Mejoramiento de Suelo

2.6.1. Introduction

Oil products are used for a variety of purposes such as transport (e.g. LPG, gasoline, kerosene, diesel, heavy fuel oil/marine bunker fuel, etc.), heating and cooking (e.g.

kerosene, gasoil, etc.), and power production (e.g. gas oil, fuel oil, etc.) as well as in industrial processes. In the EU, motor-fuel represents the biggest use of refined oil products.

All oil products are co-products and are made by distillation and further processing of crude oil in refineries. The configuration of the refinery defines the produced quantities of each product and can only be varied slightly. The produced product mix can also be slightly influenced by the used crude feedstock. Using lighter i.e. lower density crude results in higher quantities of light products such as gasoline and diesel while the use of heavy crude produces higher quantities of heavy products (e.g. fuel oil). Therefore, the possibility for refineries to react to demand shifts in local product markets is limited (Pieterse et al.

2008), (EC 2010a). However, investments in additional technology influence product output.

2.6.2. Price trends

Crude oil and oil product spot prices basically run parallel in northwest (NW) Europe (Figure 61). Crack spreads⁹⁶ for gasoil and kerosene have mostly been between about 10 and 20

€/bbl.

Figure 61: Oil product spot prices in northwest Europe

Source: Study authors based on (IEA 2013), (EIA 2013a), (Eurostat 2013a)

The crack spread for gasoline has shown some variability in recent years. Figure 61 shows a peak of about 17 €/bbl in 2007 and a virtually non-existent spread for certain periods in 2008 and 2011. Between 2008 and 2012, the spot price level of marine bunker fuel⁹⁷ increased more strongly than crude oil spot prices did. Correlation coefficients for all oil

96 Crack spread: differential between the price of crude oil and oil products extracted from it.

97 Marine bunker fuels are fuels used for ship propulsion. Several different qualities exist. For this study a bunker fuel with 180 cst (centistokes describes the viscosity of the fuel) at Rotterdam harbour has been used. Prices are for fuels delivered on board including barge transport and/or ex-price fees.

products in Europe and the USA show very high values of r>0.95 without time lags, indicating very strong correlations.

As Figure 62 shows, spot prices for oil products in the USA develop similarly to the European spot prices⁹⁸.

Figure 62: Oil product spot prices in the USA

Source: Study authors based on (IEA 2013), (EIA 2013a), (Eurostat 2013a)

2.6.3. Market fundamentals

Between 2000 and 2008, North Sea crude production declined by about 2 million barrels per day to a level of 4.3 million barrels per day. The result was an increased share of imported crudes (up by 5% to 80% in 2008). The quality and composition of the crudes determines the level of processing and pre-processing required to achieve the desired output of oil products. In this case, replacing North Sea crudes with heavier imported crudes like Urals crude and Arabian Gulf crude results in a higher share of less valuable heavy oil products from distillation and requires additional processing to produce higher value oil products. In addition, the sulphur content of imported crudes is higher than in North Sea crude, making it less attractive for the production of low sulphur fuels as required in the EU. Heavy crudes with high sulphur content also have increased impurities of nitrogen and metal, making it more costly to produce light products (EC 2010b).

Over the last years, European policy has stimulated the consumption of diesel fuel for transport, resulting in a shift of local oil product demand from gasoline to diesel. Between 1990 and 2010, demand for middle distillates (predominantly diesel for transport but also kerosene) almost doubled. This resulted in a growing asymmetry between product output from European refineries and European product demand. Since refineries can only slightly adapt to changes in the demanded product mix, the increased supply of diesel fuel for transport, to some extent, also leads to increased gasoline production. Those local imbalances between product supply and demand are equilibrated by international trade (see Figure 64).

98 Using IEA “Energy prices and taxes” as source for US gasoline prices, a disproportionate price increase can be detected in 2011. Data provided by EIA do not support this price increase, which is probably due to a switch in data provider by IEA.

Figure 63: Development of oil product output from European refineries

Source: Study authors based on (Eurostat 2013d)

In the USA, gasoline is by far the most important product. For some time, US refineries were not able or have not chosen to adapt to the strong gasoline demand which has developed over the last two decades. Therefore, the US imported surplus gasoline from European refineries to compensate for its own deficits and in return exported diesel to Europe. Only recently have the US refineries switched to increased gasoline output, and European gasoline exports previously destined for the USA have been directed towards Africa.

The increased demand of diesel fuel in Europe is met by additional imports from the Former Soviet Union (FSU) and the Middle East (Pieterse et al. 2008), (Meijknecht et al. 2012).

Figure 64: Crude oil and oil product trade

Source: Study authors based on (BP 2013) Source: Study authors based on (Eurostat 2013d)

The EU oil product market is considered to have passed its peak demand between 1990 and the financial crisis in 2008. Between 2005 and 2008 the demand fell by 3% (EC 2010b).

Since 2000, the net EU motor gasoline export has increased from about 15 Mt/a to about 40 Mt/a. In the same period, diesel, and kerosene imports increased to 20 Mt/a and 15 Mt/a, respectively (see Figure 64).

