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SThis presentation will address supplying gasoline to meet U.S. demand. 
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SUS gasoline demand is met by production from domestic refineries, and gasoline imports.  Earlier EIA papers presented at NPRA have focused on US refining capacity issues, but this presentation will focus more on gasoline imports.   
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SThe next few slides pose the gasoline supply issues that the rest of the presentation will address 
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SThe excess refining capacity that existed in the early 1980’s is gone.  But, will U.S. capacity growth necessarily be the most economic supply source to meet growing demand in the short or the long term, or will it be increased imports?
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SAdequacy of supply cannot be addressed without also exploring future demand.  The presentation will explore not only likely demand growth, but also some uncertainties that could affect that growth.   
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SUS gasoline demand has been growing steadily.  The presentation briefly discuss if recent trends might change and when that change might occur.
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SThe focus will then shift to supplying US gasoline, and in particular gasoline imports, addressing:
S- How US gasoline imports have grown;
S- How gasoline imports are affected by product specification changes;
S- How the recent increase in refining capacity utilization in world refining regions might affect US gasoline supply from imports.
SClearly future demand growth is an important variable in determining future supply needs.
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SU.S. demand more than tripled in the 50 years from 1950 to 2000, fueled by transportation, which went from just over half of petroleum demand in 1950 to over 2/3 of demand by the year 2000.
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SBut will such growth continue in the future, and what might change that pattern?
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SMost “reference case” or “business as usual” forecasts today show petroleum demand in the United States continuing to grow over the next 25 years or so, driven by transportation fuels.
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SEIA’s reference case shows petroleum demand for transportation fuels reaching a level in 2025 that is more than 50% greater than petroleum transportation demand today.  An additional 7 million barrels per day will need to be supplied over what was supplied in 2000, which indicates a need for more capacity.
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SFactors can change this outlook.  It would seem that a significant slowing in demand growth or a significant shift in the mix between diesel and gasoline could have tremendous impacts on the shape of the refining industry in the future. 
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SBut do such alternative scenarios merit consideration?  History can provide some insights.  For example, in the early 1980’s, high prices, a recession, and improved vehicle fuel efficiencies helped reduce demand.
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SThe next slides consider the potential impact of fuel efficiencies.
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SCorporate Average Fuel Economy (CAFE) standards and high fuel prices resulted in large improvements in vehicle efficiencies for almost 10 years in the late seventies and early eighties.
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SUltimately other factors such as the interest in minivans, SUV’s and heavier and higher performance automobiles countered those improvements, and light-duty-vehicle efficiency actually declined for the entire fleet.  Will this change?
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SAs we look into the future, one factor that could change the current efficiency trend is a stronger movement towards limiting CO2 emissions.  Technology exists to improve efficiencies, but at a cost. 
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SAssuming the United States decided to incur the cost, how quickly could changes in efficiency make an appreciable impact?
SWhile the situation historically was different than now, it does provide an illustration of how quickly efficiency changes can affect demand.  This slide focuses on the period from 1978 through 1987, which covers part of the time when fleet efficiency was improving rapidly. 
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SThe graph illustrates that efficiency improvements can affect demand in less than 10 years.  During the early period from 1978 to 1982 shown to the left of the dotted line, vehicle miles traveled was basically flat, and gasoline consumption declined as car efficiencies improved.  Even after 1982, gasoline consumption growth was small as car efficiencies continued to improve, countering the increasing share of light-duty trucks in the fleet. 
S- During the entire 1978-1987 period, the total VMT (vehicle miles traveled) for light duty cars and trucks rose at 2.4%, which is about the same as it was between 1995 and 2001. 
S- But in the 1978-1987 period, there was virtually no growth in gasoline consumption, compared to an annual average growth rate for gasoline of 1.7% for the 1995-2001 period.
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SBecause vehicles are further along the efficiency curve now, we might not see the dramatic percentage improvements in the future that occurred in the past.  During the late 1970’s and early 1980’s, the fuel efficiency of the new vehicles was between 45% and 55% of the average fleet on the road.  Still, the technology exists to improve fuel economy by over 30%. 
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SIf the United States targeted fuel economy improvement, we could see a dramatic reduction in gasoline demand growth. For example, assume 3 years to design efficiencies and then gradually introduce fuel economy improvements into new vehicles.  If new vehicle efficiency reached a 28% improvement in 7 years, by the end of 10 years, we could see demand growth more than cut in half.  That is, a “base case” 2% growth rate would fall to less than 1% within a decade.
