DOE/EIA-0621

May 1998

Assessment of Summer 1997

Motor Gasoline Price Increase

Energy Information Administration

Washington DC 20585

This report was prepared by the Energy Information Administration, the independent statistical and

analytical agency within the Department of Energy. The information contained herein should not

be construed as advocating or reflecting any policy position of the Department of Energy or any

other organization.
Contacts and Acknowledgments

This report was prepared by the Energy Information Administration (EIA) under the general

direction of Dr. John Cook, Director, Petroleum Division, Office of Oil and Gas, (202) 586-5214,

john.cook@eia.doe.gov. Specific questions for this report can be directed to:

Office of Oil and Gas:

Charles Dale (202) 586-1805 charles.dale@eia.doe.gov

John Zyren (202) 586-6405 john.zyren@eia.doe.gov

Office of Energy Markets and End Use:

Jon Rasmussen (202) 586-1449 jon.rasmussen@eia.doe.gov

EIA would like to acknowledge the contributions of Mike Conner, Eva Fleming, Diana House, and

Charles Riner in preparing this report. EIA would like to thank the following contract employees

for their assistance: Michael Burdette, Jaime Chan, John Hackworth, Joanne Shore, and Andy

Stowe.

ii Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
Contents

1. Introduction...........................................1

2. Fundamentals Drive Up August Prices.............................3

U.S. Supply and Demand Fundamentals ...........................4

Gasoline Prices Responded to Change in Market Balance . . . . . . . . . . . . . . . . . 10

3. PADD 5 August Gasoline Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

PADD 5 Supply and Demand Fundamentals . . . . . . . . . . . . . . . . . . . . . . . . 16

Prices Responded to the Change in Supply/Demand Balance. . . . . . . . . . . . . . . . 21

4. Focus on Refinery Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Gasoline Production in PADD 1 Could Have Been Higher . . . . . . . . . . . . . . . . . 26

Gasoline Production in PADD 2 Was At Maximum . . . . . . . . . . . . . . . . . . . . 30

PADD 3 Gasoline Production Was Close to Maximum. . . . . . . . . . . . . . . . . . . 31

PADD 5 Major Refining Centers Approached Production Limits . . . . . . . . . . . . . 34

Conclusions from Production Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

5. Focus on Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Background on U.S. Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

The Role of Imports in Summer 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

The Role of Exports in Summer 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

6. Focus on Gasoline Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Noncommercial Traders Were Active During The August Price Rise . . . . . . . . . . . 49

Increased Margins in 1997 Benefitted Refiners . . . . . . . . . . . . . . . . . . . . . . . 53

Price Movement from Spot to Retail Was Typical . . . . . . . . . . . . . . . . . . . . . 55

Appendix A Petroleum Administration For Defense Districts (PADD) Definitions . . . . . . 59

Appendix B Why Do Prices Vary Regionally? California Case Study . . . . . . . . . . . . . 61

Appendix C Analyzing Refinery Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

A Simple Description of Crude Oil Refining . . . . . . . . . . . . . . . . . . . . . . . . 67

Examples from Chapter 4 of Using Refinery Data . . . . . . . . . . . . . . . . . . . . . 71

Appendix D EIA Capacity Utilization Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Appendix E Quantitative Explanation Of Motor Gasoline Price Pass-Through . . . . . . . . . 77

Assessment of Summer 1997 Motor Gasoline Price Increase iii

Energy Information Administration
Tables

Table 2.1 July-August 1997, Spring 1997, and Spring 1996 Summary

Market Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Table 3.1 1997 Gasoline Supply and Demand Summaries by PADD . . . . . . . . . . . . 15

Table 3.2 1997 Export Destinations from PADD 5 . . . . . . . . . . . . . . . . . . . . . . 20

Table 4.1 PADD 1 Summer Refinery Inputs and Gasoline Production . . . . . . . . . . . . 28

Table 4.2 PADD 2 Summer Refinery Inputs and Gasoline Production . . . . . . . . . . . . 30

Table 4.3 PADD 3 Summer Refinery Inputs and Gasoline Production . . . . . . . . . . . . 32

Table 4.4 PADD 5 Refining Capacity Locations . . . . . . . . . . . . . . . . . . . . . . . 35

Table 4.5 Operable Refinery Upgrading Capacity in Summer 1997 . . . . . . . . . . . . . 36

Table 4.6 PADD 5 Summer Refinery Inputs and Gasoline Production . . . . . . . . . . . . 37

Table 5.1 U.S. Total Motor Gasoline Imports. . . . . . . . . . . . . . . . . . . . . . . . . 44

Table 6.1 Class of Trade Margins for Conventional Gasoline . . . . . . . . . . . . . . . . 54

Table 6.2 Cumulative Pass-Through to Retail for a 10-Cent Change in Spot Price . . . . . 57

Table B.1 Market Concentration Comparison (Preliminary 1997 Estimates) . . . . . . . . . 64

Table B.2 Retail Minus DTW Price Comparison . . . . . . . . . . . . . . . . . . . . . . . 65

Table C.1 Overlapping Temperature Ranges for Distillation Products . . . . . . . . . . . . 69

Table C.2 PADD 3 Annual Average Refinery Data . . . . . . . . . . . . . . . . . . . . . . 70

Table C.3 PADD 3 Unfinished Oil in 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Table D.1 Comparison of Summer 1997 Average Operable and Operating

Capacity Utilization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Table D.2 FCC Operations for Eleven PADD 3 Refineries in Summer 1997 . . . . . . . . . 75

Table E.1 Ordinary Least Squares Regression Results

(Weekly Prices to December 22, 1997). . . . . . . . . . . . . . . . . . . . . . . 79

Table E.2 Cumulative Pass-Through to Retail for a 10-Cent Change in Spot Price . . . . . 81

Table E.3 Predictive Stability Tests for August 1997 Price Runup . . . . . . . . . . . . . . 81

iv Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
Figures

Figure 2.1 Weekly Retail Regular U.S. Gasoline Prices ....................3

Figure 2.2 Gasoline Price Components (Conventional Regular Grade, August 1997) .....4

Figure 2.3 U.S. Finished Gasoline and Gasoline Blending Component Stocks.........5

Figure 2.4 U.S. Motor Gasoline Demand ............................6

Figure 2.5 U.S. Crude Oil Inputs to Refineries .........................7

Figure 2.6 U.S. Refinery and Field Gasoline Production ....................8

Figure 2.7 U.S. Net Imports of Finished Gasoline and Blending Components .........9

Figure 2.8 Gasoline and Crude Oil Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 2.9 Oxygenate Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 2.10 U.S. Weekly Retail Regular Gasoline Prices . . . . . . . . . . . . . . . . . . . . 13

Figure 3.1 PADD 1 and PADD 5 Weekly Retail RFG Prices. . . . . . . . . . . . . . . . . 16

Figure 3.2 PADD 5 Gasoline Supply/Demand Balance . . . . . . . . . . . . . . . . . . . . 18

Figure 3.3 California RFG Minus Gulf Coast RFG Spot Prices . . . . . . . . . . . . . . . . 21

Figure 3.4 Average Monthly Los Angeles Spot Price Minus Crude Oil Price . . . . . . . . 22

Figure 3.5 California Retail and Spot Prices . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Figure 4.1 Monthly PADD 1 Operable Refining Capacity and Gross Inputs . . . . . . . . . 26

Figure 4.2 PADD 1 Adjusted Gasoline Yield . . . . . . . . . . . . . . . . . . . . . . . . . 27

Figure 4.3 Monthly PADD 3 Operable Refinery Capacity and Gross Inputs . . . . . . . . . 31

Figure 4.4 PADD 3 Adjusted Gasoline Yield . . . . . . . . . . . . . . . . . . . . . . . . . 33

Figure 4.5 Monthly PADD 5 Operable Refinery Capacity and Gross Inputs . . . . . . . . . 35

Figure 4.6 Monthy PADD 5 Light-Product Yield . . . . . . . . . . . . . . . . . . . . . . . 36

Figure 4.7 PADD 5 Adjusted Gasoline Yield . . . . . . . . . . . . . . . . . . . . . . . . . 38

Figure 4.8 PADD 5 Distillate, Kerosene, and Jet Kerosene Yield Inputs . . . . . . . . . . . 38

Figure 5.1 Composition of Total Gasoline Imports . . . . . . . . . . . . . . . . . . . . . . 44

Figure 5.2 Weekly Average Spot Gasoline Price Difference Between NY Harbor

and Rotterdam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Figure 5.3 Monthly Total Gasoline Imports By Geographic Source. . . . . . . . . . . . . . 47