Figure 65: Oil product output from European refineries in 2011

Source: Study authors based on (Eurostat 2013d)

Figure 66: Development of refinery capacity and utilization rates in the USA, Europe and the rest of the world

Source: Study authors based on (BP 2013)

Increasing exports and imports are a result of the inability of the refinery industry to adapt to regional shifts in demand, (Pieterse et al. 2008).

The EU is the second largest producer of oil products in the world. Refineries exist in 22 Member States with a total product output of 888 Mt in 2011 (EC 2010a), (Eurostat 2013d). Figure 63 and Figure 65 show details of the European refinery capacity and product mix over time and its regional distribution, respectively. There is a current over-hang in European refining. The resulting trend towards reduction in refining capacity since 2008 visible in Figure 66 is expected to continue in the coming years, further aggravated by increasing competitive pressure from refineries on the US East Coast (IEA 2013b), (DG Energy 2013a).

2.6.4. Price formation mechanisms

Oil products are internationally traded commodities. The international trade ensures that the price difference between different regional markets is kept at a minimum. Therefore, product (as well as crude) prices are determined by demand and supply on a worldwide basis. Trade also ensures outbalancing deviations between regional oil product supply and demand.The cost of production for oil products predominantly depends on the crude oil prices. The ACCC (Australian Competition and Consumer Commission) states that crude oil accounts for 85%-90% of the cost of refined products. However, the international demand for oil products can also influence the crude oil price (AIP 2013).

Furthermore, refining margins and product transportation costs have an influence on oil product prices. Refining margins are the differential between the price of crude oil and oil products extracted from it. They are influenced by the price and quality of the feedstock (i.e. crude oil), by regional and global product demand, and by the availability and utilization rate of regional and international refineries. In addition, the complexity of the refinery has an influence on its achievable margin. E.g. more complex cracking refineries can produce a larger share of more valuable middle distillates and can therefore achieve a higher margin than e.g. simpler hydroskimming refineries (EC 2010b), (Pieterse et al.

2008), (Grant et al. 2006).

Figure 67: Refining margins for simple and complex refineries and various types of crude oil

Source: Study authors based on (IEA 2013b)

After the “golden years” of profit margins in the refining sector from 2004 to 2008, margins declined to a minimum for European refineries due to a falling European demand for oil products, existing overcapacity in Europe, and higher crude feedstock prices (Meijknecht et al. 2012).

2.6.5. Regional differences in the EU

Regional prices vary by transport costs from major price setting trading points such as Rotterdam, which is price setting for NW Europe. This is true both for price differentials between Member States and within individual Member States.

For example, within Germany regionally differentiated prices for eight regions are fixed by service providers on a daily basis. Regional production and demand balances also play a role. However, in general, regional differences are very small.

2.6.6. Impact of oil price on oil products prices

As mentioned above, the crude oil price is the predominant driver for oil product prices.

Product prices therefore directly and immediately reflect the price development of crude oil (see Figure 68), in qualitative and quantitative terms. Other factors only lead to small variations of oil product prices.

Figure 68: Correlation between crude oil price and selected oil products

Source: Study authors based on (EIA 2013a), (IEA 2013), (Eurostat 2013a)

2.7. Conclusions

The crude oil price is the predominant driver for oil product prices, which directly and immediately follow oil price changes. For other energy commodities; the strongest impact of the oil price on wholesale energy prices is through oil-indexed long-term gas contracts. The share of oil-indexed contracts, which shows significant regional variations in Europe, and the details of the contractual agreements determine the strength of the impact. There is a general, but slow trend away from oil-indexation in gas contracts. For coal, the impact of the oil price is weaker. It is largely based on the high consumption of oil products in coal extraction and inland transport. International sea freight rates develop independently from the oil price in spite of the fact that fuel costs are a major element of freight costs.

Electricity prices in general show a moderate correlation to oil price developments. Through the merit order curve, national electricity mixes lead to different prices and sensitivities.

Market integration into a single electricity market in Europe has not yet been fully achieved.

Since oil only has a very minor role as a fuel in electricity generation, the prices of oil and of oil products have little direct impact on electricity prices in Europe. The most important indirect impact is through oil-indexed natural gas contracts, reinforced by the fact that gas-fired power plants are often price setting in the merit order curve. The smaller impact of oil prices on coal provides for a small indirect impact on electricity prices. Figure 69 shows routes of direct and indirect impacts of the oil price on energy commodity prices. The thickness of the arrows qualitatively corresponds to the strength of the impact: thick lines indicate strong impacts, thin lines weak impacts of oil price on wholesale energy prices. This graphical representation is not comprehensive; however, the most important impact routes identified in this chapter are included.

Figure 69: Overview on most important price formation mechanisms of energy commodities

Source: Study authors

Although both gas and oil share fundamental price drivers (such as economic development) and their prices often seem to be correlated, in places where oil indexation is basically absent, such as the USA, gas and oil prices are often decoupled, proving that there are no fundamental reasons why gas prices should follow those of oil.