US faces summer fuel price surge

One thing to start:

• US officials are pushing tariffs or a price cap on Russian crude to help break an impasse in the EU over new oil sanctions.

Welcome back to Energy Source!

With fuel stockpiles expected to continue dropping, we have a dire warning from JPMorgan that US petrol prices could top $6 a gallon as Americans hit the road this summer.

We also have more on scrubbing out the scourge of gas flaring from Mark Davis at Capterio, who wrote on the topic for us last week. You can go back and read part 1 here.

Today’s Data Drill shows the huge toll China’s zero-Covid lockdowns are taking on both electric vehicle sales in the country and the factories that turn out the cars.

Thanks for reading!

Justin

PS join the FT today at Moral Money Summit Europe 2022 where investors, corporates and policymakers will come together to take the pulse of ESG and unlock its potential. Register here. Energy Source subscribers are eligible for a free digital pass using the code PREMIUM2022.

Refining crunch could send summertime US petrol prices past $6 a gallon

Prices at the pump have gotten even more painful of late — and things could get much worse.

In the US, the national average petrol price topped $4.55 a gallon yesterday, a fresh record high. Diesel is more than $5.50 a gallon at the pump, another record, according to the Automobile Association of America. Prices in the UK and across Europe are at all-time highs too, fuelling a surge in inflation and weighing heavily on the global economy.

Enter JPMorgan with more bad news. The bank’s analysts say US petrol prices could surge well past $6 a gallon as the American summer driving season — which unofficially starts around the Memorial Day holiday at the end of May — shifts into gear.

The problem is refiners have been turning out as much diesel as possible in recent months given historically low stockpiles and record-high profit margins for the fuel. That has left gasoline inventories running low just as demand is expected to pick up when Americans hit the road for summer holidays.

On the east coast, petrol stockpiles are the lowest they’ve been at this time of year in a decade and JPMorgan is warning that by the end of summer national fuel inventories could be run down to the lowest levels since 2008, when previous price records were hit.

“With expectations of strong driving demand . . . US retail prices could surge another 37 per cent by August to a $6.20 a gallon national average,” Natasha Kaneva, an analyst at the bank, wrote in a note to clients yesterday.

Refiners are already running their facilities at near maximum capacity, leaving little left to catch up with demand and rebuild stockpiles.

The sector has been hobbled by a spate of refinery closures as demand crashed during the coronavirus pandemic. More than 1mn barrels a day of capacity was closed as steep financial losses and a shaky long-term fuel demand outlook forced weaker facilities out of business.

Even amid this year’s fuel crunch, chemical company LyondellBasell said late last month it would close one of its Houston-area refineries by the end of next year in a sign of the long-term challenges facing the sector. The company made the move as part of a strategy to decarbonise its business, it said.

Unusually high petrol exports, mostly to Mexico and other countries across Latin America with struggling refining systems, are also pulling fuel stockpiles in the US lower, JPMorgan says.

“Unless refiners shift yields toward gasoline and cut exports immediately to rebuild stocks before the driving season picks up, US consumers should not expect much in the way of relief in prices at the pump until the end of the year,” the bank said.

A summertime surge in pump prices would be politically explosive ahead of November’s midterm elections. Republicans have already put high pump prices and inflation at the centre of their campaign to take back majorities in the US House and Senate. A renewed rise in fuel prices would provide a tailwind for a red wave at the polls. (Justin Jacobs)

Opinion: Tackling flaring is a huge market opportunity

By Mark Davis, chief executive of Capterio

Clamping down on flaring is not only a climate imperative, it is also a positive opportunity to get more gas to market and plug the gap left by lost Russian volumes.

Last week, we showed how much natural gas was being needlessly flared around the world: 143bn cu metres in 2021.

Capturing all this gas (as over 100 governments, companies and banks have committed to by 2030) and rerouting it could in theory replace almost all Europe’s gas imports from Russia. As much as 15 per cent of this is even on its doorstep, in north Africa.

There is also another reason why Europe should support flaring reduction.

Despite its climate leadership, Europe’s oil imports have “embedded” flaring emissions — those associated with the oil production in its supplying countries — that are 40 per cent higher than the global average.