Figure 5.4 Monthly Average Spot Gasoline Price Minus Crude Oil Price . . . . . . . . . . 48

Figure 6.1 1997 Weekly U.S. Blending Component & Finished Gasoline Stocks . . . . . . 50

Figure 6.2 1997 Noncommercial Holdings of Gasoline Futures Contracts

and RFG Spot Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Figure 6.3 1997 Noncommercial Holdings of Gasoline Futures Contracts . . . . . . . . . . 51

Figure 6.4 1997 Noncommercial Holdings of Sweet Crude Oil Futures

Contracts and Crude Oil Spot Prices . . . . . . . . . . . . . . . . . . . . . . . . 52

Figure 6.5 U.S. Conventional Gasoline Class of Trade Margins . . . . . . . . . . . . . . . 55

Figure 6.6 Lag Between Retail and Spot Prices . . . . . . . . . . . . . . . . . . . . . . . . 56

Figure B.1 California and U.S. Retail Regular Gasoline Prices . . . . . . . . . . . . . . . . 61

Figure B.2 Annual Refining and Marketing Operating Cost Comparison . . . . . . . . . . . 62

Figure B.3 Annual Return on Investment Comparison . . . . . . . . . . . . . . . . . . . . . 63

Figure C.1 Distillation Curves for Two Crude Oils . . . . . . . . . . . . . . . . . . . . . . 68

Figure C.2 Crude Oil Distillation and Refinery Stream Flow . . . . . . . . . . . . . . . . . 68

Figure C.3 PADD 3 FCC Feed Rate and Light-Product Yields . . . . . . . . . . . . . . . . 69

Figure E.1 PADD 1A Model Versus Actual Results . . . . . . . . . . . . . . . . . . . . . . 82

Figure E.2 PADD 1B Model Versus Actual Results . . . . . . . . . . . . . . . . . . . . . . 82

Figure E.3 PADD 1C Model Versus Actual Results . . . . . . . . . . . . . . . . . . . . . . 83

Figure E.4 PADD 2 Model Versus Actual Results. . . . . . . . . . . . . . . . . . . . . . . 83

Assessment of Summer 1997 Motor Gasoline Price Increase v

Energy Information Administration
Figure E.5 PADD 3 Model Versus Actual Results. . . . . . . . . . . . . . . . . . . . . . . 84

Figure E.6 PADD 5 Model Versus Actual Results. . . . . . . . . . . . . . . . . . . . . . . 84

vi Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
1. Introduction

Gasoline markets in 1996 and 1997 provided several spectacular examples of petroleum market

dynamics. The first occurred in spring 1996, when tight markets, following a long winter of high

demand, resulted in rising crude oil prices just when gasoline prices exhibit their normal spring rise

ahead of the summer driving season. Rising crude oil prices again pushed gasoline prices up at the

end of 1996, but a warm winter and growing supplies weakened world crude oil markets, pushing

down crude oil and gasoline prices during spring 1997. The 1996 and 1997 spring markets

provided good examples of how crude oil prices can move gasoline prices both up and down,

regardless of the state of the gasoline market in the United States. Both of these spring events were

covered in prior Energy Information Administration (EIA) reports.1

As the summer of 1997 was coming to a close, consumers experienced yet another surge in gasoline

prices. Unlike the previous increase in spring 1996, crude oil was not a factor. The late summer

1997 price increase was brought about by the supply/demand fundamentals in the gasoline markets,

rather than the crude oil markets.

The nature of the summer 1997 gasoline price increase raised questions regarding production and

imports. Given very strong demand in July and August, the seemingly limited supply response

required examination. In addition, the price increase that occurred on the West Coast during late

summer exhibited behavior different than the increase east of the Rocky Mountains. Thus, the

Petroleum Administration for Defense District (PADD) 5 region needed additional analysis

(Appendix A). This report is a study of this late summer gasoline market and some of the important

issues surrounding that event.

Chapter 2 provides an overview of U.S. fundamental supply/demand balance movements behind

the summer 1997 gasoline price increase.

Chapter 3 discusses the market on the West Coast, which is essentially independent of the markets

east of the Rocky Mountains.

Chapter 4 provides an in-depth examination of U.S. gasoline production this past summer. The

United States experienced record-high production levels and very high capacity utilization rates,

but aggregate PADD-level information alone can only provide clues as to how close the industry

was to producing at maximum capability. This chapter summarizes a study that examined

individual refineries as well as aggregate information to answer this question.

Chapter 5 provides a closer look at gasoline imports to the United States, which played an important

role in the price increase in the eastern portion of the country.

Assessment of Summer 1997 Motor Gasoline Price Increase 1

Energy Information Administration

1 Department of Energy, An Analysis of Gasoline Markets Spring 1996, DOE/PO-0046, June 1996; Energy Information

Administration, Motor Gasoline Assessment Spring 1997, DOE/EIA-0613, July 1997.
Chapter 6 focuses on the interrelationships among gasoline prices at various levels in the

distribution system and on the futures market. In the futures market, noncommercial traders

(speculators) behaved differently during the late summer price runup than in the past. The chapter

also revisits the connection between spot and retail prices to see if they maintained their normal

relationship through the August runup.

Appendix A lists the states included in each PADD.

Appendix B explores why California prices are frequently higher than average U.S. prices.

Appendix C provides background information on the fundamentals of how crude oil is transformed

into refined products. The discussion includes several demonstrations of how those fundamentals

are applied in developing the results of Chapter 4.

Appendix D is a description of the EIA capacity data used in Chapter 4.

Appendix E contains the technical background for the statistical analysis relating gasoline retail

and spot prices that is summarized in Chapter 6.

Throughout the publication, data mentioned in the text are generally from the following references:

Volume Data: Petroleum Supply Annual (DOE/EIA-0340) and Petroleum Supply Monthly

(DOE/EIA-0109) publications.

Monthly Price Data: Petroleum Marketing Annual (DOE/EIA-0487) and Petroleum

Marketing Monthly (DOE/EIA-0380) publications.

Weekly Retail Price Data: Form EIA-878, “Motor Gasoline Price Survey,” published in the

Weekly Petroleum Status Report (DOE/EIA-0208).

Spot Price Data: Reuters or DRI Platts Data.

2 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
2. Fundamentals Drive Up August Prices

U.S. retail gasoline prices have varied widely in recent years (Figure 2.1). They can fluctuate as

much as 10 cents per gallon seasonally, excluding other market conditions such as crude oil price

changes. Although gasoline prices frequently are driven up by heightened demand relative to

supply in August, the size of the increase nationwide in August 1997 was unusual. New York

Harbor spot prices for reformulated (RFG) and conventional gasoline rose about 20 cents per

gallon from the end of July through August 20, while West Texas Intermediate crude oil prices only

rose about 1 cent per gallon. Conventional retail prices increased about 7 cents, while RFG

increased over 11 cents per gallon. The smaller increase in retail prices compared to spot prices is

mainly due to the typical retail price lag behind spot market price changes (Chapter 6).

Movements in gasoline prices come from changes in the components of price, which are illustrated

in Figure 2.2. In August 1997, crude oil, the primary material from which gasoline is made, cost

$18 per barrel (43 cents per gallon), and represented about 36 percent of the retail gasoline price.

Refining, distribution, marketing, transportation costs and margins were about 32 cents per gallon,

while retail costs and margins amounted to 7 cents per gallon. State and Federal taxes together

came to 39 cents per gallon, excluding percentage-based taxes such as gross earnings taxes.

Changes in the components can derive from regular seasonal variations in the market place as well

as unexpected market changes. Seasonal variations in price stem mainly from changes in the

Assessment of Summer 1997 Motor Gasoline Price Increase 3

Energy Information Administration

90

95

100

105

110

115

120

125

130

135

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Feb-97

Cents per Gallon

Figure 2.1 Weekly Retail Regular U.S. Gasoline Prices

Source: Energy Information Administration, Weekly Retail Outlet Prices, Regular Grade, All Gasoline Formulations

(Conventional, Oxygenated, Reformulated), Form EIA-878, “Motor Gasoline Price Survey.”
refining, marketing, and distribution margins, while some of the more recent, dramatic,

unexpected price increases have come from variations in the crude oil price component.

In 1996 and 1997, consumers saw several large gasoline price changes. A dramatic runup

occurred in spring of 1996, mainly due to sharply rising crude oil prices occurring just when

gasoline prices were increasing seasonally at the beginning of the summer driving season. In

spring 1997, the opposite occurred as crude oil prices fell, pulling gasoline prices downward.

