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SThe distillate market continues to show signs of interesting changes taking place.  The dilemma is to try to understand what may be behind the changes we are seeing. 
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SWe are dealing with a market where diesel fuel oil has just gone through a major specification change – both in Europe and the United States. 
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SBut even before the move to ultra-low-sulfur diesel (ULSD), the market was indicating a tightening that might be tied more to the strong growth in demand for this fuel relative to gasoline demand growth. 
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SThe presentation is broken into two major parts.  The first will review how the ULSD program is going so far. 
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SThe second part of the presentation will focus on the longer-term trends for distillate, focusing on the Atlantic Basin.
SThe ULSD program is well underway.  This part of the presentation will review how production and imports have progressed, the transition issues that we saw and those we may still see, and last, the price impacts ULSD may have had on the market.
SPrior to June 2006, we saw very little production of ULSD, although some volume was being produced for special markets.
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SBy the last week in June, ULSD refinery production was over 2.1 million barrels per day, and ramped up to average over 2.5 million barrels per day fourth quarter 2006, which represents well over the requirement to meet 80% of the on-highway diesel demand.
SPADDs have moved to ULSD at different rates.  The figure on the left shows PADDs 2 and 3 still were producing a fairly sizable volume of 500 ppm diesel.  The figure on the right shows the shares of distillate being produced in each PADD.
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SIn PADDs 2 and 3, ULSD projects are in the works that should be completed in 2007. 
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SPADD 4 was an area of concern before the program began because of its isolation and the ability of some PADD 4 refineries to take advantage of the small-refinery delays that were allowed.  But PADD 4 refineries converted almost entirely to ULSD. 
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SThis table shows the actual ULSD production in late 2006 by PADD, compared to the survey estimates of ULSD produced by Solomon Associates for API and NPRA and to a summary of the refinery planning information provided to EPA.
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SActual volumes are close to the estimates.  The total ULSD production was slightly lower than either the Solomon or EPA estimates, but only off by about 29 thousand barrels per day from Solomon and 126 thousand barrels per day from EPA’s estimates. 
SA number of years ago, when we began to look at the challenge facing U.S. refiners to produce ULSD, we speculated whether refiners would de-sulfurize the easier projects first, leaving the more challenging feedstocks to later as ULSD demand grew.  But looking at individual refineries, that does not seem to be the case.
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SThe first group of refineries on this chart have already converted their total distillate pool to ULSD.  The second group has converted almost all of their diesel pool to ULSD, but is still producing some high sulfur distillate.  These facilities may not do much more in the short term.
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SThe third and fourth groups of PADD 3 refiners above produce still produce substantial LSD.  Moving to the higher ULSD production may be costly, but will likely be no more challenging than projects experienced by some refiners already at full ULSD production.
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SThus, we do not anticipate a huge hurdle in moving to full ULSD.  However, there still may be more challenges further down the distribution chain.  We have not yet tested the system’s ability to handle large contamination issues, for example, particularly when diesel product is in a region where large volumes of heating oil are not used.
SWhile imports are not a major source of diesel supply to the U.S., they also have shown the switch from 500 ppm low-sulfur diesel (LSD) to ULSD.
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SThe two primary sources of diesel imports historically have been Canada and the Virgin Islands.  In 2006, both of these areas shifted from LSD to ULSD as shown.
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SAreas that supply lower volumes, such as Western Europe, have also moved to providing ULSD, and in total, there appears to be no significant change in the overall volume of diesel imports. 
SThe transition in 2006 to ULSD went well.  In 2005, the production potential had taken a backseat to concerns over distribution, but most ULSD made it to terminals without contamination.  In fact in some cases, it made it to terminals well under the 15 ppm required at retail.
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SIn many cases, terminals opted to carry only ULSD.   As a result, ULSD is being used to supply diesel outside the highway market.  Some of the outages this past fall in PADD 2 that were occurring at the end of the distribution system may have been exacerbated by the limited flexibility this situation creates.  Suppliers were reporting stronger than usual seasonal demand in the Midwest, which uses diesel fuel for farm use.  Even without the ULSD program this can create temporary terminal outages.  Some refinery problems contributed to the tight supply.  It did not appear that ULSD was the main cause of the outages, but more a contributing factor.
