U.S. consumption. We forecast that consumption of petroleum and liquid fuels in the United States will average 20.5 million barrels per day (b/d) in 2022, which would be about the same as in 2019. In 2023, we forecast that consumption will grow to 20.8 million b/d. Our forecast of growth in U.S. consumption of petroleum and liquid fuels is driven by hydrocarbon gas liquids (HGLs) in 2022 and by gasoline in 2023.

We forecast that U.S. consumption of HGLs will increase by 0.2 million b/d in 2022 and by 0.1 million b/d in 2023. We expect all of the growth in HGL consumption in 2022 and 2023 to be from increased use of ethane as a petrochemical feedstock. Domestic ethane consumption increased this year when a new petrochemical cracker came online in the beginning of 2022, and we expect an additional petrochemical cracker to start up during the next two months, both of which will exclusively use ethane as a feedstock.

U.S. gasoline consumption averaged 8.7 million b/d in 1H22, up 0.1 million b/d from the same period in 2021. The April data for vehicle miles traveled (VMT), published by the Federal Highway Administration, is lower than we had forecast in last month’s STEO, which possibly reflects the effects of high gasoline prices. As a result of the lower-than-expected VMT, we revised down our forecast VMT for the third quarter of 2022 (3Q22). Following the reduction in forecast VMT, we forecast U.S. gasoline consumption will average 9.0 million b/d in the second half of 2022 (2H22), a slight decline from 2H21. Gasoline consumption declines even though we forecast almost 5 million more jobs in the U.S. economy in 2H22 compared with a year earlier, based on the S&P Global macroeconomic model. However, the effects of high gasoline prices and strong employment on driving habits are uncertain. Employees may now have more flexibility when choosing between commuting to work or working from home, and with high gasoline prices, employees may be choosing to work from home more than before the COVID-19 pandemic. In addition, we expect a 2% increase in overall vehicle fleet fuel efficiency will also limit gasoline consumption growth in 2H22 compared with 2H21.

Distillate fuel consumption in the United States averaged 4.0 million b/d in 1H22, unchanged from the same period in 2021. However, we estimate distillate consumption averaged 3.8 million b/d in 2Q22, which down by 0.1 million b/d from 2Q21. Trade press reports indicate that the spot segment of the trucking market has slowed, which is likely reducing distillate consumption. We expect distillate consumption will average 3.9 million b/d in 2H22 and 4.0 million b/d in 2023.

U.S. jet fuel consumption averaged 1.5 million b/d in 1H22, up 0.3 million b/d from 1H21. Despite this growth, jet fuel consumption in 1H22 remained 12% lower than 1H19 levels, the largest decline on a percentage basis among the major fuel types. We forecast that U.S. consumption of jet fuel will average 1.6 million b/d in 2H22 and in 2023.

U.S. crude oil supply. We estimate U.S. crude oil production averaged 11.6 million b/d in 1H22, up 0.6 million b/d from year-ago levels. Although crude oil prices are high, economic headwinds including inflation, supply chain issues, and labor shortages, and less operator activity than we had forecast at the beginning of this year have limited production growth. We forecast that crude oil production will rise to an average of 12.2 million b/d in 2H22 and to 12.8 million b/d in 2023, which would surpass the previous annual record set in 2019.

During 2022, most of the drilling activity has occurred in the Permian Basin. Favorable geology combined with technological and operational improvements have made the Permian Basin one of the most prolific regions of U.S. crude oil production. We forecast that average annual crude oil production in the Permian Basin will reach 5.3 million b/d in 2022 and 5.7 million b/d in 2023.

However, the increased production of associated natural gas from this region poses a downside risk to Permian crude oil production. If natural gas pipeline constraints are not eased and the proposed 5.0 billion cubic feet per day of pipeline takeaway capacity out of the Permian Basin is not brought online by 2024, drilling activity in areas with high concentration of natural gas might be reduced. In addition, the capital deployment decisions of producers will be critical for rig deployment and production. Further, production could be less than our forecast if supply chain issues and input cost inflation persist through the forecast period.

