 period. Upstream profitability plunged in 1986 and remained well below levels realized earlier during the period of high oil prices. Downstream profitability, by contrast, rose steeply in the late 1980's. Lower oil prices led to increased demand for petroleum products. Refiners, overall, completed their retrenchments at just about the time that oil prices collapsed. Both developments favored an upswing in downstream profitability, as did lower crude oil input pr ices. Lower feedstock costs, stemming from low oil prices, also contributed to a surge in chemical profits. The sharp rise in the profitability of nonpetroleum businesses was largely a reflection of developments in the majors’ chemical operations. The 1990's. Crude oil prices rose sharply in the last two quarters of 1990, largely due to the effects of Iraq’s invasion of Kuwait. After the expulsion of Iraqi troops in early 1991, oil prices have tended to vary in the same range prevailing in the late 1980's (on an inflation-adjusted basis). Upstream operations benefitted from the war-induced oil price spike in 1990 but then declined. Although upstream profitability in the 1990's has not come close to pre-collapse levels, it is clearly higher than the levels of 1986- 1989. Cost-cutting in the 1990's has helped raise the returns to oil and gas production. Downstream operations have also been a focus of cost-cutting in the 1990's, but, despite these efforts, downstream profitability has trended downwards. The increased share of businesses outside petroleum and natural gas in recent years (see figure to right) was largely due to a surge in chemical earnings.

# 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 200 400 600 800 1000Million Dollars 

# 1400

-200 Majors' Q 1 US R/M Income Majors' Q 2 US R/M Income
1200

Energy Information Administration / Petroleum 1996: Issues and Trends 149 

# Table 18. Quarterly Income in U.S. Refining and Marketing (Million Dollars)

1995 1996 Percent Change U.S. Refining/Marketing Income for the Majors (13 Companies) First Quarter

................ -100 223 NM Second Quarter . . . . . . . . . . . . . 765 1,261 64.8 Net Income for Independent Refiners (13 Companies) First Quarter . . . . . . . . . . . . . . . . 4 121 3,025.0 Second Quarter . . . . . . . . . . . . . 184 286 55.4 NM = Not meaningful. Source: Company 1996 reports to shareholders.

Source: Companies’ quarterly reports to shareholders. 

# Figure 107. Majors’ First and Second Quarter U.S. Refining/Marketing Net Income



# margin of the year before (Table 19). In Q195, the refining Demand growth also favored higher refining profits in Q196 margin fell to a 6-year low, squeezed by a combination of a r elative to Q195. The quantity of total refined products slight rise in crude oil input costs and downward pressures on s upplied was up 4 percent over this period, mainly reflecting gasoline and distillate prices. The modest recovery in the the greater demand for space heating fuels. Improved overall refining margin largely reflected the effects of an economic conditions also contributed to overall petroleum especially cold winter in 1995-1996, particularly in March. d emand, with real GDP growing 2 percent between Q195 Distillate prices were up 17 percent and the price of propane and Q 196. The total amount of distillate fuel oil and propane rose 22 percent between Q195 and Q196. In contrast, s upplied was up 5 percent. Residual fuel oil volumes were up gasoline prices were up 6 percent, just matching the rise in 7 percent, fed by electric utility demand. However, growth crude oil input prices. in gasoline demand was nearly flat.

# 150 Energy Information Administration / Petroleum 1996: Issues and Trends 

# Table 19. Refined Product Resale Prices, Margins, and Products Supplied, First and Second Quarters, 1995 and 1996 Q195 Q196 Q295 Q296 Resale Prices (Dollars per Barrel)

Motor Gasoline

.............................. 25.24 26.72 28.92 31.82 Distillate

.................................... 21.14 24.83 22.42 27.07 Kerojet and Kerosene

......................... 22.09 25.65 22.43 26.23 Propane

.................................... 14.63 17.78 13.82 15.46 Other Products 15.97 18.55 17.48 18.68

Composite Product Price

..................... 22.75 25.16 26.12 29.27 Composite Refiner Acquisition Cost of Crude Oil . . 16.99 18.47 18.24 20.45 Gross Refining Margin

.......................... 5.76 6.69 7.88 8.82 Products Supplied (Thousand Barrels per Day)

Motor Gasoline

.............................. 7,477 7,511 7,921 7,985 Distillate

.................................... 3,463 3,616 3,089 3,231 Jet Fuel

.................................... 1,513 1,605 1,425 1,505 Propane and Other Products

................... 5,187 5,560 5,084 5,193 Total Products Supplied

......................... 17,640 18,292 17,519 17,914 Retailer Margin (Dollars per Barrel)

Motor Gasoline

.............................. 5.68 5.09 5.34 6.14 Diesel Fuel

.................................. 1.09 1.00 0.98 1.07

Sources: Energy Information Administration (EIA), Petroleum Marketing Monthly, August 1996, DOE/EIA-0380(96/08) (Washington, DC, August 1996) and Petroleum Supply Monthly, August 1996, DOE/EIA-0109(96/08) (Washington, DC, August 1996).



# In the second quarter, the rise in gasoline prices outpaced the invasion of Kuwait yielded record refining margins rise in crude oil prices compared with Q295, $2.91 per barrel (Figure 107). The independent refiners recent second-quarter vs. $2.21. However, overall distillate product prices financial results also surpassed those of 1990 (Figure 108). registered a steeper rise of $4.65 per barrel over the same period. Similarly, while motor gasoline demand rose nearly It is probably worthwhile to note that second-quarter profits 1 percent, distillate demand was up nearly 5 percent, in 1996 exceeded expectations based on the estimated reflecting strong demand for diesel and replenishment of relationships between profits and the gross refining margin inventories. noted above. Based on these relationships, the actual value 

# Second-quarter U.S. Refining Profits Reach a 10-Year Peak in 1996 Public concerns about U.S. refinery profits were probably most intensely focused on the second quarter of 1996, since the rise in gasoline prices began late in the first quarter andcontinued into the second quarter. The majors’ secondquarter financial results for their U.S. refining/marketing operations were at a 10-year peak, surpassing the previous peak in 1990, when crude oil gluts preceding the Iraqi of Q296 refining/marketing profits were 1.7 times the predicted value for the majors and 1.3 times the predicted value for the independents. One source of higher profits in this quarter not accounted for by the above relationships appeared to be a wider spread between wholesale prices paid and retail prices charged for gasoline by retailers. The retailer margin in Q296 was up 2 cents a gallon (15 percent) from the previous year (Table 19). Since most of the refiners that reported second-quarter financial results have gasoline marketing networks, an increased spread in the retailer margin would contribute to improved bottom-line results.

# 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 0 50 100 150 200 250Million Dollars 

# Independents' Q1 Net Income Independents' Q2 Net Income 300

Energy Information Administration / Petroleum 1996: Issues and Trends 151 Source: Companies’ quarterly reports to shareholders. 

# Figure 108. Independent Refiners’ First and Second Quarter Net Income