SDemand change could occur, but it would take some time to occur. Meanwhile U.S. supply will be met, and, as will be shown, gasoline imports have become an essential component of US supply and will continue to be needed.  US refiners alone do not have the capacity to fully meet US gasoline demand
SCurrent expectations about refining capacity additions indicate that gasoline imports need to increase in the future
SNext, we will address the availability of import supply will be available.
Why imports have been a competitive supply source;
Future impacts of U.S. specification changes;
International supply/demand impacts.
SFrom 1998 to 2003, the increases in domestic production and imports have been almost equal, with net imports comprising 56% of the supply increase and production supplying 44 percent.  Gasoline imports have been an economic source of supply as implied by refinery utilization being lower in all years from 1999 through 2003 than in 1998.
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SIn 1998, U.S. refining capacity utilization was at an historic high and very near maximum input levels during the summer gasoline season.  While utilization has been somewhat lower since then, only modest capability to produce more gasoline has existed during the summer period.  Moreover, refining capacity increases from 1995 to 2003 have not been sufficient to produce the increases in volume of gasoline sold in the United States.  As a result, gasoline imports increased. 
SNow consider U.S. capacity decisions in the context of competing with capacity from abroad.
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SHistorically, capacity abroad has been very competitive in the U.S. gasoline market, as demonstrated by gasoline imports having doubled in volume since 1990.  As a result, imports have become an essential source of gasoline supply to the U.S. East Coast, where they met 24% of East Coast (PADD 1) demand in 2003.
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SBut will these competitive imports continue to be available and grow to help meet growing U.S. demand?
SGasoline import sources can be grouped based on several important attributes
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SThe US is a major market for the refineries in Atlantic Canada and the Hovensa refinery in the Virgin Islands, and to a lesser extent the Venezuelan export refineries.
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SWestern Europe has become a growing source of US gasoline as the US has been the market to absorb their excess gasoline production resulting from the growth of diesel demand in Europe.
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SThus, the economic relationship weakens as the distance between source and market increases and also where other markets are available to compete for the gasoline exports of the source country.
SEurope, as a gasoline import source, merits addition explanation. The United States has benefited from Europe’s dieselization program historically.  As Europe’s dieselization program evolved, demand for diesel fuel grew faster than gasoline, and Europe’s refineries produced more gasoline than the region could use.  This provided an economic source of supply for the United States
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SEuropean diesel demand overtook gasoline demand after 1995, and is expected by many forecasters to continue to outstrip gasoline – even to the extent that gasoline demand might decline.
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SThis forecast shows the ratio of gasoline to diesel halving between 1990 and 2015, which has significant impacts for refiners.
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SAlso note that the forecast is based on a continuation of the change in vehicles in Europe that has occurred historically.
SAs in the United States, European diesel fuel consumption has grown because of growth in road freight movements.  But in Europe, most of the growth in diesel fuel has been due to the growth in diesel-fueled light-duty passenger vehicles.
S- New vehicle registrations showed new diesel vehicles exceeding 40% of new light-duty vehicles. 
S- This compares to 1-2% in the United States.
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SIn Europe, tax incentives favoring diesel fuel over gasoline have existed for a number of years in many countries.  Recently, concern over greenhouse gases and carbon dioxide emissions have resulted in additional diesel fuel tax incentives.
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SFurther penetration of diesel-fueled vehicles is predicted, and as shown in the previous slide, the result could be a drop in gasoline demand.
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SThis shift from gasoline to diesel has been occurring over many years, which raises the question of whether refiners are adjusting their capacity to better match this changing fuel mix, thereby reducing the amount of excess gasoline available to the United States.
SIn response to the market shift from gasoline to diesel fuel, European refiners have increased hydrocracking capacity to increase production of diesel compared to gasoline.  Since 1990, hydrocracking as a percent of distillation capacity has increased from 2% to almost 7%, while FCC capacity as a percent of distillation has leveled at about 16%.
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SDespite the growth in hydrodcracking capacity, the deficit in diesel production compared to demand and the excess in gasoline production has continued to grow.  This is expected to continue for some time, even with continued hydrocracking capacity growth. 
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SThis implies that Western Europe may be able to provide the United States with higher imports in the near future, to some limited extent. 
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SAlso, as both European and U.S. gasoline specifications become more stringent, more Eastern European refiners may have the incentive to upgrade as well.