Gasoline prices declined for much of the summer. Then in August 1997, consumers experienced

another unusual price increase, but with different underlying causes than those behind the prior

price changes. While crude oil prices were the main reason for unusual gasoline price behavior in

spring 1996 and spring 1997, crude oil prices were static in August 1997. The remainder of this

chapter will address the factors driving the August gasoline prices upward.

U.S. Supply and Demand Fundamentals

Prices respond to changes in demand and supply. U.S. demand is met through production, net

imports, and changes in inventory levels. If demand outstrips supply from production and net

imports, stocks are drawn to meet the imbalance. If stocks are low in this situation and continuing

to fall, rising uncertainties over supply adequacy can generate “precautionary buying” price

pressure. This section explores how each of the demand and supply elements contributed to the

tightening of the market that eventually drove prices up in August.

4 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

State & Local Taxes

Federal Taxes

Retail Costs & Margins

Refining, Storage,

Transportation,

Marketing Costs &

Margins

Crude Oil

Costs

Retail 120.8 ¢

43¢

32¢

7¢

18¢

21¢

Figure 2.2 Gasoline Price Components

(Conventional Regular Grade, August 1997, Cents per Gallon)

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380(97/12), Tables 1, 32, EN1.

Form EIA-878, “Motor Gasoline Price Survey.”
Inventories Plunged in July Indicating Market Imbalance

Stocks are the component of supply that balance demand with refinery output and net imports. As

such, they serve as a barometer for judging whether the market balance is tightening or loosening.

Buyers watch weekly reports of stock levels for unusual and persistent declines in levels during

periods of high demand. If stocks are falling and approach minimum operating levels (i.e., the level

needed to keep gasoline flowing from refineries to end users), wholesale buyers sometimes become

concerned that supplies may not be adequate over the short term, and willingly bid prices higher to

assure that they have product.

Gasoline inventories began 1997 at very low levels, but high production and exceptionally high

imports exceeded demand, allowing stocks to recover. In May and June, total gasoline stocks, and

RFG stocks in particular, increased to end June at the bottom of the normal range (Figure 2.3). But

during July, the situation changed rapidly. Gasoline stocks plummeted, dropping 15 million

barrels, compared to an average monthly decline (for the 1992-1996 period) of 4 million barrels.

Stocks ended the month at near-record low levels. Gasoline suppliers were left facing August,

which is usually the highest demand month of the year, with virtually no discretionary inventory.

As August progressed, production and import levels did not meet domestic demand and export

needs. Stocks continued to fall in August, ending the month at the lowest level recorded since 1981.

The rest of this section describes how demand and the other supply components contributed to the

tightening market in July as exhibited by the stock decline, and the subsequent August price

increase.

Assessment of Summer 1997 Motor Gasoline Price Increase 5

Energy Information Administration

170

180

190

200

210

220

230

240

Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97

Million Barrels

Normal Range

Actual

July

June

Figure 2.3 U.S. Finished Gasoline and Gasoline Blending Component Stocks

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Table 2.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 2.

Note: Normal range is the 1992-1996 average value for a given month plus or minus one standard deviation of that month ’s

values.
Demand Played a Major Role in July Market Turnaround

Unexpected, very high gasoline demand in July was a major factor behind the August 1997 price

increase (Figure 2.4). Through June 1997, demand1 rose a modest 1.1 percent over levels seen

during the first 6 months of 1996. Gasoline demand typically varies little in July from June levels,

and usually peaks in August. July 1997 demand shot up 211 thousand barrels per day (2.6 percent)

over an already high June demand, reaching a peak not seen since EIA data collection began in

January 1981. The year-over-year July increase was almost 4 percent.

Production Also Contributed to the Market Tightening

As refineries came out of spring maintenance in 1997, stocks were quite low, and seasonal gasoline

margins were higher than normal, which encouraged strong production. From April to May,

refineries increased crude oil inputs 800 thousand barrels per day (Figure 2.5). The year-over-year

increase in May was 640 thousand barrels per day. In PADD 1, which represents only about 10

percent of U.S. capacity, the April to May crude oil input rise was a robust 200 thousand barrels per

day, due in part to the return to operation of the Tosco Trainer refinery in May. U.S. operable

refinery utilization jumped from 92.6 percent in April 1997 to 97.3 percent in May, as refiners

pushed to meet both growing gasoline needs and strong jet fuel and diesel demand. Although

6 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

6,700

6,900

7,100

7,300

7,500

7,700

7,900

8,100

8,300

8,500

8,700

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-1996

July

Figure 2.4 U.S. Motor Gasoline Demand

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Table 3.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 4.

1 Demand in this report is deduced from primary supply and disposition data. It is equal to field production, plus refinery

production, plus net imports, minus refinery inputs, minus stock change.
year-over-year gasoline yields in May had dropped, the high crude oil inputs resulted in the highest

gasoline production since 1981, and the stock situation began to improve.

In June, crude runs were even higher and refinery utilization tipped 97.7 percent, with PADD’s 2

and 3 reaching 103.2 percent and 99.0 percent, respectively, as both high distillate and gasoline

demands were being met. These regional utilizations were exceptionally high and perhaps not

sustainable. U.S. gasoline refinery production broke the May record to average 8,050 thousand

barrels per day. With field production included, total gasoline production averaged 8,180 thousand

barrels per day for the month (Figure 2.6). As in May, gasoline yields in many parts of the country

were lower than in 1996. Production increases were being achieved with increased crude oil inputs.

Gasoline stocks finally grew back into the normal range, as measured by historical stock levels for

June, and gasoline margins began to weaken.

With growing inventories, very high capacity utilizations in some areas, weakening margins, and

recognition that demand growth through June was lower than expected, refiners in PADD’s 1, 2 and

3 reduced production slightly in July. As a result, U.S. production declined from June by 224

thousand barrels per day (2.8 percent). Relative to prior years, July production was still high, and

utilization only fell back to 97.1 percent. PADD 2 and PADD 3 July utilizations were 100.1 and

97.1 percent, while PADD 1 utilization, at 94.4 percent, changed little from June.

In summary, production declines in July, as demand unexpectedly shot up, contributed to the

market tightening that induced the August price increase. July production reflected refiners’

Assessment of Summer 1997 Motor Gasoline Price Increase 7

Energy Information Administration

12,000

12,500

13,000

13,500

14,000

14,500

15,000

15,500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-1996

Figure 2.5 U.S. Crude Oil Inputs to Refineries

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Table 3.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 4.
assessment of the market from the perspective of the weakening market in late June. As July

demand overtook those assessments and prices eventually rose, refiners responded with increased

production in August. U.S. August utilization was 98.6 percent, with PADD 1 at 93.9 percent,

PADD 2 at 102.6 percent and PADD 3 at 99.1 percent. Yet, the magnitude of the August gasoline

production increase did not add sufficient supply to draw prices down. Lower gasoline yields in

summer 1997 than in 1996, high production, and very high utilizations coupled with sustained high

prices led to EIA looking more closely at how refineries operated this past summer (Chapter 4).

The aggregate data begged the question of whether at least part of the August price rise was due to

the U.S. refineries operating at capacity.

Net Imports Fell Through July, Diminishing Supply

Imports, along with production, help explain why the market tightened in late July. Gasoline

imports are an important supply source for the eastern United States. In 1996, over 95 percent of

U.S. imports of finished gasoline and blending components came to the East Coast (PADD 1).

Imports for the first half of 1996 supplied about 17 percent of East Coast gasoline demand, but for

the first half of 1997, imports were even higher, meeting almost 21 percent of the region’s needs.

Refinery turnarounds during the first quarter helped encourage imports. But imports stayed high as

refineries resumed strong production in April and May, running at high utilizations and having

additional volumes from the return of the Trainer refinery in PADD 1. Imports began to fall after

8 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

6,700

6,900

7,100

7,300

7,500

7,700

7,900

8,100

8,300

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-1996

July

Figure 2.6 U.S. Refinery and Field Gasoline Production

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Table 3.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 4.
peaking in May 1997 at 664 thousand barrels per day, tumbling 109 thousand barrels per day in

June and another 125 thousand barrels per day in July. July imports averaged 430 thousand barrels

per day, 77 thousand barrels per day less than the previous year.

Most of the decline in June and July stemmed from a drop in European imports, which were

discouraged by U.S. East Coast market prices declining relative to European prices. The high U.S.

imports and production in May and June weakened the market, causing prices and margins in the

U.S. to decline. Although European prices also fell in June, U.S. prices fell faster, thus decreasing

the incentive for Europeans to ship gasoline to the United States (Chapter 5).

