US diesel-generator boom threatens petroleum stocks

June 7, 2001

NEW YORK (Reuters) via NewsEdge Corporation -

A surge in the construction of large-scale diesel generators across the U.S. due to fears of power outages could leave the nation's heating oil and diesel supplies vulnerable to summer demand spikes, analysts said Wednesday.

Caterpillar Inc. , Cummins Engine Inc. , and Detroit Diesel all report booming demand for their diesel-powered generators, particularly on the West Coast where rolling blackouts are threatening businesses that depend on around-the-clock computer feeds.

``We're in rapid growth right now,'' said Robert Sheldon, a spokesman for Cummins. Sheldon said business in California and the Northwest has grown 160 percent this year with the construction of roughly 200 megawatts -- enough to power 200,000 homes.

Most of the units, used for everything from home power to electricity plant peaking units, are diesel powered because diesel is considered a readily available, moderately priced, reliable source of energy.

But even with diesel and other distillates now in good supply, some energy analysts say the increased presence of diesel-powered electricity across the U.S. could pressure inventories -- which for the last two years have fallen low enough ahead of peak demand in winter to spark heating oil scares.

``It's hard to say how much this trend will add to overall distillate demand,'' said Mary Menino, analyst for Energy Security Analysis Inc. in Boston. ``But in the case of power shortages, which are likely this summer, these (generators) will come on and there will be a jump in consumption.''

California is predicting roughly 100 hours of blackouts this summer due to energy shortages, triggering heated political wrangling and leading the state's oil refineries to seriously consider the possibility of dropping off the grid.

The new diesel generators add to concern over what the energy industry calls ``switching,'' which happens when certain units at utilities switch from natural gas to petroleum distillates as fuel for their plants.

Utilities will generally switch to distillates when natural gas prices become high, as they did last winter. Industry analysts estimated that utility switching added between 200,000 and 300,000 barrels per day of demand during some stretches in the cold months.

The current rise in back-up generator production would add to that number, though estimates are sketchy. Most of the generators will be used solely for standby in case of a blackout, while others could be used constantly to sell power onto the grid.

As of last week, however, U.S. distillate supplies were high enough to withstand the odd demand spike. Spare inventories grew more than 4 million barrels during the week ended June 1 to climb more than 4 million barrels ahead of last year, according to the American Petroleum Institute.

^ REUTERS@

http://www.individual.com/story.shtml?story=d0607103.100

-- Martin Thompson (mthom1927@aol.com), June 07, 2001