SWith the increasing growth of diesel demand and declining growth of gasoline in Northwest Europe, one might have expected diesel prices to increase relative to gasoline.  This graph shows that has not occurred.  While the swings in the price differences have increased, on average there is no downward trend.
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SThe United States’ need for gasoline imports has helped Europe maintain its gasoline production balance.  Hydrocracker investment to increase diesel production is expensive, and with Europe being in a better position to meet U.S. gasoline specifications than many other exporters, increasing flow of gasoline from Europe to the United States is likely.  Higher U.S. prices may be required to draw these gasoline import volumes, which will retard hydrocracker growth in Europe and provide more imports for the United States. 
SThis year, we are seeing the impact that gasoline quality specification change can have on imports.  In particular, specification changes raise the possibility of a drop in import levels and a shift of import source regions, as some of these areas are possibly eliminated by their inability to produce our new products.
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SThe volumes shown in this chart are imports into New York and New Jersey, where imports have had to accommodate both the lower sulfur level common to all U.S. gasoline (Tier 2 requirements) and the elimination of MTBE in New York and Connecticut.  Reformulated gasoline required in New York and Connecticut now is produced by providing low RVP RBOB in the summer months that is blended with ethanol locally before being distributed to retail outlets.
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SAs the chart shows, import volumes from Western Europe have grown, while those from Eastern Europe and other regions (particularly Latin America) have declined.  Imports from Canada and the Virgin Islands have increased modestly.
SOne of the supply issues facing the US in the next several years is how changing gasoline specifications in the United States will affect the availability of imports from other regions.  As we showed in the previous slide, the ban on MTBE, which requires very low RVP gasoline components to blend with ethanol in order to produce RFG, reduces the number of import suppliers that can provide acceptable RFG components. 
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SU.S. sulfur constraints are also expected to reduce the number of suppliers, but more for timing reasons than because the United States is taking a unique specification path.  The United States is moving towards low sulfur product before many other regions do so.
S- Europe is relatively close to U.S. standards, and its exports to the United States may not be limited by sulfur.  In fact, with its tax incentive programs, gasoline being sold in some European countries today has lower sulfur content than U.S. requirements.
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S- South America generally is producing gasoline with higher sulfur levels than in the United States, and that is not expected to change soon.
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S- Asia is moving to lower sulfur levels in some countries, but still has higher sulfur specifications in many regions.
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SRegional specification changes, along with knowledge of the origin of our imports can give us a clue as to how the U.S. specifications may impact import availability.
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SThis chart shows imports stacked roughly by their ability to produce low sulfur gasoline.  Those with the greatest ability are on the bottom. SOne could assume that refineries that depend on the United States for much of their output would invest to comply with U.S. regulatory changes.  Facilities dependent on U.S markets include Eastern Canadian refineries, the Hovensa refinery in the U.S. Virgin Islands, and to a lesser extent refineries in Venezuela.  In 2003, these three regions supplied 42% of total gasoline imports.  SIn addition, Western Europe has become an important supplier to the United States, and with European Union (EU) specifications being close to U.S. specifications, we might expect a large share of those volumes to continue to be available.  SHowever, much of the historical supply from Latin America outside of Venezuela may not be able to meet our specifications in the near future. Venezuela’s ability to supply future specifications on time is uncertain as a result of the changes in PDVSA that occurred since the strike in December 2002.  SWe may also lose some Eastern European volumes – particularly when we move to 30 ppm requirements next year.  Furthermore, some of our Asian sources of imports (e.g., India and China) may not be able to supply low-sulfur product for some time. However, Asia is a small source of imports, supplying only 4% of total imports in 2003. SThis implies that in the short run, we may need higher prices to attract needed volumes both because fewer sources can produce U.S. product and because the product we need is higher valued.  SOne of our biggest import source areas, Europe, may need to supply more product in the future if other areas drop out.  But will Europe have enough extra supply for export to make up for other lost volumes?
SThe first few months of 2004 demonstrate that we may be seeing a shift in supply sources consistent with availability of low sulfur gasoline.
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SWestern Europe volumes increase by 30% from 2003 to 2004
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SSignificant changes occurred in the “Latin American” and “Other” categories.  Brazil and Argentina dropped from 7.4% of total to 2.6%, Asia dropped from 3.6% to 2.3% and Algeria plus Nigeria increased from 0.6% to 1.5% of total.
SThis chart summarizes the factors that will either work to push gasoline imports up or down.
SUp until this point, the discussion of gasoline imports has focused on product specification issues.  This presentation will now address if recent high demand growth and increased refining capacity utilization in some refining regions will impact gasoline imports available to the US.