U.S. gasoline exports, which are much smaller than imports, increased in July about 60 thousand

barrels per day over June to average 175 thousand barrels per day, but most of the increase was from

the West Coast (Chapter 3). Exports had little effect on eastern U.S. markets. Because of the

relative size of imports to exports, U.S. net imports followed the pattern of imports over the

summer 1997; however, the falloff in July is slightly exaggerated by the increase in exports (Figure

2.7).

In conclusion, declining imports were another important contribution to the market reversing from

weak in June to tight by the end of July. With August being near the end of the gasoline season, and

uncertainty over how long prices would remain elevated, buyers and sellers were reluctant to

commit to additional imports. August net imports only rose 53 thousand barrels per day over July.

Assessment of Summer 1997 Motor Gasoline Price Increase 9

Energy Information Administration

0

100

200

300

400

500

600

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-1996

July

Figure 2.7 U.S. Net Imports of Finished Gasoline and Blending Components

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Table 3.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 4.
Thus, not only did falling imports in June and July play a role in adding to the market tightening in

late July, they also played little role in resolving the tightness in August.

Gasoline Prices Responded to Change in Market Balance

Despite relatively flat crude oil prices during summer 1997, spot gasoline prices responded to the

dramatic increase in July gasoline demand and drop in inventories by turning up sharply at the end

of summer (Figure 2.8). Spot gasoline prices had been climbing slowly since late June as markets

began to tighten. Towards the end of July, gasoline spot market prices began to rise sharply, as

buyers were confronted with rapidly expanding consumption and declining stocks. With little

discretionary inventory left, and facing the prospect of even higher demand in August, prices rose

rapidly as market fundamentals tightened and precautionary buying added upward pressure.

During one week, from July 24 to July 31, New York Harbor spot conventional gasoline prices rose

over 10 cents per gallon.

In late July and early August, numerous refinery problems were reported. Uncertainties in the

timing and duration of a maintenance shutdown of the Tosco Bayway refinery’s large fluid catalytic

cracking unit, a key East Coast supply source, added buying pressure, as did a fire at Exxon’s

Baytown refinery, problems at two of PDVSA’s (Venezuela’s) export refineries, and a subsequent

10 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

30

40

50

60

70

80

90

100

1/2/972/3/973/5/974/4/975/6/976/5/977/7/978/6/979/5/97

10/7/9711/6/9712/8/97

Cents per Gallon

U.S. Retail Regular (excl. taxes)

N.Y. Spot

Conventional

West Texas

Intermediate Crude Oil

Figure 2.8 Gasoline and Crude Oil Prices

Source: Spot Prices: Reuters Daily Spot Prices; Retail Prices: Energy Information Administration, Weekly Retail Outlet,

Regular Grade, All Formulations (Conventional, Oxygenated, Reformulated), Form EIA-878 “Motor Gasoline Price

Survey,” less estimated taxes of 38 cents per gallon.
declaration by Venezuela of force majeure on up to nine cargoes of gasoline scheduled for August

delivery to the United States. In addition, three major refineries in Europe experienced catalytic

cracking unit problems during this same time, signaling that little supply relief would come from

that important source of gasoline imports.

Although demand dipped somewhat in August, supply increases from production and imports were

insufficient to cover continuing relatively high domestic demand and export requirements. As a

result, inventories continued to decline, albeit at a slower rate than in July. Prices continued to rise

through the first part of August. New York Harbor spot prices increased about another 10 cents per

gallon from July 31 to August 20, when they peaked at almost 77 cents per gallon, or about 20 cents

higher than in late July.

On top of the gasoline supply/demand fundamentals, oxygenates also added to gasoline price

pressure. Methyl tertiary butyl ether (MTBE) supply problems pushed MTBE prices up, which, in

turn, elevated RFG prices faster than those for conventional gasoline (See Sidebar - 1997

Oxygenate Markets). MTBE spot prices averaged 4 cents per gallon higher in June than in May due

to supply problems, and rose further in July to average 11 cents per gallon higher than June. These

increases could add about 2 cents per gallon to the price of RFG versus conventional, all other

factors being equal. However, RFG prices increased more than would be expected from the rising

cost implications of MTBE. RFG spot prices in New York held at about 2.5 cents per gallon over

conventional in June, but spiked briefly in the later part of July to about 6 cents per gallon over

conventional. In August, MTBE prices began to fall, and RFG prices quickly receded to a 2.5-3.0

cent differential over conventional.

Along with rising MTBE values, the strong New York Harbor spot RFG price response relative to

conventional gasoline during this period was affected by the strong dependence of East Coast RFG

supply on distant sources like imports, which cannot quickly fill unexpected needs. Imports, the

most distant supply source, supplied about 31 percent of East Coast RFG demand in 1997, and

other U.S. regions (mainly PADD 3) supplied another 30 percent of East Coast RFG demand. With

rising MTBE prices, dwindling stocks, and little production close at hand, RFG buyers on the East

Coast bid prices up in an effort to assure their needs would be met.

The impact of increases in spot and wholesale prices in late July and the first three weeks of August

showed up at the retail level in August and the first part of September (Figure 2.10). While retail

prices nationwide rose less than spot prices, as is typically the case, they nevertheless rose to an

unusual degree during this period (Chapter 6). With demand receding from high summer driving

levels after Labor Day, prices softened and continued to fall through year end.

In summary, 1996 and 1997 exhibited crude-driven and gasoline market-driven price changes. The

two crude-driven situations (spring 1996 and spring 1997) were described in earlier reports. Table

2.1 summarizes the similarities and differences between the two spring markets and the

gasoline-driven August 1997 market.

The nature of the summer 1997 price increase raised questions regarding production and imports,

requiring an EIA examination of the factors contributing to the relatively weak supply response. In

addition, the price increase that occurred on the West Coast in late summer 1997 exhibited different

Assessment of Summer 1997 Motor Gasoline Price Increase 11

Energy Information Administration
behavior than seen in the rest of the country. The remaining chapters of the report provide the

results of the EIA work in these areas.

12 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

1997 Oxygenate Markets: Ethanol Quiet, MTBE Volatile

Ethanol prices were fairly stable during August, as they were through most of 1997,

fluctuating in a narrow band around $1.20 per gallon (Figure 2.9). In the United States, corn is

the primary source for fuel ethanol, and for most of the year corn prices traded in a range

between $2.50 and $3.00 per bushel. In contrast, spot corn prices in 1996 had varied

between $2.50 and $5.25 per bushel, and ethanol prices were correspondingly much more

volatile than MTBE prices.

In July 1997, it was MTBE that had a sharp price runup, peaking at 96 cents per gallon, 22

cents per gallon higher than its low point in April. Methanol is an important feedstock for

making MTBE, and it rose in price in July to 66 cents per gallon, 8 cents higher than in June. In

addition, plant outages in August decreased the supply of MTBE, keeping prices elevated

over 90 cents per gallon through much of August. The price spike in MTBE added to the

overall cost of gasoline in August.

60

70

80

90

100

110

120

130

140

150

160

Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97

Cents per Gallon

Ethanol

MTBE

Figure 2.9 Oxygenate Prices

Source: “Octane Week Price Report,” Octane Week, Hart Publications, Arlington, VA, Various Issues.
Assessment of Summer 1997 Motor Gasoline Price Increase 13

Energy Information Administration

90

95

100

105

110

115

120

125

130

135

140

Jan-95 Jan-96 Jan-97

Cents per Gallon

RFG

Conventional

Figure 2.10 U.S. Weekly Retail Regular Gasoline Prices

Source: Energy Information Administration, Retail Outlet, Regular Grade, Form EIA-878, “Motor Gasoline Price Survey.”
14 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 2.1 July-August 1997, Spring 1997, and Spring 1996 Summary Market

Comparison

Markets January-April 1996 January-April 1997 July-August 1997

Crude Oil Markets Began 1996 under

$20/barrel.

Began 1997 about

$26/barrel after

high-demand fourth

quarter.

Began July just over

$20/barrel after a slight

increase at the end of

June.

Tight: Prices rose February

thru April with cold weather

and lack of expected

supplies.

Weakening: Prices fell

January through April with

strong supplies relative to

demand.

Flat: Market stayed

relatively constant. West

Texas Intermediate (WTI)

fell back in July, averaging

$19.66. August WTI

averaged $19.95.

Backwardation was steep

(decreasing term structure of

crude oil futures contracts).

Term structure of crude oil

futures was flattening.

Futures market was in

contango (increasing term

structure) during July and

August.

U.S. Gasoline

Supply/Demand Balance

Demand growth was modest

(1.1 percent).

Demand growth was low to

modest (0.8 percent).

Demand growth was

modest through June

(1.1%), but shot up in July

(3.7% over July 1996).

Third quarter demand in

1997 averaged 2.1%

higher than in 1996.

