More than half of the refining and conversion capacity of the larger European region (which includes the E.U.-27, Iceland, Liechtenstein, Norway, Switzerland, and former Yugoslavia countries) was built to meet its transportation needs. But since 1990, European motorists have been adopting more diesel cars due to pricing and environmental concerns. Refiners have been unable to keep up with shifting trends, creating an increasing gasoline surplus and forcing the region to rely more on jet fuel and diesel imports.

Now, global downstream market trends and fears of a prolonged recession that would cut fuel demand are adding to the imbalance. Construction costs have soared, while Europe’s refining margins are expected to level off in 2009 at nearly 40 percent less than 2007’s highs as the new refining capacity comes online globally, according to a report by the consulting firm Purvin & Gertz Inc. prepared for the European Commission earlier this year.

Required added capacity, especially for diesel and jet fuel, would also generate more greenhouse gas emissions, which are becoming more expensive to produce under European regulations. Thus, importing those fuels is cheaper than producing them locally.

There are other clouds on the horizon, including a planned increase in the share of biofuels to 10 percent by 2020, improved motor efficiency, and the use of hybrid cars, which will represent 15 percent of European car registration by 2020, compared to 3 percent by 2010. Those are likely to decrease demand for fossil fuels and further deter investments in Europe’s downstream market. In fact, European refiners appear more concerned about their ability to process heavier crudes instead of the North Sea Brent they have relied on for decades.

The likely result is that Europe will be increasingly dependent on imported diesel and jet fuel, while gasoline exports will be under increased risk of “dumping” in the long term, analysts say, although they caution that will largely depend on how the global downstream market continues to evolve, especially in the United States. Net gasoline exports of the larger European region will amount to 42 percent of its production by 2020, compared to 23 percent in 2005, according to Purvin & Gertz.

In stark contrast, net gasoil and diesel imports will increase to 17 percent of total demand in 2020, compared to 10 percent in 2005, and jet fuel and kerosene imports will increase to 36 percent of the demand in 2020, compared to 25 percent in 2005.

Installed capacity for crude distillation and hydrocracking, to produce jet fuel, gasoil, and diesel, will increase almost 3 percent, or about 500,000 barrels per day, through 2014, according to the report.

“In many cases, it will be less expensive for markets to import products rather than invest to increase local supply. Furthermore, as has been seen in Europe in the current decade, changing trade patterns are a far more flexible and less expensive way to meet demand trends than changes in refinery configuration,” the report says.

The imbalance in refining capacity raises the risk that European producers will dump their excess gasoline on the global market, with the U.S. being the likely destination.

“The big problem for European refiners is what the U.S. will do. There is the possibility that the balance in the Atlantic Basin will be fundamentally altered,” says Paris-based Daniel Evans, PFC Energy’s global downstream manager.

While analysts don’t expect a projected increase in U.S. refining capacity alone to diminish the need for European gasoline imports, improved car efficiency in the U.S., an extended recession that results in lower fuel demand, and a bigger share of biofuels could have that undesired effect.

“For European exporters, the expected fall in European demand, compounded by the increasing use of bio-ethanol in gasoline, is such that it is likely that some gasoline-manufacturing units…will need to be shutdown, as even export markets will be unable to absorb the projected surplus with the existing refinery configuration,” the Purvin & Gertz report says. In fact, European gasoline exports to the U.S. may decrease slightly, while the surplus will increase. Latin America (especially Mexico) and Africa are expected to offset lower U.S. demand, but the risk of dumping cannot be dismissed.

“The question is whether they react to problems they’re going to have,” Evans said, “or [whether] they are forced to find new markets.”