# Presentation: 420628

## Gasoline Prices:What is Happening?

**Energy Information Administration**
**Briefing for the**
**Democratic Policy Committee Staff**
**May 9, 2001**

## Retail Motor Gasoline Price* Forecast Doesn’t Reflect Potential Volatility 

- * Regular self-service

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, May 2001.**

**Notes:**
EIA’s gasoline price forecast has gasoline prices, on a monthly average, possibly exceeding $1.70 per gallon.   Of course, weekly prices would likely peak this summer even higher.  While this forecast looks very smooth, we believe there is a substantial risk of volatility.

 Regional price volatility around this base case can be substantial.  The situation of relatively low inventories for gasoline could set the stage for some regional imbalances in supply that could once again bring about significant price volatility in the U.S. gasoline market.  

## Midwest Looking Like Last Year

**Source: Energy Information Administration**

**Notes:**
This graph show the regional variations that can occur during a time of high prices.

Last year, the Midwest saw a price spike in conventional gasoline that is being repeated this year.  

One difference from last year is that the Northeast and California are also moving up strongly -- just not as fast.  Another difference is that this year’s increases are occurring about a month earlier than last year’s.

## RFG Responding More Strongly

**Source: Energy Information Administration**

**Notes:**
There is also volatility across various types of gasoline.  Because the RFG market is smaller than conventional, and often tighter, regional variations are often larger for RFG than for gasoline. 

 The Midwest, with its particular type of RFG (ethanol based RFG), and California, with its specific RFG requirements, have become somewhat isolated from the rest of the country’s RFG market.  Thus, if there is a problem in those regions, it may take a while to get needed supplies into those regions, thus keeping prices high.

## Gasoline Prices Vary Among LocationsRetail Regular Gasoline Price, Cents per GallonMay 8, 2001

**180.1**

**163.6**

**168.1**

**149.9**

**163.3**

**175.8**

**181.1**

**191.6**

**189.1**

**157.8**

**160.5**

**181.5**

**176.7**

**164.4**

**167.1**

**197.6**

**197.9**

**157.5**

**176.6**

**Source:  American Automobile Association**

**Notes:**

The public is probably more knowledgeable about what they pay for gasoline than about anything else they use regularly.  Most Americans are bombarded several times a day with the price of gasoline.

Many people who phone our office don’t only want to know why prices have risen, but why their prices are different than prices in some other area – the gasoline station two blocks away, the average price quoted on the news, the price their uncle is paying in a different region of the country.

This chart shows some of the different state averages for a specific month.  While taxes can be a large piece of the differences between states, this chart excludes taxes.  These differences are due to factors such as distance from refining sources, and mix of reformulated versus conventional fuels.

What this snapshot does not show,is that all of these prices can move up and down together – though not in lockstep.  The large underlying up and downs are the result of general global and larger regional factors.

## Crude Oil Affects Gasoline Prices

**WTI Crude Oil Price**

**Retail Gasoline Price**

**Source: Energy Information Administration**

**Notes:**
This graph illustrates how crude oil explains much of the large movements in gasoline prices that we have seen over time -- such as during the Gulf War at the end of 1990, and fall in prices from early 1997 followed by the rise starting in 1999.

The dark green area is influenced by the gasoline market apart from the global crude oil market, which will be discussed later.

This graph shows that since December 1998, crude price increases explain about 35 cents of the 45 cent gasoline price increase between then and March 2001.   

## WTI Crude Oil Prices Are Expected To Remain Relatively High Through At Least 2001 

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, May 2001.**

**West Texas Intermediate (WTI)**

**Notes:**
 As we just saw, one of the primary factors impacting gasoline price is the crude oil price.  

This graph shows monthly average spot West Texas Intermediate crude oil prices.  Spot WTI crude oil prices broke $36 per barrel in November briefly as anticipated boosts to world supply from OPEC and other sources did not show up in actual stocks data.  

Crude oil prices are expected to be about $30 per barrel for the rest of this year, but note the uncertainty bands on this projection.  They give an indication of how difficult it is to know what these prices are going to do.    

Also, EIA does not forecast volatility.  This relatively flat forecast could be correct on average, with wide swings around the base line. 

With the EIA forecast for crude prices staying high this year, gasoline prices can be expected to remain high.  

## Low Total OECD Oil Stocks* Keep Market Balance Tight

***Total includes commercial and government stocks.**

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, May 2001.**

**Notes:**
This chart illustrates why EIA sees crude oil prices staying relatively high.  It shows global inventories, as measured by OECD petroleum stocks.

EIA sees a tenuous supply/demand balance over the remainder of 2001.  Global inventories remain low, and need to recover to more adequate levels of forward demand coverage in order to avoid continued price volatility.  

The most recent data show OECD inventories remaining at very low levels.  Low inventories increase the potential for price volatility throughout 2001.
Inventories are a good measure of the supply/demand balance that affects prices.  A large over-supply (production greater than demand) will put downward pressure on prices, while under-supply will push prices upward.

OECD inventories illustrate the changes in the world petroleum balance.  OECD inventories rose to high levels during 1997 and 1998 when production exceeded demand and prices dropped to around $10 per barrel in December 1998.  However, when demand exceeded production in 1999 and early 2000, inventories fell to low levels, and prices rose, averaging almost $35 per barrel (WTI) in November 2000.

 EIA’s forecast of a continued low stock cushion implies we not only should see continued high prices, but we also could experience price volatility from the crude oil market--apart from volatility stemming from product markets.