Demand level was

seasonally high (7,601

thousand barrels per day).

Demand level was

seasonally high (7,658

thousand barrels per day).

Demand level was record

high in July (8,471

thousand barrels per day);

fell back slightly in August

(8,195 thousand barrels

per day).

Production growth was

modest.

Production growth was

modest.

Production in July was

higher than previous July,

but 233 thousand barrels

per day less than

record-high June

production.

Imports were high through

the market event (met 6.0

percent of national demand).

Imports were very high

through the entire event

(met 7.7 percent of

demand).

Imports began very high,

but fell rapidly in June and

July. Met 8.2 percent of

demand in May, 6.7

percent in June, and 5.1

percent in July.

Stocks were low. Stocks were very low. Stocks recovered to

normal levels in June, but

dropped well below the

normal range in July and

reached record lows in

August.

Gasoline Price

Components

Increasing crude oil prices

pushed gasoline prices up.

Falling crude oil prices

brought gasoline prices

down.

Flat crude oil prices did not

affect gasoline prices.

Spot spreads were mainly at

or below seasonal norms.

Spot spreads were slightly

above seasonal norms.

Spot spreads moved from

below seasonal norms in

June to slightly above in

July, and well above

seasonal norms in August.

Source: Energy Information Administration
3. PADD 5 August Gasoline Markets

PADD 5 covers the western region of the United States and represents about 17 percent of the

nation’s gasoline demand (Table 3.1). It is relatively isolated from other PADD’s in terms of

petroleum supply. Pipeline connections from other PADD’s reach only a very limited area in the

region, and tankers from the Gulf Coast must transit the Panama Canal. In addition, major product

import sources, such as Europe, are a long distance from the West Coast. As such, refineries within

PADD 5 supply almost all of the region’s needs. Isolated markets even exist within the PADD,

such as Alaska and Hawaii. California is also somewhat isolated because of its use of a unique

clean-burning fuel -- California reformulated gasoline (CaRFG). This single state consumes over

10 percent of the gasoline sold in the United States, and produces most of PADD 5’s gasoline.

Since the inception of the CaRFG program, PADD 5 prices often rise higher and fall farther than

average U.S. prices (Appendix B). They also sometimes move at different times and for different

reasons than prices in markets east of the Rocky Mountains (Figure 3.1). In late summer 1997, the

West Coast experienced a price increase about the same time as the rest of the country. CaRFG spot

prices rose almost 29 cents per gallon from late July to peak just after Labor Day. The increase

lasted longer and was over 9 cents more than for New York Harbor spot RFG. After peaking at 89

cents in early September 1997, CaRFG spot prices fell by about 35 cents in about 5 months. Retail

prices lagged behind the changes in spot prices, beginning their rise and peaking later. Because

retail prices pick up prior spot price changes over a longer period of time, retail prices don’t

Assessment of Summer 1997 Motor Gasoline Price Increase 15

Energy Information Administration

Table 3.1 1997 Gasoline Supply and Demand Summaries by PADD

(Thousand Barrels per Day)

PADD Demand Total

Production

Total

Imports

Total

Exports

Tot Net

Receipts

1 2,830 992 481 4 1,581

2 2,411 1,928 3 1 541

3 1,131 3,371 11 124 (2,208)

4 258 249 1 - 10

5 1,377 1,323 9 21 77

Total 8,007 7,863 505 150

PADD Shares (Percent)

1 35.3% 12.6% 95.2% 2.7%

2 30.1% 24.5% 0.6% 0.7%

3 14.1% 42.9% 2.2% 82.7%

4 3.2% 3.2% 0.2% 0.0%

5 17.2% 16.8% 1.8% 14.0%

Total 100.0% 100.0% 100.0% 100.0%

Source: Energy Information Administration, Petroleum Supply Annual, DOE/EIA-0340(96)/1, Tables 5, 7, 9, 11, and 13.

Notes: Total production is refinery plus field production. Total imports, total exports, and total net receipts are finished

gasoline plus blending components.
normally rise as much as spot prices (Chapter 6). PADD 5 conventional prices only rose about 11

cents per gallon, while CaRFG rose about 19 cents.

Although the West Coast increase occurred about the same time as the increase in the rest of the

country, the causes were not entirely the same. The remainder of this chapter explains the factors

behind the PADD 5 gasoline markets in August 1997.

PADD 5 Supply and Demand Fundamentals

As discussed in Chapter 2, prices respond to changes in demand and supply. At a PADD level,

gasoline demand is met by the supply components of production within the PADD, net imports into

the PADD, net flow of production from other PADD’s, and changes in PADD inventory levels

absorbing the imbalances. The next part of this chapter examines each of these supply and demand

elements individually to help explain the roles they played in the August price runup.

Stocks: The Measure of Supply/Demand Balance

Gasoline stock levels and changes in stock levels reflect the relative tightness of the gasoline

market. If inventories are falling, demand is exceeding production, net imports, and net receipts

from other PADD’s, and stocks are being drawn to meet demand. When stocks have fallen to a low

level, especially in a high demand season, the market is considered tight, and buyers bid prices up to

16 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

100

110

120

130

140

150

160

1/2/953/2/955/2/957/2/959/2/95

11/2/95

1/2/963/2/965/2/967/2/969/2/96

11/2/96

1/2/973/2/975/2/977/2/979/2/97

11/2/97

Cents per Gallon

PADD 5

PADD 1

Figure 3.1 PADD 1 and PADD 5 Weekly Retail RFG Prices

Source: Energy Information Administration, Weekly Retail Outlet, Regular Grade, Form EIA-878, “Motor Gasoline

Survey.”
assure supply. These increasing prices provide additional stimulus for new supply —whether from

imports or higher production.

West Coast stock levels were an exaggeration of national inventory behavior during summer 1997

(Figure 3.2). Inventories in March were below normal levels, but rose to end May well above

normal. During June, stocks fell back to within the normal band, still comfortably high. As in the

rest of the country, the market turned around in July. Inventories plunged 2.8 million barrels, which

is 11 times the average drop for the month. Stocks ended July well below normal, leaving little

stock cushion for August, typically the peak-demand month in PADD 5. The next sections discuss

the role of each of the demand and supply components in producing the large stock draw and

subsequent price increases.

Demand Kept Pressure on the Market, But Added No Surprises

Through April of 1997, demand in PADD 5 had been at or below the prior year’s levels, but the

situation reversed during the summer (Figure 3.2). Demand picked up after April, averaging 2.2

percent higher in May through September than in 1996. Compared to 1996, 1997 PADD 5 demand

followed a more typical seasonal pattern, building from a low point in January to peak in August.

Strong summer demand after a weak spring can surprise refiners. In PADD’s 1, 2, and 3, demand

stayed weak through June, but surged unexpectedly in July. In contrast, summer demand in PADD

5 was generally strong, with no specific month standing out. Demand alone cannot explain the

sharp drop in July inventories and market tightening.

Production Limits Reached in Major Refining Centers

PADD 5 gasoline production in February and March 1997 was much lower than in 1996 due to

refinery operating problems, including a large explosion and fire at Tosco’s Avon, California

refinery. With stocks ending March below normal, refiners pushed production hard to meet rising

summer demand. However, strong PADD 5 production exceeded weak demand during April and

May, resulting in a large stock build and declining prices. With excess stocks at the end of May and

weak prices, refiners cut back on production in June, and stocks fell back into the normal range. In

July, stocks continued to fall, even though refiners increased production substantially in

anticipation of export needs and growing demand. While some refinery problems were reported in

late July, they were not large enough to prevent refinery production in July from hitting the highest

monthly gasoline production recorded since January 1981.1 Refinery production stayed high in

August, before falling off as summer driving demand receded.

Assessment of Summer 1997 Motor Gasoline Price Increase 17

Energy Information Administration

1 Note that Figure 3.2 shows field production plus refinery production. While total production was higher in August than

in July, refinery production peaked in July.
With the exception of June, refineries in the major refining areas of Los Angeles, San Francisco,

and Puget Sound produced gasoline at or near their maximum capability (Chapter 4). The only way

they could have produced more would have been to cut back on distillate production, but refiners

were balancing growing jet fuel and diesel needs with gasoline over the summer.

Net Receipts Explained Little of the Late Summer Tightening

PADD 5 receives some product from PADD’s 3 and 4, mainly by pipeline, but these pipelines do

not feed the major consuming area of California. In 1996, pipelines from PADD’s 3 and 4 delivered

46 and 22 thousand barrels per day, respectively, of gasoline into PADD 5. Tankers from PADD 3

delivered another 13 thousand barrels per day to the West Coast. As is usually the case, very little

gasoline (4 thousand barrels per day) moved from PADD 5 to other PADD’s in 1996.