We expect that crude oil production from the Gulf of Mexico will average about 1.8 million b/d in both 2022 and 2023. In 2021, seven new projects came online. We expect nine more projects to come online in 2022.

Alaska’s crude oil production in the forecast stays near the 2021 level of 0.4 million b/d in both 2022 and 2023.

Hydrocarbon gas liquids supply. We forecast U.S. production of HGLs to increase by 0.5 million b/d in 2022 to an average of 6.5 million b/d and then to increase to an average of 6.8 million b/d in 2023. HGL production will increase as a result of rising production of natural gas in 2022 and 2023, as well as higher rates of natural gas processing plant utilization. Ethane production is the leading contributor to the HGL growth, and we expect it will rise to meet growing demand for ethane as a petrochemical feedstock both in the United States and globally.

Liquid biofuels. Consumption of biofuels has risen in the United States in 2022, and we expect this growth to continue. Increasing demand for transportation fuels, higher 2022 Renewable Fuel Standard (RFS) program targets announced on June 3, and new renewable diesel production capacity coming online all contribute to this growth. Prices for Renewable identification number (RIN) credits—the compliance mechanism used for the Renewable Fuel Standard (RFS) program administered by the U.S. Environmental Protection Agency (EPA)—have increased in 2022 to near record-high prices, which has facilitated growing biofuel consumption. From 1H21 to 1H22, ethanol consumption increased by 24,000 b/d (3%), renewable diesel consumption increased by 32,000 b/d (46%), and other biofuels consumption increased by 6,000 b/d (133%). Biodiesel consumption was unchanged during the same period.

We expect that new renewable diesel production will help meet rising RFS targets. Marathon Petroleum’s renewable diesel refinery in Dickinson, North Dakota, became fully operational in 2Q21. It is now the second-largest renewable diesel refinery in the United States and has a production capacity of 12,500 b/d. In 4Q21, Diamond Green Diesel expanded its Norco, Louisiana, refinery, which is now the largest renewable diesel refinery in the United States, with a production capacity of 44,000 b/d. So far in 2022, HollyFrontier’s Cheyenne, Wyoming, refinery has come online, and CVR Energy’s Wynnewood, Oklahoma, refinery has come partially online. Seven other projects are set to come online by the end of the year, potentially adding as much as 88,000 b/d of capacity, and several more projects will come online in 2023. We forecast renewable diesel consumption of 116,000 b/d in 2022, an increase of 41,000 b/d (53%) from 2021, and we expect renewable diesel consumption to increase further to 164,000 b/d in 2023. This forecast assumes that some of the capacity scheduled to come online in 2022 and 2023 will have delays or be affected by high agricultural feedstock costs.

Because one gallon of renewable diesel produces more RIN credits under the RFS program than biodiesel and also faces no infrastructure or blending constraints, we expect new renewable diesel plants to be brought online to secure scarce oil feedstocks, such as soybean oil, outpacing biodiesel refineries and limiting biodiesel production. We forecast slightly higher biodiesel consumption in 2022 than in 2021. However, we expect U.S. biodiesel consumption to decrease in 2023 as renewable diesel increasingly satisfies RFS requirements. We forecast U.S. biodiesel production in 2022 to fall 8% from 2021 to less than 100,000 b/d, the lowest annual average since 2015.

More fuel ethanol was consumed in the United States in 1H22 than in the same period in 2021, mainly because of more gasoline consumption. We expect similar gasoline and fuel ethanol consumption in 2H22. We forecast that U.S. fuel ethanol consumption will remain around 2022 levels in 2023 and that the ethanol share of U.S. gasoline consumption will be near 10.3%. If favorable blending economics for fuel ethanol, driven by lower relative fuel ethanol prices, and high RIN prices persist, the fuel ethanol share of gasoline consumption could potentially increase.

