The future looks pretty bleak where diesel fuel supplies — and prices — are concerned. According to estimates by the Energy Information Administration (EIA), the demand for oil in the U.S. is projected to increase by 33% during the next 20 years.
At the same time, domestic oil production continues to drop precipitously. “We now produce 39% less oil than we did in 1970, losing nearly 4-million barrels a day in the process. And unless energy policy changes, production will slip further, to just 5.1-million barrels per day by 2020. This is down from a high of 9.4-million a day 30 years ago,” said Energy Secretary Spencer Abraham in a recent speech.
“The widening gap between demand and domestic supply will make us increasingly dependent upon foreign imports,” he added. “Back in 1973, at the height of the oil crisis, America imported just 36% of its oil from abroad. Today, we import 54%. And if we allow this trend to continue, we'll soon be forced to look abroad for some 64% of our oil. This will put more power in the hands of foreign suppliers — power they are not reluctant to use.”
The Organization of Petroleum Exporting Countries (OPEC) demonstrated that power last year by instituting a number of production cutbacks that more than tripled the price of a barrel of oil in less than six months, jumping from $10 to over $35 a barrel. That price hike sent shock waves throughout the transportation industry, as diesel fuel prices jumped from 90¢ a gallon to over $2 a gallon in some parts of the country.
The repercussions of high oil prices go further than trucking. Abraham said America's last three recessions have all been tied to rising energy prices, and there's strong evidence that the latest crisis is already having a negative impact. For example, the National Association of Manufacturers estimates that soaring fuel prices between 1999 and 2000 cost the U.S. economy more than $115 billion, shaving a full percentage point off the GDP.
Despite a 20% decline in diesel prices since last October, the U.S. still remains uniquely vulnerable to severe fuel price fluctuations, said Abraham. “Securing an affordable, reliable and adequate supply of crude is a critical challenge, but it's only half the oil story,” he said. “Since 1980, the number of American refineries has been cut in half. There hasn't been a new refinery built in the U.S. in over 25 years.
“New regulatory interpretations limit the ability of existing refineries to expand capacity,” he said. “Add to that regulations that require the production of more than 15 different types of gasoline and you have a refining industry strained to capacity, leaving us dangerously vulnerable to regional supply disruptions and price spikes.”
Abraham added that U.S. refineries are so constrained that when then-President Clinton released 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) last fall, it had to be shipped overseas to be refined.
DWINDLING DOMESTIC SUPPLY
How did America find itself over this barrel? EIA's Annual Energy Outlook for 2001 gives some insight. World oil prices fell sharply through most of 1997 and 1998, due in part to economic developments in East Asia that resulted in an oversupply of oil. But in 1999, OPEC and some non-OPEC countries began to restrain oil production, resulting in higher world oil prices. In 2000, the price of natural gas in the U.S. increased due to higher than expected demand and tight supplies caused by reduced drilling in reaction to low prices in 1998.
According to EIA, the average world oil price is projected to reach $27.60 this year, fall to about $20.50 per barrel by 2003, and go back up to about $22.41 per barrel by 2020.
These projections are fairly moderate. But they could jump much higher over the next several years if cutbacks in oil production are more severe than expected, and if there's increased demand from the recovering economies in Asia.
Worldwide demand for oil is projected to increase from 75.5-million barrels per day in 1999 to 117.4-million barrels per day by 2020 — 112.4-million barrels per day higher than last year's EIA estimate.
On the supply side, OPEC oil production is expected to reach 57.6-million barrels per day in 2020, nearly double the 29.9-million barrels per day achieved in 1999, assuming there's enough capital to expand capacity. This also assumes that the United Nations resolution limiting Iraqi oil will remain in place through 2001. If sanctions are lifted, oil production in Iraq is expected to hit 3.5-million barrels per day within two years and about 5-million barrels per day within a decade.
Production figures are easier to calculate than supply, which refers to the amount of oil in the ground that can be pumped out. The U.S. Geological Survey raised its estimate of world resources last June by about 700-billion barrels from the 1994 assessment. Consequently, non-OPEC oil production is expected to increase from 44.8-million barrels per day to 59.5-million barrels per day between 1999 and 2020.
