Diesel Demand to Surge through 2040
When it comes to enhancing American energy security, policymakers often look to gasoline-powered passenger or light-duty vehicles as the largest and most profligate consumers of petroleum fuels. But recent forecasts by the U.S. Department of Energy suggest that, over the next 25 years, the fastest-growing petroleum-powered fleets may be, quite literally, much bigger. As the U.S. economy grows, so too will the vehicle miles traveled (VMT) for heavy-duty vehicles (HDVs), like big rigs and semi-trucks. The Energy Information Administration (EIA) estimates that energy demand for HDVs will increase by 5.3 quadrillion British thermal units (Btu) in 2012, to 7.2 quadrillion Btu in 2040—a 41.5 percent increase. Put another way, growth in industrial output increases HDV VMT by 1.9 percent per year. Thankfully not all of that growth will be fueled by petroleum. Shifting demand towards natural gas, current and future fuel economy standards for heavy-duty vehicles, and the renewable fuel standard should all play a role in ensuring lower oil use to move freight. Even so, demand for diesel fuel will certainly rise in coming years. Diesel, a product of crude oil, is characterized by longer hydrocarbon chains and is less “combustible” than its distillate siblings, gasoline and kerosene. Compared with gasoline, which powers more than three-fifths (61 percent) of the United States transportation sector, diesel has a higher energy content, which makes it more fuel efficient in heavy-duty applications, and provides more “low-end torque” required to transport heavy loads. Thus, it is more ideally suited for vehicles carrying payload. Diesel fuel is used by the vast majority of boats and barges in the United States, as well as upwards of 90 percent of HDVs, and most cargo-handling equipment. Recent analyses by the EIA based on data from the National Highway Traffic Safety Administration and Environmental Protection Agency reveal important changes in fuel consumption through 2040, particularly among lighter weight fleets. As a result of the Obama Administration’s new fuel economy standards, light-duty vehicle (LDV) efficiency should improve to 54.5 miles per gallon (mpg) in 2025, up from 33 mpg in 2012. This is projected to bring about a decline in motor gasoline consumption in the transportation sector as a whole. The figure below illustrates how these two phenomena interplay. As motor gasoline consumption in the transportation sector falls 2.1 mbd, diesel fuel consumption increases by 0.9 mbd in EIA’s Reference case. The EIA’s Annual Energy Outlook 2014 (AEO) identifies two important implications for this shift from gasoline to diesel. The first is that there will have to be a shift in crude oil refining of finished products to meet changing demand. The average barrel of crude oil contains too little gasoline and too much heavy oil for current consumption. According to Exxon Mobil, a barrel of crude is refined to produce 19.4 gallons of gasoline, 9.7 gallons of distillate fuel oil (heating oil and diesel), and 4.2 gallons of jet fuel, among others. Impending consumption changes in the transportation sector, however, may alter the ratio of these finished products from a barrel of crude. Here is how the EIA describes how refiners will go about shifting production:
In response to the drop in gasoline demand, refinery utilization for fluid catalytic cracking (FCC) units falls from 67% in 2012 to about 55% in 2040. In contrast, with diesel production increasing, installed distillate and gas oil hydrocracking capacity grows from about 2.2 MMbbl/d in 2012 to 2.9 MMbbl/d in 2040, indicating a shift from FCC feeds to hydrocrackers to maximize diesel production.In the oil industry, refiners use the term “crack spread” to refer to the difference between the price of a barrel of crude oil and the petroleum products extracted from it. Presently, refiners use a 3-2-1 crack spread to “estimate the profitability of processing three barrels of crude oil to produce two barrels of gasoline and one barrel of distillate,” says the EIA. But by 2040, refiners may move to a 5-3-2 spread that would be most consistent with the 1.3 gasoline-to-diesel production ratio after 2035. In the coming decades, the ratio of finished gasoline products to diesel from a barrel of crude oil will continue a gradual decline, as evidenced by this graph. There are a couple of factors that could affect U.S. consumption of diesel fuel. The first is the next round of HDV fuel economy standards, which will continue to reduce the amount of diesel used in this segment. The proposed standard will be released in March 2015, and if a strong standard is enacted over 1 mbd of diesel could be saved by 2030. Additionally, EIA anticipates almost all gasoline-9jpowered HDVs will be converted to natural gas. To that end, competitive prices will sharply raise demand for liquefied natural gas and compressed natural gas, resulting in modest growth in HDV natural gas consumption through 2040:
Within the transportation sector, which dominates demand for petroleum and other liquids, there is a shift from motor gasoline (losing more than 10% of its share of total transportation petroleum and other liquids demand over the projection) to distillate (gaining slightly less than 10% of the total). The increased use of compressed natural gas and LNG in vehicles also offsets about 3% of petroleum and other liquids consumption in the transportation sector in 2040.As HDVs grow as a share of the total transportation sector energy demand (from 19 percent to 28 percent in 2040), these changes help reduce the volatility of fuel costs that businesses face today with oil.
 The EIA defines “energy-weighted industrial output” as the weighted sum of real output for all two-digit Standard Industrial Classification(SIC) manufacturing industries plus agriculture, construction, and mining. The weight for each industry is the ratio between the quantity of end-use energy consumption to the value of real output.
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