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SThe other transition issue that emerged was the need to use ultra-low-sulfur kerosene as a blending component in winter highway diesel.   Some marketers that normally line up kerosene supplies in the summer, were not finding suppliers willing to commit.  ULSK suppliers were focusing on the transition to diesel at that time. There was also some change in supply sources, which adds to transition pressures.
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SWinter-quality diesel was supplied using the typical means.  In addition to blending with kerosene at terminals, some suppliers produced a “winterized diesel” at the refinery that already had lighter distillate material blended in to keep it from gelling in colder weather; however, some suppliers used more additives that prevent gelling than in the past.
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SWhen the cold snap hit in February, gelling issues popped up in several areas.  But these seemed to be more issues of terminals and fleet operators getting caught with winter product in their tanks that was not blended for temperatures as low as they dropped.  ULSK was moved to those areas, but that does not happen quickly.
SNow we turn to prices.  How much of this year’s high diesel prices was caused by the transition to ULSD?  Certainly some of it, but perhaps not as much as some people might think.
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SThis chart shows the difference between 500 ppm low-sulfur diesel (LSD) and heating oil.  LSD compared to No. 2 heating oil is shown in red.  Indeed we see a spike in both LSD and ULSD in 2006 as we went into the ULSD transition.  ULSD could have pulled LSD along.  But note that 2004 and 2005 (apart from the hurricane) had significantly higher LSD diesel premiums over heating oil than seen in prior years.  During 2004 and 2005, the diesel-heating oil difference more than doubled from what had been.   
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SThe increasing diesel value over heating oil seems to reflecting a growing tightness in that market, which we will discuss shortly. 
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SWhile the difference between ULSD and heating oil can be seen on the chart, it is difficult to interpret the difference between LSD and ULSD prices during this transition.  Local dislocations and the smaller volumes of LSD create short-term variations that may disappear as the market settles down.
SIn both 2005 and 2006, the average diesel spot crack spread (spot product price minus crude oil price) exceeded the regular gasoline crack spread.  For most years, gasoline crack spreads exceeded the diesel crack spreads on average, except for those years, like 2000, where unusually cold winter spells resulted in heating oil prices carrying diesel prices up.
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SThis change in relative margins occurred well before the U.S. ULSD program got underway, and thus is not a result of this product transition.
SDue to the fact that ULSD is more difficult to handle, it was not clear if delivery costs and/or bottlenecks might not drive retail prices up over wholesale more than usual. 
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SThat was not the case.  The increase in prices seen at retail was driven mainly by wholesale prices, as is typically the situation.  There has been only a modest increase in retail over spot margins for diesel and gasoline in 2002-2006 period.
SWe have also been watching European ULSD prices to see if we can gain any insights that might carry over into U.S. ULSD price behavior.
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SEurope went through its transition to ULSD in 2005, so it has had a little more time for the market to settle.   
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SSince some areas in Europe moved to ULSD in advance of 2005, price information is available before 2005.  This chart shows Europe’s ULSD’s premium over heating oil since early 2003.  It shows some extra price pressure at the end of 2004 and spring of 2005, but prices seem to have settled at about 10 cents per gallon over heating oil.   U.S. ULSD spread over heating oil was about 15 cents in December.
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SDistillate in general – not just diesel– has been showing price strength.
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SHeating oil prices on both sides of the Atlantic exceeded gasoline prices for much of 2005 and for a good part of 2006. We maybe seeing signs of a fundamental shift in the relative pricing of these primary light refined products due to tightening of the distillate markets in the Atlantic Basin in particular. 
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SWe have all been watching the growth in diesel demand, and have known that at some point, price for diesel would have to rise relative to gasoline to produce the incentives needed to shift refinery investment towards more distillate production.  Is this the beginning of that situation? 
SAs just described, more seems to be going on in the distillate markets than the change to ULSD.  This section will look back at history, quickly focusing on the Atlantic Basin to gain some insights into what history is telling us about the future.
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STransportation has been the primary driver behind petroleum product demand growth, and it is perhaps the least sensitive to price and fuel substitution effects in the short run – if not also the long run.
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SCAFÉ standards, enacted in the U.S. in 1975, gave rise to substantial efficiency improvements in light-duty vehicles, and were the major factor behind a decline in gasoline demand seen in the early 1980’s.  Today, however, the “easy” efficiency improvements seen in the early 1980’s are gone.  Efficiency improvements are still possible, but we are likely to see less impact in the short run than we saw in the early 1980’s.   
