Statement by John Felmy
Chief Economist and Director
Statistics Department
2005 was another challenging year for the U.S. oil and natural gas industry and its customers. In the first part of the year, tight markets for crude oil led to higher prices going into the end Then the industry felt the one-two punches of Hurricanes Katrina and Rita and a substantial portion of production, refining, transportation and marketing sectors were shut down.
This supply impact, combined with increased Labor Day weekend purchases, led to record prices. Then, as production and imports increased and demand abated, prices came down. In short, markets worked and suppliers and consumers responded to market signals and order in markets was maintained.
This is a dramatic difference from supply shocks of the 1970s when markets were not allowed to function and consumers suffered in widespread, long gas lines.
While the industry has succeeded in restoring much of its damaged assets to full production, some remain offline as repairs are made. Restoration of production has moved as rapidly as possible, given the need to restore operations only when certain that the environment will not be adversely affected. More work remains to be done.
Looking forward, 2006 could be another challenging year for the petroleum industry. The new energy law eliminates the oxygen requirement in May and requires a minimum amount of ethanol use. Also, ultra-low sulfur diesel will be introduced starting on June 1. The industry is working very hard to meet these new requirements, but they are major transitions and will present a challenge. Indeed the EIA recently called 2006 “the year of the fuel spec.” These changes, combined with the EIA outlook that includes higher world demand growth, limited excess spare capacity and higher prices throughout 2006, could make for a difficult year for consumers – and that is without a body blow from hurricanes as we experienced last year.
In attempting to meet the challenges we face, it is also most important to do no harm. The worst thing Congress could do in these challenging times would be to repeat the mistakes of some past energy policies by overriding the free marketplace. Imposing new controls, allocation schemes, new taxes on industry, or other obstacles would only serve to make the situation much worse.
If we all do our part – industry providing supplies and repairs as expeditiously as possible, government facilitating needed approvals, and consumers adjusting their driving habits to consume less fuel – Americans can overcome this challenge as we have others in our nation’s history.
Statement by Ronald J. Planting
Manager, Information and Analysis
Statistics Department
Today, we are releasing our estimates of U.S. petroleum supply and demand for the year 2005. Our figures show that growth in gasoline demand (as measured by "deliveries") slowed to a fraction of the rate that it averaged during the previous three years. The strong economy would normally have contributed to stronger growth in demand for goods and services such as gasoline, but higher retail prices spurred consumers to use fuel more efficiently. Those prices reflected the escalating cost of crude oil during 2005, combined with the disruption to domestic crude and product markets caused by record hurricane activity.
Highway diesel demand continued to grow, and industrial and electric utility users drove residual fuel oil demand higher as they sought alternatives to costly natural gas. However, declines for jet fuel and for petrochemical feedstocks were large enough to cause an overall decline in U.S. petroleum use for the year.
The major hurricanes that slammed the Gulf Coast in August and September continued to have lingering effects, even at year-end. Offshore, oil and natural gas production is still substantially lower than it was before the hurricanes. Crude oil output for the year fell at the sharpest rate in decades. At refineries, December’s output of products still lagged year-ago levels as several refineries remained less than fully operational. At year-end, roughly 1 million barrels per day of U.S. refinery capacity still had not returned to normal operations. As a result, refinery activity for the year as a whole was down 2 percent, its first annual decline in three years. Remarkably, refiners still produced more distillate fuel oil in 2005 than in any previous year. Distillate fuel oil includes both diesel fuel and heating oil.
Imports of petroleum products in 2005 surged to an all-time high and accounted for a record 17 percent of domestic consumption. The growth was especially strong for gasoline, imports of which rose more than 20 percent. They surpassed 1 million barrels per day for the first year ever. For distillate fuel oil, tight world markets made it difficult to find additional product overseas. Thus, despite strong domestic demand for diesel, imports only held about steady. Because of the jump in product imports, total petroleum imports rose for the year, even though imports of crude oil declined slightly. U.S. reliance on imports of crude and products in 2005 rose to about 65 percent of domestic consumption.