SDemand for petroleum products are in a major upswing in 2004, and most analysts predict a continuation of growth in 2005
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SHistorically, oil product growth has varied considerably.  After the major demand decline in the early 1980s following the large increase in crude oil prices, demand growth has varied up to about 2 million barrels per day. 
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SSome market analysts believe that the strong growth of 2004 and 2005 will absorb all surplus refinery capacity, creating a “refinery capacity crisis.”  We see higher utilization occurring but not reaching a cliff edge or crisis situation.
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SOne of the problems seems to come from a comparison of world product demand and world refinery capacity.  A balance of  83 MMB/D of capacity against 82 MMB/D of demand implies a very tight situation.  But one needs to look more closely.  For example, the U.S. has over 20 MMB/D of demand and only 16.0  MMB/D of refinery inputs plus 1.4 MMB/D of product imports.  Gas liquids and other hydrocarbons and oxygenates contribute significant supply volumes.
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SIt is necessary to look at regional refinery markets in order to get a meaningful  picture  of how high capacity utilization is.
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SHowever, while our view is  more restrained than some other analysts that state that world capacity is “maxing out”, it is correct that demand is growing faster than capacity in recent years, and the situation will become tighter if high demand growth continues.
SWhen capacity utilization in major world regions is analyzed, a far less worrisome picture emerges.
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SRefining capacity utilization in most regional markets reached a high point in 1998.  The Asian financial collapse, recession, and capacity expansion reduced utilizations since then, but utilizations are increasing again.  Utilizations, however, are unlikely to reach 1998 levels in 2004 in most regions.
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SThe U.S. is currently experiencing high utilizations during this summer’s gasoline season, and Asia is seeing both high demand growth and capacity utilization.
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SThe Asian demand growth should also result in increased utilization in the Middle East.
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SIn Europe, neither product demand nor capacity utilization has shown much change in recent years, as shown in the next chart.
SWhile some observers have noted the high utilizations in the U.S. and Europe this year, they fail to put those utilizations in perspective. 
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SThe relationship between EU 15 oil product demand and refining capacity has shown little change since 1998, and concerns about global warming have created efforts directed at demand declines in the future.
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SBoth in the US and EU15, utilization reached a high in 1998, and this year, utilization may approach those levels, but are not likely to exceed them. 
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SThe region  showing the most change in recent years is Asia.
SThe Asian oil product market can be broken into four types of countries:
 OECD countries; Japan has declining demand and refinery closures. Korea has low demand growth.
 High growth countries such as China and India, which have historically developed domestic refining to serve their needs and raised protective tariffs,
 Rest of Asia/Pacific with modest demand growth.
 The major export refinery center of Singapore (shown in this chart),
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SAsia has also been a net product importer and a major market for the export refineries in the Middle East.
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SThe Asian financial collapse in 1998 resulted in demand and refinery utilization falling in Singapore, which is somewhat of a bell weather for the Asian refinery market.  Last year and this year, utilization has again grown, and is approaching 1998 levels.
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SChina, where growth has been most dramatic in 2004, has reported crude runs of over 6 MMB/D in recent months.  Utilization must be very high.  The latest source available to us reported a Chinese refining capacity of 5.2 to 5.4 MMB/D, which means reported capacity is likely to be lower than actual.
SThis slide shows downstream capacity as a percent of distillation capacity for 6 of the largest producing countries in Europe and Asia, and for the 4 largest oil-producing exporters in the Middle East.
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SWhile available distillation capacity is a critical factor in meeting world demand, downstream capability is critical in producing the cleaner fuels required by the U.S. 
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SNot surprisingly, fluid catalytic cracking capacity is more common in U.S. refineries than elsewhere because it is an excellent gasoline production process, and gasoline’s share of petroleum demand in the US is higher than in these other regions.
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SHydrotreating is commonly used to remove sulfur, and there is more hytrotreating capability in the U.S. and Europe per barrel of crude oil capacity than in Asia or the Middle East.  Another important aspect of hydrotreating capacity is that it has the ability to reduce sulfur to very low levels, (less than 10 ppm.)  Thus, in the following slides, you will see expansion of hydrotreating in regions already with seemingly high capacity. 
SCapacity additions in Asia and the Middle East reflect a different mix of products than in Europe and the U.S.  This slide and the next one show capacity additions in the four regions from 1995 through 2004, as well as potential additions either in the planning or construction phase as reported in the Oil and Gas Journal Construction Survey.  In cases where the Oil and Gas Journal does not list the size of a planned project, press releases were researched to add that information.