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SDistillate demand, driven largely by diesel transportation use, has grown worldwide more strongly than gasoline.  While heavy-duty vehicle use drives U.S. demand for diesel, diesel-fueled light duty vehicles are playing a large role in Europe.
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SToday, the large Asian economies of China and India are accounting for much of the growth in both gasoline and distillate.  They are being driven by economic development.  Barring a recession, that growth may be difficult to stem. 
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SBut a major region that seems to be driving distillate ahead of gasoline in the world is Europe.
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SThis chart illustrates the dramatic product mix change that has taken place in Europe relative to the rest of the world by graphing middle distillate demand’s share of total demand for gasoline and middle distillates.  With Europe representing about 21% of the world’s gasoline and middle distillate consumption, it has an impact. 
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SMiddle distillates in this graph includes diesel, heating oil, kerosene, and jet fuel, and gasoline includes naphtha.  But the change in middle distillate demand’s share captured in the chart is driven mainly by changes in diesel fuel demand.
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SWhile not shown on the chart, the U.S. share of middle distillates has shifted slightly higher (2% change since 1985), and the rest of the world has actually shifted a bit towards more gasoline. 
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SEurope’s strong shift away from gasoline to distillate has created some supply challenges for itself that have affected the U.S. gasoline and distillate markets, as will be discussed. 
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SEurope has had a policy to reduce transportation fuel demand in response to its interest in reducing carbon dioxide (CO2) emissions.  Although petroleum transportation fuel demand growth averaged only 0.7% per year since 1995, CO2 targets are not being reached, and new government mandates may mean more biofuels, efficiency requirements, etc. 
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SOne of the primary means of curtailing demand was to encourage the use of diesel-engine light-duty vehicles over the less efficient, gasoline-fuel engines. As a result, diesel demand is increasing, while gasoline demand is declining.
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SThis slide illustrates the rapid penetration of light-duty vehicles in recent years that has been behind the demand shift from gasoline to diesel fuel.  European diesel-fueled new car registrations went from just over 20% in the mid-1990’s to about half of the new car sales today.  This compares to 1-2% in the United States.
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SA number of forecasters predict that the penetration rate of diesel-fueled, light-duty vehicles will increase much more slowly in the future.  However, even if the penetration rate were to flatten out at the current 50% level, the total stock of diesel-fueled vehicles in the fleet would continue to increase from where it is today at about 30% of the existing stock of vehicles until it reaches the flattened penetration rate.  Thus, diesel-fuel demand would continue to increase, while gasoline demand declines.
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SThis graph shows how gasoline and diesel demand have changed.  Between 1999 and 2006, distillate demand has risen by 784 thousand barrels per day, while gasoline demand has fallen by 648 thousand barrels per day.
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SThe next slide addresses how European refiners have dealt with this issue.
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STo meet the increase in distillate demand of 784 thousand barrels per day between 1999 and 2006:
OECD European refineries shifted production to maximize distillate production and made some investments in hydrocracking. 
They also did not increase kerojet production to keep up with rising demand for that product. 
The result was an increase in distillate fuel imports of 403 thousand barrels per day and kerojet imports of 271 thousand barrels per day, for a total distillate and kerojet import increase of 674 thousand barrels per day.
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SAs can be seen, the increase in distillate yield was 2.8%, while gasoline yield only declined 0.6%, indicating that the increase in distillate yield did not come primarily from a shift from gasoline production.
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SFrom a review of European refinery projects in the planning stages, most of those projects with increased distillate yield are achieving that increase from improved conversion – reducing residual fuel oil production and showing little change in gasoline production.  Thus, the gasoline excess in Europe will grow as gasoline demand declines.
SThis chart quantifies the gasoline and distillate imbalances in Europe.  Distillate products (diesel, heating oil, and jet fuel) are imported in increasing quantities, and excess gasoline is exported in increasing quantities, despite recent hydrocracking investments.
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SIn 2004, the Former Soviet Union countries supplied about ¾ of Europe’s diesel and gas oil imports.
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SThe U.S. East Coast has been the principal market for Europe’s gasoline exports, taking ¾ of Europe’s export volumes.  In 2006, the elimination of MTBE from RFG on the East Coast added a challenge for Europe’s gasoline exporters to the U.S., which was met as the U.S. has become a critical market for European refiners.
