Louisiana’s Governor Jeff Landry this week declared a state of emergency over diesel supplies. For a month, farmers and loggers will be allowed to use lower-taxed 'dyed diesel' in their on-road vehicles, to give them some relief from record high diesel prices. The fact that even Louisiana, a heartland of the US oil and gas industry, has been forced to take action to cushion the blow from fuel costs is a sign of the severity of the crisis.
In Washington, too, emergency measures to address diesel prices have been on the agenda. President Donald Trump said this week that he was calling for a ban on exports. “I've said, let's not send out the diesel,” he told a press briefing on Tuesday.
Other leading Republicans, including Senator Chuck Grassley from the agricultural state of Iowa, have backed the idea. But there has also been widespread opposition, some of it from inside the administration.
Chris Wright, the energy secretary, said at an event in New York this week: “The blunt tool of banning diesel exports definitely doesn't work.”
The result has been confusion over what exactly the administration might do. One news outlet reported that a 90-day export ban was under consideration at the White House, but that story was quickly denied.
Industry groups including the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers have warned that a ban would be a costly mistake that could make the situation worse. Oil industry executives have reportedly been calling the president to try to talk him out of export restrictions.
Senator Grassley said he hoped the White House would not listen to the warnings from oil companies, and argued that an export ban would help farmers. A group representing oil and gas workers replied that if that logic held, the US should ban beef exports, too.
At the time of writing, there had been no formal announcement of any export restrictions. Secretary Wright was reportedly talking to refining industry leaders, asking them to introduce “voluntary” curbs. Bloomberg reported that President Trump’s advisers were still analysing the potential impact of a ban.
Another idea in circulation has been that refiners could “voluntarily” agree to earmark a proportion of their production for lower-priced sales to farmers and other groups that have been facing the greatest difficulties. Such a plan would face significant administrative challenges, including deciding which refiners should contribute the lower-cost fuel, and who would be eligible for it.
But some agreement with the industry along those lines seems more likely than an outright export ban.
The Wood Mackenzie view
The appeal of banning fuel exports is understandable. Other countries have done it. Russia banned diesel exports in July, in response to Ukrainian drone attacks on its refineries. China curbed oil product exports in March, and although those restrictions have since been eased it still operates a quota system for international sales.
But Wood Mackenzie modelling suggests that Secretary Wright, the industry associations, and other critics of an export ban are exactly right. Restricting US diesel exports would actually increase fuel costs for most Americans quite significantly.
The reasons lie in the dynamics of the US refining industry. US diesel and gasoil exports over the summer were running at about 1 million bpd. If exports were banned, refineries could use some flexibility to reduce diesel yields, but they would still have substantial excess production that would have to go into storage. When the tanks were full, the refineries would have to cut back their crude runs.
The impact would be concentrated in the Gulf Coast, by far the largest refining region in the US. It holds the bulk of US crude distillation capacity, and virtually all of the deepwater export infrastructure. If exports were cut off, it would be Gulf Coast barrels that would have nowhere to go.
The result would be that US gasoline production would fall. Analysis using Wood Mackenzie’s Refinery Supply Model (RSM) suggests that diesel and gasoil production would fall about 800 000 bpd, and gasoline production would drop about 70 000 bpd.
Wood Mackenzie estimate that would raise gasoline prices on the US east coast by about 15%, relative to our base case. That translates to an increase of about US¢26/gal., pushing US gasoline prices towards record highs.
"The irony of a US diesel export ban is that it would likely increase costs for American consumers,” says Alan Gelder, Wood Mackenzie’s SVP for Refining, Chemicals and Oil Markets.
“A policy designed to bring relief at the diesel pump could end up driving prices higher at the gasoline pump."
US diesel prices would indeed fall in most of the country, as refiners sought to put more product into the domestic market. But international prices would rise. Diesel in North-West Europe would be about 27% higher than in our base case, representing an increase of about US¢80/gal.
That prospect has alarmed governments around the world. President Emmanuel Macron urged President Trump not to impose a ban, saying it would be bad for the world, and for the US economy.
Another direct effect on the US is that higher international prices would hit some American consumers. The US East Coast is connected to international markets: it imported about 120 000 bpd of diesel last year. If international prices rise, that would put upward pressure on the cost of diesel in the North-East US, the region that is most reliant on imports.
There would also be second-round effects. A higher cost of fuel in Europe and Mexico would force those economies to raise the prices of the goods they sell to the US, adding to the inflationary pressures on American consumers. That array of potential unintended consequences lies behind the opposition to an export ban from Secretary Wright and others.
The “voluntary” measures now being debated would probably have less severe impacts, depending on exactly how they were structured. But any agreements or executive orders that interfere with market mechanisms would make the US refining sector less efficient.
Even so, it seems likely that the administration will make an attempt to drive down the cost of diesel. With retail diesel prices still close to record levels in the US, and the midterm elections on 3 November coming up fast, the pressure on the administration to do something is only going to grow.
In brief
France has promised to send troops to protect the Saudi Arabian oil port of Yanbu on the Red Sea, which has been under attack from Iran and Houthi militants. President Macron said France would send “military assets, meaning soldiers, radars and defence systems” to defend Yanbu, which is on a critical exit route for Saudi Arabia’s oil exports.
The oil terminal at Yanbu is connected to the East-West pipeline that carries crude across Saudi Arabia from the oilfields in the east of the country, providing an alternative export route to sending tankers through the Strait of Hormuz. Since the current conflict began at the end of February, the pipeline and port complex have been attacked multiple times by Iran and its Houthi allies using drones and missiles.
Flows on the East-West pipeline restarted this week, 11 days after it was shut down by drone strikes that hit the pipe and three pumping stations. The pipeline is expected to operate at 40% of normal capacity within two days, but a full restart will take six to eight weeks, sources told Reuters. Tanker loadings at the port have not yet restarted. Saudi Arabia said on Thursday it had intercepted another six Houthi ballistic missiles aimed at Yanbu and the city of Taif, a popular summer resort.
To read the original piece from Wood Mackenzie, access here now.