US considers diesel export restrictions

Louisiana’s Governor Jeff Landry this week declared a state of emergency over diesel supplies. For a month, farmers and loggers will be allowed to use lower-taxed “dyed diesel” in their on-road vehicles, to give them some relief from record high diesel prices. The fact that even Louisiana, a heartland of the US oil and gas industry, has been forced to take action to cushion the blow from fuel costs is a sign of the severity of the crisis.

In Washington, too, emergency measures to address diesel prices have been on the agenda. President Donald Trump said this week that he was calling for a ban on exports. “I've said, let's not send out the diesel,” he told a press briefing on Tuesday.

Other leading Republicans, including Senator Chuck Grassley from the agricultural state of Iowa, have backed the idea. But there has also been widespread opposition, some of it from inside the administration.

Chris Wright, the energy secretary, said at an event in New York this week: “The blunt tool of banning diesel exports definitely doesn't work.”

The result has been confusion over what exactly the administration might do. One news outlet reported that a 90-day export ban was under consideration at the White House, but that story was quickly denied.

Industry groups including the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers have warned that a ban would be a costly mistake that could make the situation worse. Oil industry executives have reportedly been calling the president to try to talk him out of export restrictions.

Senator Grassley said he hoped the White House would not listen to the warnings from oil companies, and argued that an export ban would help farmers. A group representing oil and gas workers replied that if that logic held, the US should ban beef exports, too.

At the time of writing, there had been no formal announcement of any export restrictions. Secretary Wright was reportedly talking to refining industry leaders, asking them to introduce “voluntary” curbs. Bloomberg reported that President Trump’s advisers were still analysing the potential impact of a ban.

Another idea in circulation has been that refiners could “voluntarily” agree to earmark a proportion of their production for lower-priced sales to farmers and other groups that have been facing the greatest difficulties. Such a plan would face significant administrative challenges, including deciding which refiners should contribute the lower-cost fuel, and who would be eligible for it.

But some agreement with the industry along those lines seems more likely than an outright export ban.

The Wood Mackenzie view

The appeal of banning fuel exports is understandable. Other countries have done it. Russia banned diesel exports in July, in response to Ukrainian drone attacks on its refineries. China curbed oil product exports in March, and although those restrictions have since been eased it still operates a quota system for international sales.

But Wood Mackenzie modelling suggests that Secretary Wright, the industry associations, and other critics of an export ban are exactly right. Restricting US diesel exports would actually increase fuel costs for most Americans quite significantly.

The reasons lie in the dynamics of the US refining industry. US diesel and gasoil exports over the summer were running at about 1 million barrels a day. If exports were banned, refineries could use some flexibility to reduce diesel yields, but they would still have substantial excess production that would have to go into storage. When the tanks were full, the refineries would have to cut back their crude runs.

The impact would be concentrated in the Gulf Coast, by far the largest refining region in the US. It holds the bulk of US crude distillation capacity, and virtually all of the deepwater export infrastructure. If exports were cut off, it would be Gulf Coast barrels that would have nowhere to go.

The result would be that US gasoline production would fall. Analysis using Wood Mackenzie’s Refinery Supply Model (RSM) suggests that diesel and gasoil production would fall about 800,000 b/d, and gasoline production would drop about 70,000 b/d.

We estimate that would raise gasoline prices on the US east coast by about 15%, relative to our base case. That translates to an increase of about 26 US cents a gallon, pushing US gasoline prices towards record highs.

"The irony of a US diesel export ban is that it would likely increase costs for American consumers,” says Alan Gelder, Wood Mackenzie’s SVP for Refining, Chemicals and Oil Markets.

“A policy designed to bring relief at the diesel pump could end up driving prices higher at the gasoline pump."

US diesel prices would indeed fall in most of the country, as refiners sought to put more product into the domestic market. But international prices would rise. Diesel in North-West Europe would be about 27% higher than in our base case, representing an increase of about 80 cents per gallon.

That prospect has alarmed governments around the world. President Emmanuel Macron urged President Trump not to impose a ban, saying it would be bad for the world, and for the US economy.

Another direct effect on the US is that higher international prices would hit some American consumers. The US East Coast is connected to international markets: it imported about 120,000 b/d of diesel last year. If international prices rise, that would put upward pressure on the cost of diesel in the North-East US, the region that is most reliant on imports.