TRANSPORTATION DEMAND RISES
Trucks, trains, buses and cars rely on diesel and gasoline for 97% of their fuel needs. And demand for those two fuels continues to grow. According to EIA, petroleum demand is projected to grow from 19.5-million barrels per day in 1999 to 25.8 million in 2020, about 1.3% per year, led primarily by growth in the transportation sector, which accounts for about 70% of overall U.S. petroleum consumption. Previously, however, EIA forecasts have actually underestimated the growth of demand. In fact, over the past 10 years, increases in demand were more than double what EIA predicted.
The scary part is that production of crude oil in the U.S. is projected to decline at an average annual rate of 0.7% from 1999 to 2020, to 5.1-billion barrels per day, even as demand for oil increases sharply. EIA warns that advances in exploration and production technologies still don't offset declining resources. Projections call for imported petroleum to make up 64% of our supply by 2020, up from 51% in 1999.
Several factors have contributed to the surge in world oil prices, according to EIA. First, OPEC members exhibited uncharacteristic discipline in adhering to their announced oil production cutback strategies in 1998 and 1999. In addition, renewed growth in the demand for oil in the recovering economies of the Pacific Rim has been stronger than anticipated.
More importantly, rising oil prices have led to only modest increases in non-OPEC production. Companies have been slow to commit capital to major oil-field development efforts, especially for riskier offshore, deepwater projects. According to EIA, standards for profitability are higher, resulting in a greater lag time between higher prices and increases in drilling activity, and an even slower reaction time between drilling and production.
CALL FOR A STRATEGIC POLICY SHIFT
What can be done to forestall some of these grim forecasts? After a comprehensive review of energy markets in the U.S., the United States Energy Assn. (USEA) concluded that we desperately need a cohesive national energy strategy. Issues of consumption and production must be addressed to ensure that energy does not become our Achilles' heel.
The USEA report, “Toward a National Energy Strategy,” said the greatest growth in petroleum demand will be in the transportation sector of the economy. “Clearly, petroleum will provide a major source of energy for years to come,” the report stated. “The only way to meet this increased demand is to adopt national policies that support growth in petroleum supplies. The alternative is to limit demand by imposing sharply higher petroleum prices on U.S. homeowners, commuters, transportation companies, and factories.”
According to USEA, we must find ways to alleviate price concerns surrounding oil supplies, especially since the transportation sector relies so heavily on petroleum-based fuels. The group said the internal combustion engine will remain the dominant powertrain for the foreseeable future, with predictions that 80% of the gasoline- and diesel-powered vehicles purchased today will still be on the road in 2008. “In short, several decades are likely to pass before the current fleet is replaced by a new powertrain technology or by significantly more fuel-efficient vehicles,” the report stated.
Solving those problems, however, requires a strategic policy shift from short-term fixes to long-term goals, said Gary Caruso, director of the National Energy Strategy project for USEA. “The concern is that we have several challenges to deal with,” he explained in an interview with FLEET OWNER. “We're going to see continuing strong demand for petroleum fuels, and that means a need for even more imports unless we develop domestic reserves. However, we also have an increasingly fragile refining system for that oil, one that is operating at an average annual capacity of 93% and reaches 100% or more in the peak summer months as demand for gasoline spikes. That raises a red flag when it comes to meeting transportation fuel needs.”
Caruso said there's plenty of oil available today to meet demand. Fuel shortages and higher prices, however, develop from a different series of issues. One is that oil-supplying nations purposefully limit oil production to inflate the price. Second, the overburdened refinery network is hard-pressed to make fuel in sufficient quantities. On top of that, new fuel requirements mandated by federal and state governments — such as low-sulfur diesel and “clean” gasoline blends — make it harder for refineries to make the right type of fuel and deliver it at the right time.