Product prices. Increased global consumption of liquid fuels during 1H22, combined with constraints on global refining capacity and rising crude oil prices, puts upward pressure on prices for petroleum products. The average U.S. retail price for regular-grade motor gasoline in 1H22 was $4.11 per gallon (gal), an increase of $1.33/gal from 1H21. Retail diesel prices in 1H22 averaged $4.91/gal, an increase of $1.85/gal over 1H21. Russia’s full-scale invasion of Ukraine, which began at the end of February, has significantly raised crude oil prices and crack spreads. In 2Q22, retail gasoline averaged $4.50/gal, and diesel averaged $5.49/gal.

Rising crack spreads—the difference in price between wholesale refining products and the crude oil used to make them—have been a major contributor to rising retail fuel prices. Crack spreads have increased sharply as exports of refined products from Russia have decreased in response to sanctions. Even where there are no formal sanctions, some international buyers, particularly European countries who typically purchase Russia’s fuel, have chosen to reduce or end imports from Russia.

The gasoline crack spread (calculated as the U.S. refiner gasoline price for resale against Brent crude oil) in 2Q22 increased to an average of $1.05/gal from 52 cents/gal in 2Q21, and the diesel crack spread increased to an average of $1.47/gal during the same period from 40 cents/gal in 2Q21. Increasing crude oil prices often narrow crack spreads as high input costs narrow refining margins; however, the current high crack spreads are the result of decreased refinery capacity both globally and in the United States combined with Russia’s reduced product exports.

Refinery Capacity in the United States fell by 0.9 million b/d in 2020 and by 0.2 million b/d in 2021. The lost capacity mainly resulted from low refinery margins brought on by the COVID-19 pandemic, as well as a handful of refinery incidents—including the explosion at Philadelphia Energy Solutions in 2019 and the flooding of the Phillips 66 Alliance refinery during Hurricane Ida in August 2021— and conversions to biofuels production. Decreasing refinery capacity was not limited to the United States. The IEA reports that global refinery capacity fell by 0.9 million b/d in 2021, which combined with the exclusion of refining capacity in Russia, leaves the global market with less refinery capacity available to meet increasing demand this summer.

Historically high crack spreads have encouraged U.S. refiners to increase refinery utilization, which ran at 92% in 2Q22, in order to meet high demand in the United States. We expect refinery utilization to average 94% in 3Q22, compared with 89% in 3Q21. Refinery utilization is usually higher in the second and third quarters in response to summer demand for fuel. We expect utilization to average 90% in 4Q22 up only slightly over 4Q21, at a time when low product inventories and increasing demand were already providing incentives for refiners to increase refinery runs. Although we expect refinery utilization to remain well above average through the end of the year, less refinery capacity in the United States means that actual refinery inputs and volumetric production of refined products will not exceed pre-pandemic production levels.

As rising refinery production contributes to some increases in refined product inventories, we expect crack spreads to decrease in 2H22 but remain above the five-year average through the end of the forecast. We forecast gasoline crack spreads to average $0.88/gal in 3Q22 and $0.57/gal in 4Q22, or $0.72/gal for the year, before decreasing to an annual average of $0.52/gal in 2023. Similarly, we forecast distillate crack spreads to average $1.11/gal in 3Q22 and $0.91/gal in 4Q22, averaging $1.03/gal in 2022 before dropping to $0.65/gal in 2023. In comparison, the gasoline crack spread in 2019 was $0.33/gal, and the distillate crack spread was $0.43/gal in 2019.

High product crack spreads are encouraging refiners to maximize operations to meet U.S. and global demand although their ability to do so remains subject to several uncertainties. High refinery utilization brings inherently greater risks of operational malfunctions, disruptions, and unplanned turnarounds that can temporarily take units or whole facilities out of commission. Furthermore, the National Oceanic and Atmospheric Administration (NOAA) predicts an above-average hurricane season in 2022. Hurricanes present particular weather-related risks to most of U.S. refining capacity, which is concentrated along the U.S. Gulf Coast, particularly in Texas and Louisiana.