Diesel/Gasoline imbalance

Tax incentives and structural trends in transport are responsible for an increasing mismatch between refinery production and demand, with negative implications for security of supply and the environment.

For example, although diesel carries a substantially lower tax burden than gasoline, most EU refineries were initially configured to meet the demand for gasoline and fuel oil and have therefore struggled to match the growing demand for diesel.

THE DIESEL/GASOLINE IMBALANCE CAUSES STRONG SECURITY OF SUPPLY AND SUSTAINABILITY CONCERNS

Spurred on by these previously mentioned favourable excise taxes, the shift from gasoline to diesel began 20 years ago and has led to excess gasoline-production capacity and a corresponding shortage of diesel production in the EU - despite refiners’ efforts to boost diesel yields. 20 years ago, the gasoline to diesel ratio was 2:1. It is now inversed to 1:2½ and could potentially reach 1:3 by 2020.

The widespread introduction of car scrapping incentives in 2009 has reinforced this trend. While in 2009 sales of new gasoline cars exceeded those of diesel cars (65% vs. 35% for diesel [1] in EU 27 and 54% vs. 46 % in EU 15 [2]), the net increase in diesel passenger cars still outstrips that in gasoline cars. This is because the majority of cars disposed of as part of the scrapping schemes were gasoline powered. In addition, many were replaced by smaller, more fuel efficient gasoline cars.

But the rise in diesel-powered cars is not the only factor at play. The continued growth in truck transport across the EU, driven by internal markets and external trade, has also contributed to the increased demand for diesel.

Eliminating the tax bias towards diesel would help redress the imbalance in demand. Nonetheless, without significant investment to re-increase the conversion of heavy streams (fuel oil) in medium distillates (diesel and kerosene), the current market imbalance will likely continue through the course of the current fleet’s life cycle.

THE MARKET IMBALANCE INCREASES DEPENDENCY ON EXTERNAL SUPPLIERS AND CUSTOMERS

Although the EU has a significant excess of gasoline production capacity, it is still unable to meet the regional demand for diesel, heating gasoil and jet fuel. As a result, the EU relies heavily on foreign imports. Currently, the majority of diesel and heating gasoil comes from Russia, while jet fuel is largely shipped from the Middle East. Most of the EU’s excess gasoline is absorbed by the US.

However, future export markets are likely to look very different. For example, by 2020, it is expected that the US market will no longer be able to absorb the EU’s gasoline excess. In addition, over the period 2010-2020, the combined EU demand for diesel and heating oil is forecast to remain stagnant, while gasoline should fall by 2 or 3% per year.

Meanwhile, the demand for gasoline in Europe continues to shrink, while the demand for transport distillate – jet fuel, road and marine diesel – is growing. Without balancing the demand barrel by exporting the surplus of such lighter components as gasoline, many EU refiners will struggle to maintain their operations. On top of this is the increasing level of bio-components in gasoline, which only accentuates the reduction in fossil gasoline demand.

All of this means that European refiners need to seek other export markets to both replace the US market and to absorb the increased surplus of gasoline stemming from falling internal demand.

Without new export markets for the EU’s gasoline surplus, it is likely that the EU refining industry will adjust via a reduction in gasoline production. This will occur through restructuring, either by disinvestments of gasoline units (such as FCC, reformer) or by shutting down entire refineries. This second option will inevitably increase the EU’s gasoil deficit, and thus its dependence on foreign countries (in particular Russia) for gasoil imports.

The balance of actors is also shifting, with refiners in Asia and the Middle East adding capacity and rapidly entering the EU market.

[1] Source: EUROPIA White Paper on EU Refining p.32. Original source PFC Energy
[2] Source: EUROPIA White Paper on EU Refining p.32. Original source ACEA