Lagniappe

 

 

Myra P. Saefong:
Gasoline's making consumers fume

The U.S. government and consumers alike have been questioning gasoline's rise to record price levels and haven't gotten any real answers. Maybe they're just looking down a dead-end road.

How many times have we seen headlines like: "Congress takes aim at high gasoline prices?"

In fact, we ran that on MarketWatch this week. Read the story.

The investigations begin every time consumers cause a ruckus over how much they're paying at the pump to fuel their sport utility vehicles.

Government studies have yet to find that any of the price spikes have come from illegal activity on the part of oil companies.

In 2006, the Federal Trade Commission found examples of price gouging following Hurricane Katrina -- where gasoline was sold above average regional price levels even when the higher prices weren't justified by production, delivery or transportation costs. But it failed to find any instances of illegal market manipulation -- instead blaming the price run up on simple supply-and-demand economics. See archived story.

'No oil company will be hauled into court for price fixing because it is just market forces at work.'

— James Williams, WTRG Economics

Investigations are a given, but what is "equally certain is that Congress will attempt to ignore many of the factors which have contributed to lower refinery output so far this year," said James Williams, an economist at WTRG Economics.

Among those factors are "lingering effects of the 2005 hurricanes, last year's requirement that refiners drop the use of MTBE in gasoline, the requirement for ultra-low sulfur diesel fuel for over-the-road trucking ... higher levels of consumption, [and] difficulties in permitting new refineries, he said. New refineries often face the usual "NIMBY," or not-in-my-back-yard, problems.

" No oil company will be hauled into court for price fixing because it is just market forces at work," Williams said.

Still, story after story on gasoline has talked about putting blame almost solely on the oil companies, accusing them of manipulating the market.

There really is more to that story, and the many factors contributing to the record-fuel prices are what'll keep consumers' costs high in the long run.
Running high and running low

True, consumers have every right to be angry.

The average retail price for a gallon of regular gasoline climbed to $3.221 on Wednesday -- its highest level ever, according to AAA's Daily Fuel Gauge Report -- and the price continues to climb.

That compares to $2.8803 a year earlier, and it's up 52% from two years ago, according to the Oil Price Information Service, which supplies data to motorist group AAA.

And last weekend, the Lundberg Survey said the average retail price reached $3.18.

That topped the inflation-adjusted high of $3.15 seen back in 1981, it said.

In the wake of such data, Thomas McCool of the Government Accountability Office has said that the wave of mergers in the oil industry -- 2,600 in the 1990s alone -- have contributed to increases in market concentration in the refining and marketing segments of the nation's petroleum industry.

But Sen. Sam Brownback, R-Kan. argued Wednesday that the price climbs "reflect the operation of the laws of supply and demand -- laws which no amount of legislation or regulation will repeal." See full story.

" The bottom line is that we are growing population, both in the U.S. and the world, our demand for a limited resource is increasing beyond our supply, and price is going up," said Yiorgo Aretos, founder of TheTMPGroup.

U.S. demand for gas is at its highest level in history, oil companies are having difficulty keeping up with supply to meet that demand and new drivers are hitting the roads and staying on them longer -- so "demand is growing incrementally," he said.

Given all that, he calls for the possibility of $5-per-gallon gasoline by the end of the year -- arguably a doomsday scenario.

" It's possible for prices to hit the $5 range, because there is not going to be any great change in what is currently happening right now, yet supply will continue to diminish and demand will continue to rise," said Aretos.

Added to that, longer-term down the road, crude supplies will tighten with violence in Nigeria an ongoing problem, and supplies from Iraq, Iran, Venezuela and Mexico are questionable, said Kevin Kerr, editor of Global Resources Trader, a newsletter of MarketWatch, the publisher of this report.

He doesn't expect the nation's driving habits to change until gasoline is around $8 a gallon. That's the level he expects people to be forced to consider options and lifestyle changes.

" It's coming. It's just a matter of how soon," Kerr said.

Placing blame

Those price levels certainly aren't likely scenarios anytime soon, but the argument for them actually makes sense -- and it's not as simple as placing the blame on the Big Oil companies.

Think back to the last time a built-from-scratch, or grass-roots, refinery was last built here in the United States, and the picture becomes a bit clearer.