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SCapacity additions in Asia and the Middle East are relatively balanced, provding more crude throughput capability and the downstream processes to produce product in keeping with their markets.
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SNote that information on refinery projects being planned or under construction is neither complete, nor entirely accurate.  Nevertheless, the partial information does provide a useful picture of the relative levels and types of projects. 
SIn Europe and the U.S., since 1995, the graphs show a clear emphasis on hydrotreating to reduce sulfur and improve the quality of gasoline and diesel.  Europe shows a modest increase in hydrocracking over distillation capacity, helping to increase the yield of distillate fuels. 
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SThe U.S. has more increase in distillation capacity than in the 6 European countries in this graph.  This is in keeping with the larger petroleum demand growth in the U.S. than in Europe.
S“Golden Age” or “Golden Moment” – Refining margins in most parts of the world improved since 2000, albeit not smoothly.  This year, refining margins are up significantly in all regions – over 100% increase from 2003 as of this presentation.  The question was recently posed, has the refining business finally reached the “golden age” when it will earn good returns, or are 2004 margins just the result of a somewhat broader and higher price spike that will be a “golden moment”?
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SSome analysts have attributed this year’s high refinery margins to high refinery utilizations.  We disagree with that assessment.  While high utilizations are contributing to the higher margins, we find that the general state of the world petroleum market as represented by low inventories, high demand, and little surplus crude oil production capacity are the major drivers.  Inventories have stayed low with high crude oil and product prices because demand has been high and crude production has only increased slowly.
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SWhile it is unlikely that refining margins will remain at the high level for the first half of 2004, the low surplus capacity of crude oil production is likely to last a while.  Refinery utilizations are likely to continue to rise, and for the U.S., the need for increasing product imports in the face of tighter product specifications will mean higher prices to attract those import volumes
SGasoline demand increased by an average 139 MB/D for the past five years, while distillation capacity increased about 200 MB/D.  At 50% gasoline yield, the added capacity could have provided 100 MB/D more gasoline.  Thus, imports have risen to make up the difference, and because the imports have been competitively priced, U.S. refineries have run at slightly lower utilizations.
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SU.S. gasoline demand forecasts are up, compared to the last 5 years, and are projected to increase about 200 MB/D range per year.  If domestic production were to meet this demand, U.S. capacity would have to increase about 400 MB/D each year, or if imports were to meet half the increased demand, capacity would need to increase by 200 MB/D per year.
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SWhile the higher margins this year are likely to encourage capacity increases, the recent low capacity addition rate combined with what is publicly available in the planning and construction pipeline, imply that capacity addition rates may take a few years to reach an annual capacity addition rate over 300 MB/D.
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SMoreover, U.S. refiners are dealing with product quality improvements and MTBE bans that are likely to reduce yields, at least in the short run, meaning more imports will be needed.
SWe see a need for increasing gasoline imports, but at the same time, changing U.S. gasoline specifications are making the challenge more difficult.
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SThis year, we have seen evidence that gasoline import needs have been met, but import sources have changed with the decline in the occasional imports sources.  Next year, the challenge for imports increases as U.S. sulfur limits drop again.  Other world regions are also lowering their sulfur limits, but not always as soon as the United States.
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SHigher worldwide refinery capacity utilization should have little impact on U.S. gasoline imports.  The major utilization increase is in the Asian market, which should also lift utilization in the Middle East and refineries exporting to Asia.  The Asian situation is unlikely to draw much gasoline from the Atlantic Basin refineries.  In the Atlantic Basin, refinery utilization changes are more modest and should have little impact on gasoline export volumes.  The primary refining issue will be the ability of the Atlantic Basin refineries to produce U.S. quality product. 
SA challenging gasoline supply problem is facing the US for the next 3 to 5 years.  Gasoline demand is increasing faster than capacity and increased product quality requirements add to the challenge for both domestic refiners and importers
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SThis year’s events offer some encouragement that imports have come in to meet lower sulfur requirements and the low RVP RBOB fuel needs of New York and Connecticut where MTBE was banned
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SThis presentation concludes with a mixed message that, while the U.S. faces significant gasoline supply challenges, we should not underestimate the ability of the supply system in the U.S. and exporting countries to meet the challenge.  Still, the changes and re-balancing may not occur smoothly, and the current market situation should provoke some level of legitimate concern.