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
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
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
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
As a result, Latin America's aging refineries increasingly
struggle to produce enough clean gasoline and diesel to meet
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
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.