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SLooking to the future, Europe’s distillate imports may be more difficult to locate as European sulfur specifications are lowered for a few years.  After 2010, new refinery projects in the Middle East and India will look to Europe as a market for their increased diesel export capability.  But Europe may still be competing with Asia for those product barrels.
SEuropean gasoline exports have increased by 505 thousand barrels per day from 1999 to 2006, and U.S. imports have increased 520 thousand barrels per day over the same time period.
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SThe U.S. East Coast has been the principal market for European gasoline exports, and European refiners have demonstrated the ability to meet changing U.S. gasoline specifications.  Very importantly, European imports have also demonstrated the ability to increase volume when U.S. gasoline production falls back, as was demonstrated after hurricanes Rita and Katrina, although some of the European imports came from Europe’s strategic supplies as well.
SStepping back, this chart shows Europe’s large share of distillate production in its refineries, relative to gasoline.  In addition it highlights the large of amount of residual fuel being produced.
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SEurope’s refinery mix is striving to meet the high distillate demand need, but as previously discussed, falls short, and ends up producing larger surplus gasoline volumes than in the past.
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SIn contrast, U.S. refining output is designed for gasoline production and very little production of residual fuel oil.  The refining output is roughly proportional to its refined product demand.  However the U.S. does import products.  For example, imports of gasoline, distillate and residual fuel oil averaged about 1.5 million barrels per day in 2005, but gasoline (including gasoline blending components) represented over 60% of that volume. 
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S U.S. gasoline demand is 48% of total product demand, and is comparable to Europe’s 48% of distillate demand.  Yet U.S. gasoline plus distillate represent 79% of total product demand, while Europe’s gasoline plus distillate only represent a 66% share of its product demand.  Residual fuel in Europe represents 2.5 to 3 times the U.S. residual fuel demand, but is declining.  Furthermore, bunker residual fuel demand may be significantly impacted by possible new sulfur requirements.
STurning to the U.S., we need to look at both gasoline and distillate here as well to appreciate what may be happening to the distillate market. 
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SOn the demand side, the relative size of the gasoline and distillate markets is changing in the U.S., but not to the same extent as has occurred in Europe.
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SSupply changes may have larger implications for U.S. refiners than the demand shifts, as discussed in the following slides.
SLooking at U.S. demand, note that, unlike Europe, gasoline dominates the U.S. transportation fuel market.  But diesel demand has been pushing total distillate demand up at a higher growth rate.  Even the volume increase in distillate from 1995 through 2005 is almost as large as the volume increase in gasoline.
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SFast rising distillate demand will put more pressure on the refinery mix as its share of the light product market increases.
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SWe need to look behind the growth in these two products in the U.S. more closely to see what the future may bring. 
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SSeveral factors have been behind continued strong gasoline growth in the U.S.  Population growth has resulted in an increased number of drivers and an increased number of vehicles.  In addition, the miles driven per vehicle has increased since 1985. 
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SOn top of increased driving since 1985, average light-duty vehicle efficiency has declined slightly.  Car efficiency has increased, but the share of less efficient, light-duty trucks and SUV’s has increased, causing the fleet average to decline. 
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SEfficiency has actually increased on a gallon per ton-mile basis, but consumers have chosen heavier vehicles, countering these improvements.
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SOpinion surveys have indicated that consumers say they would prefer more efficient vehicles.  But are consumers willing to switch types of vehicles, or perhaps are they thinking they should be able to buy a 4000 pound vehicle that gets 35 miles per gallon?
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SWe have seen an increase in hybrid sales, but the impact on overall fuel consumption will be slow.  Hybrid sales may account for 2 percent of new car sales in 2007, but new light-duty vehicle sales are only about 7-8% of the total stock of existing vehicles.
SThis slide illustrates perhaps the largest factors hindering U.S. light-duty vehicle efficiency improvements historically -- the dramatic shift from cars to SUVs.  Over half the new light duty vehicle sales are now in the light-truck category.
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SEven though we are seeing some signs of interest in more efficient vehicles, the share of light-duty trucks has not backed down.
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SThese trends point to continued robust gasoline growth.
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SBut could an interest in light-duty diesel-fueled vehicles affect this growth?