“I'm not trying to be an alarmist here, but if you're a trucking fleet you have to be prepared for more price volatility,” said Caruso. “The tightness of refinery capacity, combined with the multitude of fuel types required by regulations, creates an atmosphere where price volatility is the norm, not the exception. Over the next three to five years there'll be no way out of that market environment until we bring more refining capacity online and get a more stable supply of oil.”
Caruso says limited refinery capacity could push fuel prices up a minimum of 10¢ to 20¢ a gallon this summer, with higher spikes occurring on a regional and local basis depending on fuel type. “We're looking at a tight market for the next 12 months because of an inventory squeeze,” he said. “Refineries focused on making home heating oil this winter to ensure there wasn't a shortage; that means diesel and gasoline inventories are low heading into the summer.”
MAKING LONG-TERM GOALS A PRIORITY
USEA proposes a series of recommendations to alleviate oil supply and refinery problems. First, the U.S. should push much harder to develop its own untapped oil reserves, especially in areas of Alaska that are currently off-limits because of environmental concerns. USEA contends that since the petroleum exploration and production “footprint” left on a geographic area has improved 90% over the past decade, harvesting oil can now take place with far fewer adverse affects on the environment.
The U.S. must also develop stronger ties with oil-supplying nations outside the reach of OPEC's long arm. “Clearly, OPEC members have constrained supply in 1999 and 2000 and maintained relatively high prices,” said USEA. “Will this pattern continue? And if new petroleum countries join world energy markets, will they become members of OPEC or another cartel?” That's why USEA contends the U.S. must take a more active role in cultivating deeper ties with oil-producing nations willing to be reliable suppliers.
Refinery capacity is an issue that must be addressed immediately — especially with an EIA prediction that the U.S. will need an additional eight to ten refineries to handle demand in the next two decades. The big question, however, is whether these facilities can be built in the face of what is expected to be stiff opposition from environmental groups.
Caruso also cautions against over-reliance on European and Caribbean refineries to take up the slack in U.S. capacity. “In the past, you could do that,” said Caruso. “But it remains to be seen whether those refineries can meet the specifications of our low-sulfur diesel and clean gasoline mandates.”
It's still unclear whether the current Administration can adopt an energy policy that will adequately address future needs. USEA warns that without a long-term policy — one that looks through 2050 and beyond — we could be heading for trouble. “On a scale of one to ten, I believe the level of concern is an eight,” said Caruso. “There's so much uncertainty out there right now in terms of oil supplies and refinery capacity that fleet managers will have to be more vigilant than ever about fuel costs.”
Efficient routing to the rescue
Stevens Transport, a Dallas-based refrigerated truckload carrier, has its own solution to the diesel fuel crisis: Use routing software to reduce fuel consumption. Matt Welding, director of quality assurance, says that by using Logistics.com's OptiYield Fuel & Route software to plan its routes and fuel stops, the carrier expects to save 0.5¢ per mile, or $550 annually per tractor. That translates into annual savings of about $800,000 for Stevens Transport's 1,400 company-owned tractors, he said.
An irregular route carrier, Stevens serves the contiguous 48 states, Mexico and Canada via 14 service centers throughout North America. It operates primarily T-2000 Kenworth tractors; the 1,450 trailers are 53-ft. Utility models equipped with Thermo King refrigeration units.
Welding said the company expects to realize a 100% return on its investment in two to three months from fuel savings through better route planning.
OptiYield Fuel & Route considers factors such as fuel prices, driver amenities, out-of-route miles, state taxes, miles on toll roads and on-time deliveries when determining the optimal route. The program not only recommends where to buy fuel, but how much to buy at each stop. Fuel prices in the final delivery area are also taken into consideration so drivers won't be stranded in high-cost areas with low fuel levels.
“Over-the-road trucking fleets need to be as cost-conscious as possible in today's fuel market and get the most out of their fuel,” said Alex Gillette, product marketing manager for Peregrine Systems, a fleet and infrastructure management software developer.
Peregrine is currently working on developing a routing and fuel management software package for its core customers, which include municipal and government fleets. “Even municipal fleets need to control their fuel costs today, and better routing can help them do that,” he said.