In Focus
April 2022

Rising energy prices: Possible consequences for transportation fuels and clean fuels

Household energy bills and pump prices were poised for a significant year-on-year increase even before the Russia’s invasion of Ukraine began.  Oil and gas prices have gradually soared since the 3rd quarter of 2021 amid growing demand as markets continued to recover from the coronavirus impact which plagued the global economy since early 2020. The outbreak of the war in Ukraine has now further and extremely aggravated the situation as consumers and households across the world are moaning under the increased cost of living as current energy supply shortages are now also spreading to staple foods. Comparing global crude prices today (05-April) to levels seen in early March, markets suggest a rather stable price move whereas daily spot prices during the last five weeks were very volatile peaking at multi-year highs, almost 25% than today’s price. Even today, volatility is still ruling the markets, responding to latest events in the Ukraine and in China as well as to measures taken in other parts of the world.

Europe      

Europe has been particularly hit hard, with fuel prices and energy bills soaring by an average of around 50%, while supply shortages have also led to price hikes and rationing in other parts of the world. Production outages in the Ukraine and Russia’s decision to limit supplies to “unfriendly” countries has tightened the supply and raised the cost for grain and cooking oils among others, increasing the risk of a global food crisis. US, European and other nations’ sanctions on Russia, albeit severe, have directly or indirectly hampered global energy supply, further aggravated by Russia’s response to demand payments from now on in Russian rouble. The charts underneath shows what has stopped the EU until now from imposing categorical sanctions on all oil and gas supplies, depending heavily on Russian supplies. Germany in particular has been opposing a ban on Natural Gas supplies, as the country takes about 40% of its demand from Russia.

Source: US EIA 2020 data, other estimates

Most governments in the EU and other European countries have introduced numerous measures to tackle rising fuel prices and energy bills, ranging from rebate/discount schemes and cuts on fuel taxes/excise duties to one-off payments to consumers/selected consumer groups, as end user prices stay at lofty levels. Gasoline pump prices in a number of EU countries are now pegged in a 2.00-2.50 Euro/litre range and a panel of experts told the parliament in the UK that petrol prices could soar to £2.50 a litre, while Diesel could hit £3 and may even need to be rationed. Gasoline prices across Europe have climbed by around 25% in March 2022 alone and are on average 30-35% above 2021 levels. Some governments are pointing the finger at oil companies, accusing them to try to profit from the supply squeeze.

US

In the US, fuel prices have also jumped significantly higher and end-of-last week’s attempt by the White House to combat growing inflation and high pump prices by releasing a record volume of strategic crude reserves seems to have failed to have a real impact on the markets till date. The chart underneath shows the US pump price history over the last 13 months, on average and by PADD.  

Source: US EIA data

Since early March 2022 weekly data on US gasoline consumption is on a downward trajectory, defying season-typical trends, as consumers are responding to the high pump price while cost of living increases in general also start to pinch.

Asia

Asia portraits a very similar picture, with fuel consumption in China drifting sharply lower, albeit this is believed to be mainly caused by the recent virus outbreaks and latest lockdown measures imposed. Gasoline demand during the current Qingming festival and holidays is estimated to be around 20% off expected levels. Gasoline prices in South-East Asia have in many cases reached the affordability limit, with i.e. Sri Lanka already seeing supplies being rationed and the demand recovery in the Philippines being hit by unaffordable price rises. Elsewhere in Asia and shortly after the borders between Malaysia and Singapore opened up for the first time in almost two years, a quarrel between the two countries broke out, when Singaporean cars were filled up with 95RON gasoline, a heavily subsidized fuel grade in Malaysia, meant for local consumption only. Foreigners are only allowed to buy 97RON gasoline. Singaporeans themselves experience also record-high fuel prices, equal to those seen in the EU.  

Impact on clean fuels  

Amid the various measures taken by local governments, prices for transportation fuels stay at elevated levels globally and the demand decline recorded in the US is likely to be reflected elsewhere as well. Governments and other interest groups are also looking at additional steps to reduce energy consumption, for transportation fuels and in other sectors.

Plans such as fuel rationing or allotment schemes find little support among voters and the wider population till date while other, more exotic proposals are floating around i.e. in Germany, where the Green Party raised the idea to reintroduce the “car-free Sunday” concept, last done in the early 1970s when oil and energy supply dried up. However, more drastic steps may be needed if the energy crisis deepens further.

Whether the demand drop will be voluntary or imposed, whether in the transportation fuels business or any other oil derivate industry, it seems to be temporarily the only cure to the tight supply situation in the global markets. OPEC is not showing any preparedness to increase its supply quota swiftly, while existing sanctions on other countries, i.e. on Iran and Venezuela, hamper the potential contribution to balance the markets.  

Biofuels interest groups are suggesting to increase fuel-Ethanol blending limits in gasoline, and the topic appears on more and more agendas. In the US, industry lobbyists are pushing to increase the allowed, year-round ethanol limit to 15%, after the U.S. Court of Appeals for the D.C. Circuit on 09-Sep 2021 denied a petition for rehearing the case. On 02-July 2021 the court had handed down a ruling that vacated a 2019 rule issued by the U.S. EPA, allowing year-round sales of E15. In Europe, too, the industry is pushing to increase the blending rate to 20% or even 25%.

What needs to be taken into account is that the war in Ukraine cuts of a vital supply line for agro-products. Shortage of supply will not only be felt in Europe but elsewhere as well. Ukraine had a world market share of 14% in the grain sector in 2021/22, while Russia represents a market share of another 10%, making both countries the biggest global suppliers, jointly with the US and Canada.

Amid growing grain and cooking oil shortages, Europe and particularly so the US are currently still affording substantial amounts of conventional biofuels to be blended into gasoline, which is certainly not a future model, technologically or in terms of energy policy. In any case, the use of first-generation biofuels is also ecologically and environmentally questionable.

Against the push from the Ethanol industry, demands for a timely suspension of the blending obligation are now becoming increasingly louder, which would contribute to certain quantities of grain being reallocated into the food cycle.

"We should take this part of the crisis very seriously," warns Sebastian Lakner, professor of agricultural economics at the University of Rostock, in an interview with the German news channel NTV. In order to secure the supply of people with corn, grain and rapeseed, he urgently recommends questioning the addition of biofuels to petrol.

As a readily available and environmentally friendly solution, the additional use of fuel ethers could be considered. The technical superiority of MTBE and ETBE over fuel ethanol makes both products an easy solution in gasoline blending, especially since most fuel specification standards worldwide leave ample room for the use of incremental ethers.

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