By John Kemp
LONDON Feb 18 Most analysts still write about the U.S. fuel market as if it were a closed system, with refiners importing crude to meet domestic needs and bringing in some extra gasoline from Europe to meet peak demand during the summer driving season.
But that model has long ceased to be an accurate description of how the system works.
Customers in Central and South America are at least as important to U.S. refiners' profits and fuel prices as those in the Midwest and on the East Coast. U.S. gasoline and heating oil prices are driven as much by events thousands of miles to the south as in New York Harbor.
It makes less and less sense to analyse North American gasoline and diesel markets in isolation. U.S. refineries have become the centre of an increasingly integrated hemisphere-wide market, in which pump prices in Columbus, Ohio, respond to diesel demand in Chile or gasoline demand in Mexico.
According to the U.S. Energy Information Administration (EIA), more than 3 million barrels per day of fuel produced at U.S. refineries are now exported, with half sent to countries in Central and South America and the Caribbean.
The massive refineries along the U.S. Gulf Coast increasingly rely on overseas markets to offset declining demand at home. Meanwhile across Latin America, countries import more and more U.S. gasoline and diesel as their own refineries struggle to keep up with growing consumption and more stringent fuel specifications.
The transformation has been dramatic. In less than a decade, Gulf Coast refiners have reoriented their business away from producing motor gasoline and heating oil for U.S. drivers and homes to producing fuels for export.
In 2005, the United States consumed almost 21 million barrels per day of gasoline, diesel, fuel oil and other refinery products. Exports totalled just over 1 million barrels per day (bpd).
By 2012, domestic U.S. consumption had fallen 10 percent, but exports had tripled to more than 3 million bpd, split about evenly between Latin America and the rest of the world.
U.S. refineries now export more than 1 million barrels of home heating oil and road diesel every day to Mexico (100-200,000 bpd), Chile (100,000 bpd), Brazil (100,000 bpd) and other destinations, according to EIA.
They also export more than 400,000 bpd of gasoline, mostly to Mexico (200-300,000 bpd), and smaller quantities of propane and butane across Central America and the Caribbean.
The United States maintains stringent controls on crude exports, but there are no restrictions on overseas shipments of refined products.
Unlike natural gas producers, who are forbidden from exporting propane and butane, U.S. refiners can even export liquefied refinery gases (LRGs) produced as the result of distillation and other refinery processes.
Much of this output is loaded onto tankers and sent to the west coast of Central and South America via the Panama Canal, where it has been one of the fastest growing items of traffic since the turn of the century.
U.S. refiners have always been occasional exporters to Latin America, for example when drought has cut hydroelectric power and forced countries to rely on diesel generators or natural gas supplies have run short.
But over the last five years, exports have become a constant part of U.S. refiners' business.
Between the 1950s and the 1980s, countries across South America sought to meet their fuel requirements entirely from local refineries as part of the drive for import-substituting industrialisation (ISI) and to lessen their vulnerability to military blockades and embargoes.
Economic liberalisation and the commodity boom has brought sharp growth in fuel consumption. But there has not been a corresponding increase in local refinery supplies. Limits on the amount of sulphur in refined fuels have also become more stringent, though they are still less strict than in Europe and North America.
As a result, Latin America's aging refineries increasingly struggle to produce enough clean gasoline and diesel to meet local requirements.
Building complex new refineries capable of handling a wide range of crude grades, complete with hydrodesulphurisation, fluid catalytic cracking and alkylation units, to produce high quality fuels requires enormous amounts of investment.
Latin America's state-regulated fuel suppliers have lacked both incentives and capital to make multi-billion dollar investments in new capacity. It is easier to bring in clean fuels from the highly complex and efficient refineries along the U.S. Gulf.
Several Latin American refineries are due to be expanded by 2016, according to OPEC, which will add hundreds of thousands of barrels per day of distillation capacity, though refinery projects continue to suffer delays.
But in addition, the region desperately needs more upgrading capacity to squeeze more gasoline and diesel from heavier crudes and downstream processing capacity to remove excess sulphur and improve fuel performance.
Without more upgrading and processing units, Latin America's refiners will struggle to compete with their rivals on the U.S. Gulf Coast, and it will remain cheaper to bring gasoline and diesel from North America than produce it locally.