[R-G] [BillTottenWeblog] The Peak Oil Crisis: The First Shortages

[Bill Totten]

by Tom Whipple

Falls Church News-Press (April 10 2008)

Fuel prices alone are unlikely to bring America to its senses.

It clearly will take outright shortages with lines at the pumps,
curtailed deliveries and many other misfortunes before serious measures
to deal with declining oil supplies - speed limits, rationing, mandatory
car pools, improved mass transit - are taken. Thus the question becomes:
how soon?

Gasoline and diesel are two different animals in America. Most gasoline
is used for personal travel and much of that for convenience and, as we
shall find out shortly, is not essential to the economy. Diesel in
America is, for the most part, an essential fuel in that it is used to
perform money-making work or, in its heating oil form, keep us from
freezing. If diesel becomes too expensive, and those expenses cannot be
passed on, then the consumption of diesel will be cut back. This in fact
is already happening - the government is reporting that distillate
consumption of diesel and heating oil currently is down by 3.1 percent
as compared to the same four week period last year. This is undoubtedly
due to the price of diesel and heating oil which is now around $4 a
gallon, an increase of $1.17 a gallon since last year.

The word "distillates" encompasses both diesel and heating oil which are
about the same thing; except that the clean air rules in the US require
most of the sulfur be removed before burning it in a motor. Currently
there is a world-wide shortage of distillates which is most severe in
China where long lines of trucks waiting for fuel are appearing across
the country.

Before examining what might lead to shortages in the US, it is useful to
get some understanding of distillates and the role they play in American
life. Few appreciate that diesel is one of the best of the liquid fuels,
for it will move your car further than the same quantity of gasoline. As
a result, the gasoline-powered car is fast disappearing in Europe and is
being replaced by small diesel-powered ones that are delivering forty,
fifty and even sixty miles per gallon. In some European countries,
diesel-powered cars are now approaching eighty percent of new car sales.

In America, about 77 percent of our daily consumption of about four
million barrels of distillates is used in diesel engines. Three quarters
of this is used in trucks and the rest is used "off highway" on farms or
boats or at construction sites, et cetera. As we only use heating oil
for about six months in the winter, consumption of distillates in the US
is highly seasonal with consumption building to a peak in January and
February and then dropping off to the end of April when the heating
season is largely over.

Distillate stockpiles in the US, therefore, vary by season with a
buildup in the late spring, summer and fall followed by a rapid drop
from late December to May as oil burners across the northern US are
cranked up. The severity of the winter too has lot do to with how much
heating oil is consumed each year and there is always a danger unusual
cold will deplete stockpiles to the point where shortages exist.

This seasonal pattern suggests that when distillate shortages come to
the US they first will arrive during the heating season, either as a
result of unusually cold weather or simply insufficient increases in
stockpiles during the warmer months. As a 42 gallon barrel of oil will
make only abut ten gallons of diesel and heating oil, the US must import
about six percent or about 250 to 350 thousand barrels of refined diesel
and heating oil each day. Most of this comes from "safe" places like
Canada and the Virgin Islands, but some must come from the world market.

It is these imports that may become our Achilles heel, for we are now
facing increasingly stiff competition as we purchase distillates abroad.
Within the last year China has started to import large quantities of
refined diesel. A new source of demand is the power shortage that is
developing all over the world. As there is no quick solution to
inadequate electricity being available on national grids, the demand for
imported diesel to fuel emergency small local generators is already
growing rapidly. The bottom line is that world diesel prices have
nowhere to go but up.

US imports of diesel appear to be dropping. For most of 2006 we were
importing about 350,000 barrels a day. In the first quarter of 2007, we
imported an average of 360,000 barrels a day but by last fall this had
dropped to 260,000 barrels and was the same for the first quarter of
2008. This could of course turn around, but given growing demand and
lack of an increased supply worldwide, it is likely that it will become
harder and much more expensive to find diesel and heating oil to import.

In recent years, US stockpiles usually peaked at around 135 to 145
million barrels in December and then declined to a low of 100 to 110
million barrels at the end of April.

So far this year seems about normal. Our stockpile at the end of March
was 109 million barrels, a little low, but still in the acceptable range.

The two new factors this year, however, are the high prices and slowing
economy which already is cutting demand by three percent or 130,000
barrels a day and the rapidly increasing demand for imported diesel
around the world.

This balance bears close watching. In another two weeks, US stockpiles
should start rising again so that we can start accumulating enough
heating oil for next winter. If demand continues to stay below normal,
we will know that the use of diesel for industry and transport is
causing at least some of the drop in demand. If demand returns closer to
normal in a couple of months, then it would suggest that drop in the use
of costly home heating was behind at least some of the recent decline in
demand.

It is a little too early to panic. However, if stockpiles do not start
increasing at something approaching normal rates, there could be trouble
just ahead. If we should have a mild winter, then we may be able to
escape for another year. If, however, we do not build adequate
stockpiles this summer or next and winter turns out to be unusually
cold, prices will spiral even higher and the first serous US shortages
in the last 25 years could easily develop.

http://www.fcnp.com/national_commentary/the_peak_oil_crisis_the_first_shortages_20080409.html

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