SOver the past decade, the heavy-duty vehicle fleet kept diesel demand growth higher than gasoline.  Jet demand fell back after 9-11, which kept its average growth over the past decade down to 1.2%.  (Future jet fuel growth is projected at 2.3% over the next decade.)  Transportation distillate demand grew on average 3.0% per year.  The other sectors were flat or declined.  SIn 2004, diesel-fueled vehicles were 3.2% of new light-duty vehicle sales.  Most of them were the heavier light-duty trucks within the light-duty vehicles.  SWhile automakers have announced a number of new light-duty diesel-fueled models becoming available in the next few years, there are no clear signs of how many U.S. buyers will opt to buy a diesel-fueled light-duty vehicle.  The price advantage diesel fuel had over gasoline seems to have vanished, and U.S. buyers have memories of the unattractive features of older diesel-fueled vehicles that must be overcome.  SStill, the new diesel-fueled vehicles are very different than the old models, offering both power and efficiency without the old diesel-vehicle smell.  Interest in light-duty, diesel-fueled vehicles could increase substantially. J.D. Power and Associates estimates light-duty diesel sales will exceed 10% of new light-duty vehicle sales by 2015. SLast year we presented a high diesel-penetration case (15% of light-duty vehicle sales by 2015).  That growth in penetration dropped gasoline sales by 192 thousand barrels per day in 2015 and increased diesel by 139 thousand barrels per day relative to the base case that kept diesel penetration at roughly today’s rate.  Should this kind of adoption of diesels by Americans occur, it could impact gasoline and diesel growth rates  -- increasing diesel by +0.3% per year, and decreasing gasoline by -0.2%. SRegardless of the diesel penetration rate into the light-duty fleet, U.S. diesel demand should still see high growth rates from the heavy-duty vehicles alone. 
SNow we turn to U.S. supply, which has larger implications for refiners than demand shifts.  These graphs show gasoline and distillate supply from 1995 through 2006. 
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SNot only has demand growth been higher for distillate than for gasoline, but comparison of the refinery output of distillate with gasoline output from crude oil and other feeds shows an even greater growth disparity.  From 1995 to 2006, U.S. refinery-based gasoline supply increased about 500 thousand barrels per day, while refinery-based middle distillates increased about 950 thousand barrels per day.
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SImports and oxygenate growth from outside the refinery supplied most of the gasoline demand growth. 
Gasoline net imports have grown substantially in recent years, partially due to the increasing availability of imports from Europe. From 1995 through 2005, total gasoline net imports (finished and blending components) have grown from 202 thousand barrels per day to 955 thousand barrels per day, supplying 55% of the demand growth over that time. 
Oxygenates have also become an increasingly important part of the gasoline supply, first with MTBE and now with ethanol.
SDistillate demand growth was supplied mainly from increased U.S. refinery production. 
Distillate product imports grew somewhat, but not as much as gasoline imports and not as much as distillate production.  We currently see a relatively steady flow of distillate imports from Canada and the Virgin Islands, accompanied by winter surges in heating oil when the weather gets quite cold. 
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SWhat do we see regarding these trends in the future?
SEIA’s AEO 2007 Reference Case has distillate and jet fuel averaging 2.0% annual growth over the next 10 years, while gasoline only grows 1.1%.  Furthermore the volume of increase of distillate and jet fuel together is 1.16 million barrels per day, which exceeds the 1.02 million barrel per day increase in gasoline. 
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SThus, the demand mix is continue to shift somewhat towards distillate, but not nearly to the degree that Europe is experiencing. 
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SThe shift that is of most interest to U.S. refiners is the shift in supply, particularly the potential increased use of biofuels.  While biodiesel is forecast to increase a small amount over the next 10 years, ethanol use in gasoline is where the large change is occurring.
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SIn recent years, the growth in ethanol was countered by the loss of MTBE.  But looking ahead, ethanol will replace what would have been refinery-based gasoline output. Both EIA and other forecasters see U.S. ethanol production growing towards 12-15 billion gallons per year, but the timing varies, and other critical supply projections vary as well.
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SThe table on the right shows in the first column how the incremental growth in gasoline was met between 2000 and 2005.  The volumes show an average annual increase for demand and for supply.  Net imports met about 58% of the demand growth.
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SThe second and third columns show two cases for how average annual gasoline demand increases between 2005 and 2015 might be met. 
The first case shows EIA’s 2007 Annual Energy Outlook.  Average demand growth is 102 thousand barrels per day.  Only about 20% of the increase is met by product imports, with the remaining 80% being met by increased use of ethanol and refinery production.  This case shows the need for some increased refinery capacity over the next decade.