18 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Figure 3.2 PADD 5 Gasoline Supply/Demand Balance

Total Stocks PADD 5

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97

Thousand Barrels

Normal Range

Actual

June to

July drop

Demand PADD 5

1,200

1,250

1,300

1,350

1,400

1,450

1,500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-96

Total Production PADD 5

1,150

1,200

1,250

1,300

1,350

1,400

1,450

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-96

Total Net Imports PADD 5

-100

-50

0

50

100

150

200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thousand Barrels per Day

1997

1996

Average 1992-96

Source: Energy Information Administration, 1992-1996: Petroleum Supply Annual, DOE/EIA-0340(92-96)/2, Tables 12,

13. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 22, 24.

Notes: Normal range is the 1992-1996 average value for a given month plus or minus one standard deviation of that

month’s values. Total stocks and total net imports include finished gasoline and blending components. Total production is

field production plus refinery production.
In 1997, net receipts into PADD 5 ran similarly to net receipts in 1996 through June. July 1997 net

receipts ran 30 thousand barrels per day lower than in July 1996 as gasoline demand soared in areas

east of the Rocky Mountains, but, in August, net receipts quickly moved back in line, averaging

only 7 thousand barrels per day above average August volumes, and over 10 thousand barrels per

day below the August 1996 volumes. Large gasoline volumes from other PADD’s have not

historically materialized when unexpected problems arise in PADD 5, in spite of attractive

short-term prices, as is discussed below. Thus, net receipts contributed very little to the market

tightening in July or the subsequent relief.

Imports Offered Little Relief

Due to the long distance from major gasoline export areas like Europe and the limited number of

export refineries that can produce CaRFG, imports are not a major supply source for PADD 5. For

example, in 1996, PADD 5 gasoline imports only averaged 15 thousand barrels per day.

When supply problems occur in PADD 5, product cannot arrive quickly from other PADD’s or from

other countries. Even if only conventional gasoline is needed, shipping time is about 14 days from

the Gulf Coast, and can be as much as 30 days from foreign sources. If CaRFG is needed, an

additional 7 to 10 days is required for refineries to produce the unique fuel.2 The lack of

immediately available outside supply is a factor in the market psychology driving PADD 5 prices

up during a tight market. Buyers are willing to pay more in the short term to assure supply, and

prices tend to be bid up for longer periods of time than would be the case if new supply were near at

hand.

For a seller outside of the region to break even financially on a delivery to PADD 5, the gasoline

price in PADD 5 must rise high enough over the seller’s regional price to cover the additional

transportation cost to get the product to the West Coast, and, in the case of CaRFG, the additional

production cost. Transportation cost alone from the Gulf Coast/Caribbean areas to California is

5-10 cents per gallon. Transportation from other countries can run even higher. When a

supply/demand balance problem drives prices up, either the buyer or the seller must take the risk

that prices will stay up long enough for the cargo of distant gasoline to arrive before prices fall back.

Shipping and production time require gasoline prices to stay up 2 to 3 weeks, which is a risk many

buyers and sellers are not willing to make.

Although PADD 5 prices surged in August 1997, no imports were attracted to the area for the

reasons stated above, and because prices in other parts of the United States had also surged,

competing for the same import barrels. However, PADD 5 August imports are normally very low,

averaging 6 thousand barrels per day in 1992-1996. In conclusion, imports neither hurt nor helped

the California markets in July and August 1997.

Assessment of Summer 1997 Motor Gasoline Price Increase 19

Energy Information Administration

2 California Energy Commission, California Air Resources Board, Motor Vehicle Fuel Price Increases, January 1997, p. 13.
Exports Provided a Piece of the Puzzle

Over the course of a year, gasoline exports from PADD 5 average about the same as imports.

Mexico and Canada are usually the two biggest destinations for these exports, accounting for 56

percent of the total in 1996. Japan received an additional 13 percent.

Exports in 1997 showed a deviation from the normal pattern. Exports increased in June and peaked

in July before falling back to more typical levels in October (Table 3.2). The increase in exports

above average in July alone was 52 thousand barrels per day, which if supplied from stocks alone,

would require a 1.7-million-barrel stock draw. Exports played a much larger role in contributing to

the August market tightness in PADD 5 than they played in areas east of the Rocky Mountains.

The reason for the increased exports during summer 1997 was the weak early summer market, as

production and net receipts outstripped demand. Markets were weaker on the West Coast in May

and June than on the East Coast. Spot prices for CaRFG on the West Coast dropped below RFG

prices on the East Coast, despite the higher production costs for CaRFG.

CaRFG spot prices remained depressed from May until the last week in July (Figure 3.3).

Furthermore, spot conventional prices in California dropped uncharacteristically below those in

Singapore through June and into July. Not surprisingly, with building inventories and attractive

prices abroad, several companies contracted to export gasoline. Most exports are contracted for

well in advance of when shipments leave the country. Thus, the weak prices in May encouraged

exports during June, and continued weak prices in June encouraged even more exports in July.3

20 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 3.2 1997 Export Destinations from PADD 5

(Thousand Barrels per Day)

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Average

Canada 2.5 6.8 6.5 2.9 3.5 4.8 17.8 17.8 2.3 2.6 2.6 2.6 6.1

Mexico 0.8 0.6 7.5 1.2 1.1 1.1 8.8 11.9 6.3 11.6 12.3 22.6 7.2

Japan 0.0 0.0 2.4 0.0 2.5 14.7 2.2 2.8 0.0 0.0 0.0 0.0 2.1

Taiwan 0.0 0.0 0.0 0.0 0.0 0.0 25.3 0.0 0.0 0.0 0.0 0.0 2.1

Ecuador 0.0 0.0 0.0 0.0 0.0 7.3 7.1 0.0 7.2 0.0 0.0 0.0 1.8

Other 0.0 1.8 3.5 0.0 0.0 1.4 0.0 4.7 0.0 2.8 3.0 0.0 1.4

Total 3.4 9.1 20.1 4.1 7.1 29.4 61.2 37.2 15.9 17.1 17.9 25.2 20.8

Average

1992-96

18.4 15.8 16.2 9.8 7.2 3.2 9.4 8.6 4.4 14.0 21.0 30.0 13.2

Source: U.S. Bureau of the Census.

3 Gasoline exports to Japan and Ecuador in June accounted for much of the U.S. export increase over May. In July,

Canada, Mexico, Taiwan and Ecuador stand out. In August, Canada and Mexico continued to attract U.S. exports.

Mexican import volumes from the United States were not unusually high, but Canadian volumes were much higher than

normal in both July and August. Reports of refinery problems in Ecuador and Canada in July and August were probably the

major factors setting attractive prices in these areas.
The unusual export volumes that occurred during summer 1997 point out a peculiarity of the West

Coast market: industry has readily available consuming markets to take excess supply, but few

readily available producing sources to supply PADD 5 gasoline consumption. Apart from distance,

product specifications also work to make it easier to export than import. PADD 5 product

specifications can meet other countries’ needs, but most other countries can only meet PADD 5

conventional requirements. Export shipments in June through August were all reported as

conventional or blending components. No product requiring RFG specifications was exported.

However, if the price is right, even CaRFG can be used to supply conventional gasoline export

markets.

Prices Responded to the Change in Supply/Demand Balance

In PADD 5, the origin of the tight market that occurred in late summer was the well-supplied market

earlier in the year. After spring refinery turnarounds, with some accompanying operational

problems, production rebounded in April and May to very high seasonal levels. Supplies quickly

caught up with the lackluster demand growth that characterized the first part of 1997. Stocks

shifted from seasonally low levels in March to high levels in April and May. Spot prices and

spreads (spot gasoline minus spot crude oil price) correspondingly plummeted with the excess

gasoline supply (Figure 3.4). Prices on the West Coast during May, June and July were much

weaker than in areas east of the Rocky Mountains. Exports were being considered, as prices in

other markets became more attractive than in California. In June, refiners began cutting back on

production and continued to look for export opportunities. The slowing in production and

increasing exports brought stocks back down toward the normal range, but price spreads continued

Assessment of Summer 1997 Motor Gasoline Price Increase 21

Energy Information Administration

-15

-10

-5

0

5

10

15

20

25

30

35

40

Jan-96 Apr-96 Jul-96 Oct-96 Jan-97 Apr-97 Jul-97 Oct-97

Cents per Gallon

Figure 3.3 California RFG Minus Gulf Coast RFG Spot Prices

Source: Reuters RFG Regular Grade Daily Spot Prices.
to remain low. By the end of June, stocks were solidly in the middle of the normal historical range;

however, prices had not improved for refiners.