" All of our refineries are old -- the last grass-roots refinery built was in the 1970s," said Charles Perry, chairman of energy-consulting firm Perry Management.

" So we have had a lot of refinery down time this spring for turnarounds, plus some additional unexpected down time," he said.

" All of this means a loss of gasoline production at a time refineries in the past were building inventory for the summer-driving season," he said. Perry points out that refineries were running at 89.5% of capacity for the week ended May 11 and that's down about 7% from normal.

Meanwhile, motor gasoline supplies are down 6.9% from a year ago, and reformulated gasoline has dropped 52% from the year-ago level, Energy Department data released Wednesday shows.

" To reach normal levels of gasoline stocks by the end of May would require stock gains of almost 5 million barrels per week," said WTRG's Williams.

'If there is a conspiracy to limit supplies of gasoline to drive prices up, it started in Sept. 2005 and must involve arranging for hurricanes Katrina and Rita to make landfall in the area where the U.S. has its highest concentration of refineries. Since that time, refinery utilization averaged 3.1% lower than the five-year average.'
— James Williams

That's an out-of-reach goal, but if refinery utilization increased closer to the 94%-95% norm, and gasoline imports stay at the 1.5 million-barrel-per-day level, the gasoline market could be "near normal by July," he said.

Perry Management's chairman is quick to point out that since the nation imports that amount of gasoline per day, gasoline is really a global market.

" If we want to keep our supplies, we have to pay more -- because if we don't pay it, some other country will," said Perry.

Meanwhile, the U.S. has less refinery capacity than it did in 1981, according to Williams.

" There were 324 refineries in the U.S. in 1981 vs. 148 today," though refineries, on average, are over twice the size of those in 1981, he said.

And believe it or not, the record hurricane season of 2005 still plays a role.

" If there is a conspiracy to limit supplies of gasoline to drive prices up, it started in Sept. 2005, and must involve arranging for Hurricanes Katrina and Rita to make landfall in the area where the U.S. has its highest concentration of refineries," said Williams. Since then, "refinery utilization averaged 3.1% lower than the five-year average."

Fear factor

So it's really no wonder that gasoline supplies dropped over 34 million barrels from early February to the end of April, according to Energy Department data.

Motorist group AAA believes "well-founded concern over gasoline availability among traders is what has driven prices so high," said Geoff Sundstrom, a spokesman for the group.

" Clearly, industry consolidation and our complex and changing blending rules for gasoline have played some role in this, but it also is true that American manufacturing of all types seems to be in decline for a variety of reasons," he said.

" It may simply be that some companies and investors have concluded that refining product offshore and importing it here is a better long-term investment than is adding refining assets in the U.S.," he said.

Either way, "high-priced gasoline and the profit opportunities it creates should be able to draw enough imported gasoline to our shores to prevent any possibility of fuel shortages," said Sundstrom.

'If refineries get their act in gear, we should be okay -- until the storm warnings begin.'

— Tom Kloza, Oil Price Information Service

Looking ahead, there's reason to hope that average gasoline prices will hit a top in the next few weeks, he said. But that's "contingent on continuing to see a week-to-week build in gasoline inventories that includes strong domestic production and imports."

Tom Kloza, chief oil analyst at the Oil Price Information Service, said he's been "trumpeting the demand response" to the high prices.

Demand is starting to "tail off in some of the real sore spots -- namely the Great Plains, Pacific Northwest and Great Lakes' states, he said on Tuesday. "These markets have seen year-on-year increases of 25% or more and we've passed the threshold where large segments of the population react and use a bit less gasoline."

" We are not on the threshold of $4-a-gallon gasoline," Kloza said.

" If refineries get their act in gear, we should be okay -- until the storm warnings begin," he said.

Myra P. Saefong is a reporter for MarketWatch in San Francisco. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by MarketWatch, on 05/24/2007. Petroleumworld reprint this article in the interest of our readers.

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator. Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Internet web links to http://www.petroleumworld.com are appreciated.

Petroleumworld News 05/25/07

Copyright©2006 Myra P. Saefong. All rights reserved

Send this story to a friend

Your feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.

Write to editor@petroleumworld.com

Any question or suggestions, please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels