How the US Became an Exporter of Distillate Fuel

Posted by Gregg Gethard on October 29, 2009 at 1:34 pm

About 12 gallons of distillate are produced from a 42-gallon barrel of crude oil. (image: eia.doe.gov)

Distillate fuel is one category of fuel oils that are derived from crude oil. While crude oil also produces gasoline, jet fuel, and heavy fuel oils used in paving, distillate fuel refers to diesel and, most importantly to readers of this site, heating oil. And while they may be used for different purposes, heating oil and diesel are very similar to each other chemically.

Like all commodities, distillate fuels are affected by the many factors that comprise the marketplace. And, due to several significant changes over the past few years, American production of distillate fuels has gone through a unique transitional phase.

According to the Energy Information Association, a branch of the US Department of Energy, America has traditionally been an importer of distillate fuel, receiving supplies primarily from Canada or the Virgin Islands. But over the past two years, America has actually become an exporter of distillate fuel.

This trend started in the summer of 2008 when a series of events changed the distillate fuel marketplace. In Argentina, price controls limited natural gas production and sales; in Chile, a severe drought drastically reduced that nation’s hydroelectric generation. This created more demand for distillate fuels, which were used to replace natural gas and to provide for electrical generation. This also led distillate fuels to become more expensive.

In response, Chinese and Indian officials gave away subsidies and placed price controls on distillate fuel used in those countries. In most cases, a rise in demand raises prices, which eventually leads to a drop in consumption. However, due to the actions of China and India, the marketplace did not respond in this fashion.

The price of distillate fuels rose so fast that a rare event occurred: distillate fuels started selling for more money than gasoline during the summer. Oil refiners responded in turn, increasing the amount of distillate fuels derived from a barrel of crude. During the summer months of 2008, distillate yields were three percent higher than they were the year before; this added about 380,000 barrels per day of additional distillate fuel to the market.

And as all of this was going on, demand for distillate fuel in America dropped by nine percent from the previous year due to the massive slowdown of the economy. The meant that the United States became an exporter of distillate fuels and sold most of its stock to countries in South America and Western Europe.

This year, the typical price trends of distillate fuel returned. Distillate fuels once again sell for less than gasoline does. However, America is still an exporter. Through July of this year, the United States exported an average of 350,000 barrels of distillate fuel a day; in 2008, that figure was 275,000.

This shows that worldwide demand for distillate fuels has increased despite the global recession. And an increase in worldwide demand creates pressure for an increase in distillate fuel prices. If demand works as it typically does, and pushes prices higher, this could result in you paying more for heating oil.