## Low U.S. Stocks Indicate Tight U.S. Market

**Sources: History:  EIA;  Projections: Short-Term Energy Outlook, May 2001.**

**Notes:**
Low crude oil inventories go hand in hand with low product inventories.  Product inventories were also drawn down to help meet demand, as shown with gasoline.  

The gasoline stocks – apart from other inventories – tell us something about the gasoline markets and thus gasoline prices over and above the crude oil markets.

## Regional Inventories

**Source: Energy Information Administration**

**Notes:**
This year has not started well for gasoline inventories, with inventories being low across regions of the country. 

The Midwest region (PADD II) had been running lower than most regions, but began to catch up during the last week in April.  Gasoline inventories ran about 9% below  their 5-year average for this time of year and about 4% below where they were last year.  

The recent refinery problems in the Midwest, though, could erase some of that recovery.  The impacts of Tosco’s Wood River refinery and Marathon’s St Paul refinery are not fully realized.  

But inventories were also precariously low along the East Coast (PADD I) and are extremely low in the Rocky Mountain region (PADD IV), although the size of this market mitigates any national impact.  While the Gulf Coast (PADD III) and the West Coast (PADD V) inventories are not as dire as in other regions, they are certainly not abundant.

## Tight Product Balance Pushes Up Product Spread (Spot Product – Crude Price)

**Source: Reuters**

**Notes:**
Gasoline inventories indicate how tight the gasoline product market is in any one region.  When the gasoline market is tight, it affects the portion of gasoline price is the spread between spot product price and crude oil price.  Note that in late 1998-and early 1999 spreads were very small when inventories were quite high.  

Contrast summers of 1998 or 1999 with summer 2000.  Last summer’s tight markets, resulting low stocks and transition to Phase 2 RFG added price pressure over and above the already high crude price pressure on gasoline -- particularly in the Midwest.  
As we ended last winter, gasoline inventories were low, and the spread between spot prices and crude oil were higher than typical as a result.  
Inventories stayed well below average and the spread during the summer of 2000 averaged 15 cents per gallon – about 50% higher than the more typical 10 cents per gallon.  (But keep in mind that the more typical spread has produced a very low return on investment for this industry.)  
In November and December 2000, as gasoline demand eased, prices relaxed and spreads returned to average levels -- only to rebound again in January and February as refineries began to undergo maintenance and the market watched the already low stock cushion erode further. 
 In January, spreads averaged 16 cents compared to less than 5 cents in January 2000.  This past February, spreads are slightly higher than last year -- averaging 12 cents.  This is about 5 cents over historical average values.  
While March spreads dropped back for a time, April spreads shot up again as tank turnarounds from winter to summer drew down supplies and some refineries had trouble getting back on line following maintenance.

Rising production and imports should begin to ease this situation.

## “New Factor” Contributing to Volatility:Excess Capacity is Gone

**Source: Energy Information Administration**

**Notes:**
With the price spreads for gasoline that we saw in April, how come we didn’t produce more gasoline?  One answer is that we are nearing full capacity.

Since about 1997, domestic refineries have been running at or near maximum capability during the peak demand summer months.

For almost 20 years, we have had an excess of refining capacity in this country, but that is no longer the case.
Actually, for gasoline we are dependent on imports.  We import over 500 thousand barrels per day on average.  
If refiners were to build capacity to meet this need, they might have to add about 1 million barrels per day of crude processing capacity (distillation capacity) to produce that gasoline.

If a problem occurs in a region when local refineries are running at maximum capability, the region must wait until the supply problem is fixed or new supplies arrive from other distant regions or countries.  

During the wait for new supplies, prices rise.  But the price surge helps to temper demand in the meantime, and encourages the quick arrival of new supply.

## Regional Refinery Utilization Shows Gulf Coast Pressure

**Source: Energy Information Administration**

**Notes:**
But there is some room for hope.

Refineries generally begin maintenance in February or March, and finish in April.  The East Coast was experiencing some lengthy refinery maintenance outages, as shown by the drop in utilization that remained low in most of March and April. 

In the meantime, the East Coast was drawing on extra supplies from the Gulf Coast and imports.

The Midwest refineries seem to have been ramping up in April as they finished what maintenance was needed.  But the Midwest no longer has the Blue Island refinery, so it also is pulling more product from the Gulf Coast.

The high Gulf Coast prices this spring reflect extra “pull” on product from both the Midwest and the East Coast, and probably from California as well. Inputs into Gulf Coast refineries over the last 4 weeks have been over 600 thousand barrels per day (nearly 9%) more than last year during the same period.  This reflects the extra demand for product from the Midwest and East Coast.  

The weekly data indicates the East Coast refineries are coming back up, which, should free up some Gulf Coast capacity to fill in for the Tosco refinery problem that occurred a week and a half ago.   With the spreads between gasoline and crude oil spot prices that we are seeing, it’s no surprise that refinery utilization is up.

## High Prices Continue to Attract Imports

**Source: Energy Information Administration**

**Notes:**
Another reason for hope is that as we are seeing production begin to climb as refiners come out of maintenance and ramp up, gasoline imports have also increased substantially recently, thus putting more gasoline supply into the U.S. market.

 Of course, it is too early to tell, but if gasoline markets don’t get worse, we may be nearing the turning point, with prices peaking this month or early next month, slightly earlier than is typical.

## douglas.macintyre@eia.doe.gov

**(202) 586-1831**