Are Diesel Exports Keeping US Gas Prices High? (VLO, MPC)
Of US refiners, Valero Energy Corp. (NYSE: VLO) is probably the best equipped to handle the cheaper, lower grades of crude oil that can more profitably be refined into distillates. Marathon Petroleum Corp. (NYSE: MRC) is upgrading its refinery near Detroit to accommodate the synthetic fuels coming from the Canadian oil sands.
In Europe, where demand for diesel fuel is highest, existing refineries are optimized to produce gasoline. That’s why US diesel fetches such a nice premium when exported. US refiners face the same limitation on diesel production, but US demand for diesel is lower and the refineries can crank up diesel production enough to take advantage of the higher export prices.
US and European refiners might be considering adding the hydrocrackers needed to produce more diesel fuel, though little more new capacity appears on the horizon. One estimate for adding hydrocracking facilities to an existing refinery gives a price tag of $4 billion for 100,000 barrels/day of diesel fuel production. As demand for diesel fuel drives the price of the fuel up, more facilities may be built, but that’s not a sure thing.
The alternative is to buy more expensive light, sweet crudes from West Africa and Libya, as well as North Sea Brent, that can be reasonably efficiently refined into more distillates. This is the current favorite mainly because it’s the most easily available choice.
It is also keeping the price of Brent higher, which in turn keeps the US pump prices of both gasoline and diesel fuel high. US drivers will have to get used to this situation because it’s unlikely to change any time soon.
Paul Ausick