In July, refiners increased production to record levels, both to meet the export obligations to which

they were already committed and to meet continuing strong demand. For the first part of the month,

weekly reports showed little change in stock levels. One mid-month report cited a refiner as saying

that the very high production was essentially negating any impact the exports might have on the

market.4 However, the market shifted during the second half of July. Stock levels began dropping

rapidly, and ended July 2.8 million barrels lower than June ending stocks, which is about 11 times

the average drop during July. Prices began to increase, but were only recovering to normal levels

by the end of the month.

In concert with the rest of the United States, the markets in the West faced the largest gasoline

demand month, August, with low and rapidly dropping stocks, in spite of high refinery production.

Stocks continued to decline during the first two weeks of August and spot prices rose rapidly.

Through the month, refiners were able to keep production at high levels. Exports were not as high

in August as in July, but remaining export commitments kept export volumes in August higher than

22 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

0

5

10

15

20

25

30

35

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents per Gallon

Actual Average 1992-96

Figure 3.4 Average Monthly Los Angeles Spot Price Minus Crude Oil Price

Source: DRI Platt’s Spot Prices for Los Angeles Regular Conventional Gasoline and West Texas Intermediate Crude Oil.

4 Oil Price Information Service, PAD 4/5 Overview, (Rockville, MD: July 14, 1997), p 9.
average. Stocks ended August lower than in July, but the strong production push and receding

export volumes kept stocks from dropping as much as they normally would have during that month.

In September, the supply/demand balance had recovered, stocks began rebuilding, and spot prices

finally fell back.

Spot prices in California reflected conditions throughout West Coast markets in summer 1997

(Figure 3.5). Spot CaRFG prices rose over 29 cents per gallon from the end of July to peak at 89

cents around Labor Day. They then declined as driving demand fell in September faster than

production and net imports declined.

Retail prices in California, as in other parts of the country, exhibited a consistent lag relationship

with spot prices (Chapter 6). The change in one week’s retail price reflects spot price changes over

the prior two months. This lag relationship has the effect of keeping retail prices from rising or

falling as much as spot prices. It also sometimes causes a visual distortion that makes it appear as

though the retail price is staying up longer than it should. EIA calculations showed that in the last

summer price runup in PADD 5, the California RFG retail price relationship to spot price was

consistent with historical behavior. That is, the lag relationship held when spot prices rose as well

as when they declined, giving rise to the asymmetric pattern seen in Figure 3.5.

Assessment of Summer 1997 Motor Gasoline Price Increase 23

Energy Information Administration

50

60

70

80

90

100

110

Jan-95

Apr-95

Jul-95

Oct-95

Jan-96

Apr-96

Jul-96

Oct-96

Jan-97

Apr-97

Jul-97

Oct-97

Cents per Gallon

Retail RFG (excl. taxes)

Los Angeles

Spot RFG

Figure 3.5 California Retail and Spot Prices

Source: Retail Regular RFG Prices: Energy Information Administration, Form EIA-878, “Motor Gasoline Survey,” less

estimated taxes of 45 cents per gallon. Spot Prices: Reuters Los Angeles Regular RFG daily prices.
4. Focus on Refinery Production

Through much of the 1990’s, petroleum product demand has grown year to year, and refinery

utilization has been high during the summer months. The sharp price increase in August 1997

raised the question of whether gasoline production limits were being reached, and if so, were part of

the reason for the price increase. This chapter looks into summer 1997 production in depth to better

understand what occurred operationally in this supply sector.

In analyzing refinery gasoline production over the summer of 1997, the objectives were to

determine:

• How close gasoline production was to maximum production capability;

• Whether gasoline and other light-product yields were decreasing due to running at high

utilizations (Appendix C).

EIA data aggregated to a PADD level and individual refinery data were both analyzed to explore

these issues.1

To estimate how close production was to maximum capability, refinery utilization of both

distillation and downstream units (fluid catalytic cracking units, hydrocrackers, and cokers) were

analyzed. The refinery capacity utilization most commonly listed is based on use of atmospheric

distillation capacity, but the availability of downstream conversion capacity is even more important

in assessing how close light product production is to maximum capability. EIAmonthly data on the

feed rate to fluid catalytic cracking units (FCC’s), hydrocrackers, and cokers were analyzed as a

percent of refinery feed of crude and unfinished oils to determine if capacity of these downstream

units may be limiting light product production.

Declines in light-product yields can be an indication of encountering downstream capacity limits. If

crude oil input to refineries rises and capacity utilization increases, then some refineries may have

insufficient capacity in key downstream conversion units to handle larger intermediate stream

volumes. These refineries with insufficient downstream capacity would suffer yield declines of

high-valued, light products. Yield trends for all light products (gasoline, jet fuel, diesel, and other

middle distillates) were analyzed to find any evidence of yield declines and potential association

with unit capacity limitations. Changing to a heavier crude oil (lower API gravity) can also

produce yield declines, but if capacity is available to meet the need for increased throughput to such

units as FCC’s and cokers, the yield decline could be very minor.

Assessment of Summer 1997 Motor Gasoline Price Increase 25

Energy Information Administration

1 Refinery data in PADD’s 1,2,3, and 5 were reviewed. PADD 4, which contains about 3 percent of total U.S. refinery

production, was not covered in this study.
Gasoline Production in PADD 1 Could Have Been Higher

Over 90 percent of the PADD 1 refinery capacity is concentrated in New Jersey and the Delaware

River Basin. The production from these refineries is consumed in the Middle Atlantic and New

England states.

In 1997, PADD 1 refinery capacity reached its highest level since 1986 with the return to operation

of the Tosco Trainer refinery (formerly the BP Marcus Hook refinery) in Pennsylvania in May, and

the increase in distillation capacity at Bayway by Tosco. Operable capacity utilization rates, based

on inputs to atmospheric distillation, reached 97.4 percent in September, and averaged 94.6 percent

during May through September (Figure 4.1). Although crude oil inputs were high, they could have

been higher for the months June through August 1997. Refinery input levels in these months may

have been set based on early summer estimates of regional summer gasoline demand, which were

lower than what actually occurred. Also, refinery operating problems restricted inputs in some

refineries during July and August.

26 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Jan-86Jan-87Jan-88Jan-89Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97

Thousand Barrels per Day

Capacity

Gross Input to

Distillation

Figure 4.1 Monthly PADD 1 Operable Refining Capacity and Gross Inputs

Source: Energy Information Administration, 1986-1996: Petroleum Supply Annual, DOE/EIA-0340(86-88)/2, Table 11,

DOE/EIA-0340(89-96)/2, Table 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 28.
PADD 1 refinery gasoline production in May through September 1997 was up compared to 1996

and 1995 as a result of increased refinery inputs. The average May through September gasoline

yield2 was also higher than in 1996, primarily because of a very high level of production in

September 1997 (Figure 4.2). In the earlier part of the summer of 1997, refiners were running at

lower gasoline yields and higher jet fuel and distillate yields than for the prior two summers. Thus,

PADD 1’s stronger emphasis on distillate production in early and mid-summer appears to have

been more based on a perception of market needs than on any limitations of refinery capability.

Gasoline production could have been higher in mid-summer 1992 in PADD 1, if not for two

factors:

• PADD 1 refiners seem to have been focused on higher summer distillate production to meet

higher jet fuel demand and to avoid the low distillate stock situation at the end of summer such as

occurred in 1996;

Assessment of Summer 1997 Motor Gasoline Price Increase 27

Energy Information Administration

40

42

44

46

48

50

52

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Volume Percent

1997

1996

1995

Figure 4.2 PADD 1 Adjusted Gasoline Yield

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 5 and

16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 8 and 28.

Note: Adjusted Yield is derived from Adjusted Production which equals refinery gasoline production minus inputs of

butane, oxygenates, and net inputs of gasoline blending components divided by crude oil plus net inputs of unfinished oils.

2 The yields used in this study are derived from “adjusted production” which equals refinery gasoline production minus

inputs of butane, oxygenates, and net inputs of gasoline blending components. The purpose of the adjustment is to separate

the gasoline produced from crude oil and net unfinished oil inputs from that produced from materials brought into the

refinery exclusively for additions to the gasoline pool. The volume of the gasoline components removed from refinery

production varies seasonally, and gasoline blending components may be added at a terminal, never entering the refinery.
• High availability of gasoline imports and only moderate gasoline demand growth were assumed

for the remainder of the summer. (As discussed in Chapter 2, that assumption turned out to be

incorrect.)