The second case is based on several forecasts and includes the IEA’s projection for increased availability of gasoline from Europe.  In this case, ethanol use is higher than in the AEO case, hitting 15 billion gallons by 2015, which is an annual average increase of 74 thousand barrels per day.  Increased use of lower-Btu ethanol results in a larger volume increase in demand.  Imports increase 50 thousand barrels per day, which could be met by Europe alone.
SThe Combo Case shows little need for refinery gasoline production increases, which indicates that the need for refinery expansion capacity would be to meet the ten-year increase of 1.1 million barrels per day of middle distillates. Total refinery capacity needs are less in this case than in the AEO reference case, but even in the reference case, expansion needs are modest.
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SPulling together the factors influencing diesel supply and demand in the Atlantic Basin, we begin with demand for transportation fuels in Europe:
As already mentioned, even with no further increase in penetration of diesel vehicles, the ratio of diesel to gasoline demand will grow as the fleet continues to change, moving toward the penetration rate.
Greenhouse gas concerns may also impact diesel demand.  The EU set a target goal for CO2 reduction for road transportation, and has been relying on a voluntary plan by automakers to achieve that goal.  Despite some progress, mostly stemming from the switch from gasoline to diesel-fueled vehicles, it is clear that progress is insufficient to achieve their goal. 
It now seems that mandatory requirements will be next.  Discussions indicate more vehicle efficiency requirements may be on the slate. But even with increased efficiencies, new car penetration is slow to impact total demand. 
Also, with the interest in reducing sulfur in ocean-going vessel fuels, bunker fuel may be replaced with distillate – increasing distillate demand even more.  
SNow look at the U.S.
Overall, most factors point to higher growth of diesel in the U.S. than for gasoline.  Diesel fuel demand growth has been mainly due to increased demand from heavy-duty vehicles.  
There may be some growth in the light-duty market, but it seems diesel penetration will initially be in the heavier end of this light-duty market – the heavier luxury cars and SUV’s for example.  This could help push up diesel growth relative to gasoline growth.
Hybrids and general efficiency improvements for gasoline fueled vehicles will have a small impact on demand before 2010, but after 2010, efficiency gains could begin to affect gasoline demand growth. 
As in the case of Europe, any shift to distillate for ocean-going vessels would also add to U.S. diesel demand.
STurning to supply, consider Europe’s situation.
There are a number of refining projects in Europe to increase refinery diesel production.  But these do not seem to be sufficient to keep pace with increasing diesel demand. 
Biofuel initiatives to reduce carbon dioxide will include increased ethanol requirements, which will add even more to gasoline supply and increase export volumes.  Biodiesel should also help to meet Europe’s growing diesel demand, but will be far from sufficient to eliminate the growing need for imports. 
Finding increasing diesel volumes for import could be a challenge during the next few years.  After 2010, diesel export volumes from projects planned for the Middle East and India  may help ease the supply situation.
The diesel margin in the Atlantic basin will be affected by the long-haul economics of product imports into Europe.
SU.S distillate supply growth presents some challenges as well, but not to the same degree as Europe’s challenges
U.S. refiners should be able to handle modest increases in distillate yields.  Lower quality crude oil feeds (such as tar sands) will add to diesel production costs.
 Gasoline from refineries will face much more of a challenge from other supply sources.  High ethanol supply growth and increased product import availability will diminish the need for new gasoline capacity.
SIn the Atlantic Basin, the distillate supply situation appears to be much tighter than the gasoline supply as we look forward.
SThe higher diesel margin relative to gasoline seen in the last couple of years is primarily a reflection of the tighter distillate supply/demand balance in the Atlantic Basin.  ULSD adds some price pressure to the system, but pressure was building apart from ULSD.  The pressures tightening the diesel market in the past few years are likely to continue.
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SOn the other hand, factors are in play that are diminishing the need for increased petroleum-based gasoline supply. 
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SWhile the market always presents uncertainties about the future, the market in combination with policies driven by GHG and energy security are presenting the potential for some major changes in the future.  No one has a good crystal ball at this point.  A scenario approach is needed to understand how different factors could evolve to change market direction.  And creative management is needed more than ever to be able to take advantage of the market opportunities that may evolve, while avoiding the potential pitfalls.