There would also be second-round effects. A higher cost of fuel in Europe and Mexico would force those economies to raise the prices of the goods they sell to the US, adding to the inflationary pressures on American consumers.
That array of potential unintended consequences lies behind the opposition to an export ban from Secretary Wright and others.

The “voluntary” measures now being debated would probably have less severe impacts, depending on exactly how they were structured. But any agreements or executive orders that interfere with market mechanisms would make the US refining sector less efficient.

Even so, it seems likely that the administration will make an attempt to drive down the cost of diesel. With retail diesel prices still close to record levels in the US, and the midterm elections on 3 November coming up fast, the pressure on the administration to do something is only going to grow.

In brief

France has promised to send troops to protect the Saudi Arabian oil port of Yanbu on the Red Sea, which has been under attack from Iran and Houthi militants. President Macron said France would send “military assets, meaning soldiers, radars and defence systems” to defend Yanbu, which is on a critical exit route for Saudi Arabia’s oil exports.

The oil terminal at Yanbu is connected to the East-West pipeline that carries crude across Saudi Arabia from the oilfields in the east of the country, providing an alternative export route to sending tankers through the Strait of Hormuz. Since the current conflict began at the end of February, the pipeline and port complex have been attacked multiple times by Iran and its Houthi allies using drones and missiles.

Flows on the East-West pipeline restarted this week, 11 days after it was shut down by drone strikes that hit the pipe and three pumping stations. The pipeline is expected to operate at 40% of normal capacity within two days, but a full restart will take six to eight weeks, sources told Reuters. Tanker loadings at the port have not yet restarted. Saudi Arabia said on Thursday it had intercepted another six Houthi ballistic missiles aimed at Yanbu and the city of Taif, a popular summer resort.

The enhanced geothermal company Fervo Energy has reported first power from its flagship Cape Station project in Utah. It is the first time a utility-scale enhanced geothermal project has started producing electricity. The first phase of Cape Station, which has nameplate capacity of 100 megawatts, is scheduled to start up fully by 1 January 2027, with power generation ramping up after that. A second phase, with 400 MW of output, is already under construction and is expected to start up in 2028.

Fervo uses horizontal drilling techniques adapted from the oil and gas industry to unlock geothermal resources that were previously inaccessible.  

Negotiations in the US Congress over reform of permitting and environmental approvals, intended to expedite infrastructure investment, appear to have stalled for the time being. Republicans and Democrats had made progress towards a deal on bipartisan legislation to reduce delays, costs and risks for both fossil fuel and renewable energy projects. However, hopes that the legislation could be passed before the midterm elections on 3 November have been disappointed, Congressional sources said.

Secretary Wright said he hoped that a permitting reform package could still be passed into law in the “lame duck” session, between the elections and the start of the new Congress at the beginning of next year.

Other views

War is reshaping LNG beyond winter – Simon Flowers and others

Renewing renewables: The next chapter in the energy transition – Søren Lassen, Chris Seiple and Charles Coppins

Off-grid solar in Sub-Saharan Africa: the multi-gigawatt opportunity hiding in plain sight – Sohan Gwalani

Quote of the week

“The magnitude of this technology’s impact will be unprecedented, perhaps 10x of the Industrial Revolution at 10x the speed. It will help us solve some of the biggest problems society faces from accelerating drug discovery to developing new clean energy sources to creating novel advanced materials. We could even reach a point where resources are no longer the limiting factor for human progress, leading to an amazing new era of abundance.”

Sir Demis Hassabis, the British computer scientist who has been one of the pioneers of artificial intelligence, made the case for a new standards body or self-regulatory organisation for the AI industry. Doing that would help make the most of AI’s potential while safely managing the associated risks, including nuclear and biological threats, he said.

Chart of the week

This comes from our new report: ‘Off-grid solar PV in Sub-Saharan Africa: a multi-gigawatt growth opportunity’ by Sohan Gwalani. Off-grid solar generation capacity has grown rapidly in sub-Saharan Africa over the past couple of years, and we expect that growth to continue through the next ten years and beyond.

Gwalani says the combination of high diesel prices, low solar costs and the increased availability of financing has been driving growth. There is still an enormous opportunity to aim for. Six hundred million people across Sub-Saharan Africa still lack access to reliable electricity, and national grids have not kept pace with population growth.

Wood Mackenzie clients can download the report for much more detail on how the vast potential of Africa’s solar market can be realised.