Europe’s embedded flaring emissions are high because large volumes of oil come from countries with high flaring intensities (Algeria, Libya, Iraq, West Africa and Russia). The situation could worsen as Europe scrambles to replace Russian crude. But a solution is possible.

Data dilemma

The first hurdle to fixing this is a lack of data: flaring has typically been underestimated, under-reported, ignored and sometimes denied. Although most flares are not actually metered, satellites can be instrumental. Flares can now be screened by their size, reliability and proximity to infrastructure to identify the best investment targets.

Take the chart below.

Operator PDO successfully — and profitably — eliminated all flaring at Oman’s Sadad North field, in early 2020, by installing new gas separation equipment, processing facilities and interconnecting piping to recover 20-30mn cu feet per day ($300mn per year at today’s prices).

By contrast, in Algeria’s Illizi-Ghadames basin, a single field flares 30-40mn cubic feet of gas daily. According to a Capterio study, with a modest investment in pipeline segments and gas compression, recovered gas could generate revenues of $430mn and reduce emissions by at least 1.2mn CO₂-equivalent tonnes annually.

The fix

To capture this opportunity, we need to build a collaborative system of policy and practice.

Regulators also need to think carefully about policies, incentives, subsidies and taxes. Punitive flaring taxes (such as Norway’s, which are equivalent to $61 per tonne of CO₂) work. Nigeria and Algeria have similar anti-flaring laws and taxes, but regulators are failing in enforcement.

But broader policies and behaviours that engage the hard-to-influence countries are important too. Governments, like the EU, are increasingly looking to carbon border adjustments for imported emissions. Equally, they should recognise their shared responsibility to reduce flaring in supplying countries, by offering collaboration, capabilities and cash.

Consumers will become more choosy by buying energy certified with lower emissions, and voluntary markets are already developing — ahead of regulation.

Equally, shareholders and lenders are demanding more transparency, especially for “non-operated” assets (where there is currently no disclosure requirement) and as emissions get transferred when ownership changes. Funders need to, selectively, mobilise capital (versus blanket “no fossil fuel investment” policies).

To help facilitate this change, governments should create data-driven flare reduction road maps. Operators must explore all possible flare capture methods (piping gas to market, using it for power, creating liquids, or even “exotic” solutions such as cryptocurrency mining or synthesising fish food).

Second, for as long as flares operate, they must have high combustion efficiency (therefore minimising methane emissions). And, thirdly, monitoring programmes need to be boosted.

Flaring reduction is a win for producers, governments and society. We must seize this low-hanging fruit and reduce emissions, create value and accelerate the energy transition.

Data Drill

China’s electric vehicle sales plummeted last month but market penetration remains strong, says a new analysis from Rystad Energy.

Passenger car sales in the country fell below one million for the first time in two years due to widespread lockdowns constraining production. Sales of battery-electric and plug-in hybrids fell 39 per cent from March to April, according to Rystad.

Tesla sold only 1,512 cars from its Shanghai factory and made no exports in April. The factory makes up 40 per cent of Tesla’s production. If supply constraints continue, Rystad expects EV sales in Europe, where most of the Teslas produced in Shanghai are exported, to take a hit.

“If China decides to go into lockdown at any point in time or reduce their manufacturing, EV sales will take a hit globally as well as in China,” said Abhishek Murali, an electric vehicle analyst at Rystad.

In the long term, China’s EV market remains strong. The industry has continued to grow its market share over the past year despite rising material costs and reductions in government subsidies. While sales fell in April, EVs made up 29 per cent of all vehicle sales, seven times higher than their market penetration two years ago, according to Rystad. (Amanda Chu)

Power Points

• The EU wants to sell more carbon permits to shift away from Russian energy, raising concerns about the increased burning of fossil fuels.

• Carbon pricing could make a return in Australia depending on the outcome of this weekend’s election.

• Rising food, labour and energy costs are hurting UK pubs and prompting menu and discount cuts.

• Air monitors serve a false promise to residents that they’re safe from toxic pollution. (ProPublica)

• Coal miners and climate activists in West Virginia are eyeing Joe Manchin to lead them in the clean energy transition. (WaPo)