There was no indication from the analysis of PADD-level or refinery-specific data that downstream

capacity limitations negatively impacted gasoline yield in the summer of 1997 in PADD 1. After

taking into consideration changes in crude oil gravity, unfinished oil inputs, gasoline/distillate

ratios, and the Tosco Trainer refinery coming back on stream, FCC throughput as a percentage of

crude and unfinished oils indicated an ability to handle the volume of FCC feed that refiners wished

to charge (Table 4.1). Total light-product yield (gasoline, kerosene, jet fuel, and distillate) in

summer 1997 exceeded 1996 levels. This is in keeping with FCC capacity availability and the use

of a higher gravity crude charge in 1997 versus 1996.

While PADD 1 FCC capacity was not viewed as a constraint to light product production in summer

1997, estimated summertime FCC capacity utilization appeared to be approaching the maximum

level. However, it is difficult to know the precise maximum input capacity for FCC’s in PADD 1.

Downstream unit capacity data is only collected every two years, and there has been some

28 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 4.1 PADD 1 Summer Refinery Inputs and Gasoline Production

May-Sept

1995

May-Sept

1996

May-Sept

1997

Operable Capacity (MB/D) 1572 1431 1642

Crude Input (MB/D) 1542 1366 1582

Crude Gravity (°API) 31.2 31.4 32.6

Net Unfinished Oil Inputs (MB/D) 106 101 108

Gross Inputs to Distillation (MB/D) 1490 1326 1554

Operable Utilization Rate (%) 94.8% 92.6% 94.6%

N-Butane + Oxygenate + Net Blending Stock

Inputs (MB/D)

90 195 275

FCC Feed Percent (1) 36.3% 38.1% 37.2%

Hydrocracker Feed Percent (1) 4.5% 4.1% 3.0%

Coker Feed Percent (1) 4.7% 5.6% 5.1%

Adjusted Gasoline Production (MB/D) (2) 741 644 750

Adjusted Gasoline Yield (1) 45.0% 43.9% 44.3%

Jet, Kerosene & Distillate Yield (1) 30.1% 31.1% 32.7%

Total Light-Product Yield (1) (3) 75.1% 75.0% 77.0%

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 5 and

16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 8 and 28.

Notes: (1) Yields and percents are calculated on the basis of percent of crude oil plus net unfinished oil inputs. (2) Adjusted

production equals refinery gasoline production minus inputs of butane, oxygenates and net inputs of gasoline blending

components. (3) Light products are gasoline, jet fuel, kerosene, and distillate.
understatement of capacity.3 As a result, the aggregate PADD data sometimes shows feed rates

higher than reported stream-day capacity on a monthly basis.4 In spite of the impression given by

the magnitude of aggregate PADD-level data, analysis of the data for specific refineries indicated

that some operated below both primary distillation and downstream unit capacity levels.

PADD 1 gasoline production levels and capacity utilization rates are affected both by demand

levels and by availability and flow of gasoline imports. Of the last three years, capacity utilization

for the months of May through September was highest in 1995. RFG was introduced in 1995, and

gasoline imports to PADD 1 fell off as importers adjusted to the new product requirements. In

1996, demand rose, while refining capacity dropped 9 percent with the shutdown of the BP Marcus

Hook refinery. An increase in capacity utilization might have been expected, but utilization

actually fell from 94.8 percent to 92.6 percent as gasoline imports increased robustly. In summer

1997, demand again rose, but far less than refinery capacity as the Tosco Trainer refinery came back

into service. This might lead one to expect a decline in utilization in 1997 over 1996, but capacity

utilization rose as imports during the summer again dropped.

Despite the difficulties of analyzing constraints limiting gasoline production, it is possible to get a

range for the maximum potential summer production for the PADD in summer 1997. In September

1997, PADD 1 adjusted gasoline production was 828 thousand barrels per day, excluding net input

of gasoline blending components, which are reported as part of refinery inputs, but which go

mainly to the blenders rather than refiners. September 1997 gasoline production set a new high for

summer monthly refinery gasoline production volumes since 1986. The September production was

achieved with:

• A record high crude input, and capacity utilization of 97.4 percent;

• A record FCC feed rate of 654 MB/CD;

• Lower jet and distillate yields than for prior summer months.

Average adjusted production in PADD 1 during May through September was 750 thousand barrels

per day (excluding blend stock inputs). Given PADD 1 capacity during summer 1997, which did

not include the Trainer refinery at the beginning of the season, and relative product demand

patterns, it appeared that total summer production for PADD 1 could have been 20-60 thousand

barrels per day above the actual summer 1997 production.

Assessment of Summer 1997 Motor Gasoline Price Increase 29

Energy Information Administration

3 Summertime 1997 FCC utilization estimates are based on January 1, 1997 capacity reported to EIA in 1996. Actual

capacity in 1997 may be higher. Also, based on comparing prior capacity and input data, there has been some capacity

understatement.

4 Stream-day capacity for PADD 1 FCC units was estimated at 575 thousand barrels per stream day as of January 1, 1997

(Energy Information Administration, Petroleum Supply Annual 1996, DOE/EIA-340 (96)/2). That figure does not include

the 50 thousand-barrels-per-stream-day FCC unit of Tosco’s Trainer, PA plant, which returned to full operation in May

1997. In May and June 1997, the PADD 1 FCC feed rate was 646 thousand barrels per calendar day, exceeding the

estimated barrel per stream-day capacity of 625 thousand barrels per stream day, and in September it was 654 thousand

barrels per stream day.
Gasoline Production in PADD 2 Was At Maximum

PADD 2 covers the mid-continent portion of the United States, bounded on the east with the states

from Michigan to Tennessee, and on the west by the states from North Dakota south to Oklahoma.

This region produces about three quarters of its own gasoline, with most of the rest coming from the

Gulf Coast refineries of PADD 3.

During the summers of 1995 through 1997, refinery capacity utilization in PADD 2 was very high

and increasing. In summer 1997, capacity utilization was 102.2 percent of calendar-day operable

distillation capacity (Appendix D). The downstream conversion units were operated at high levels

for all of the months from May through September (Table 4.2).

Throughputs to primary distillation fell back slightly in July, with corresponding changes in

downstream units. There were no indications that refinery operating problems affected light

product production during the summer.

30 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 4.2 PADD 2 Summer Refinery Inputs and Gasoline Production

May-Sept 1995 May-Sept 1996 May-Sept 1997

Operable Capacity (MB/D) 3448 3405 3447

Crude Input (MB/D) 3274 3349 3474

Crude Gravity (°API) 33.7 33.4 33.0

Net Unfinished Oil Inputs (MB/D) 34 41 33

Gross Inputs to Distillation (MB/D) 3353 3406 3524

Operable Utilization Rate (%) 97.2% 100.0% 102.2%

N-Butane + Oxygenate + Net Blending

Stock Inputs (MB/D)

16 50 17

FCC Feed Percent (1) 35.1% 33.8% 33.6%

Hydrocracker Feed Percent (1) 4.1% 4.4% 4.2%

Coker Feed Percent (1) 8.6% 8.5% 9.3%

Adjusted Gasoline Production (MB/D) (2) 1775 1783 1818

Adjusted Gasoline Yield (1) 53.7% 52.6% 51.9%

Jet, Kerosene & Distillate Yield (1) 29.4% 30.7% 31.2%

Total Light-Product Yield (1) (3) 83.1% 83.3% 83.0%

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 7

and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 12 and 28.

Notes: (1) Yields and percents are calculated on the basis of percent of crude oil plus net unfinished oil inputs.

(2) Adjusted production equals refinery gasoline production minus inputs of butane, oxygenates and net inputs of gasoline

blending components. (3) Light products are gasoline, jet fuel, kerosene, and distillate.
Light-product yields were about the same for each of the three summers. Gasoline yield declined

in 1997 from 1996 and 1995, while distillate yield (kerosene jet fuel, kerosene and distillate) rose.

This yield shift reflects a shift in the mix of the light product demand. The drop in API gravity of

crude oil inputs from 33.4 in 1996 to 33.0 in 1997 indicates use of a heavier crude charge for

refineries in the PADD, but a significant increase in the volume charged to coking units

compensated somewhat for the decline in gravity.

Given the data presented in Table 4.2 and analyzing individual refinery monthly data, it is very

difficult to see how additional gasoline could have been produced in PADD 2 during summer 1997.

PADD 2 may even have difficulty repeating those levels of production in the future without

capacity increases.

PADD 3 Gasoline Production Was Close to Maximum

PADD 3 covers the Middle South from New Mexico to Alabama, with most of the refining along

the Gulf Coast states of Texas, Louisiana and Mississippi. PADD 3 production far exceeds demand

within the PADD, but is used to help meet the needs of other regions, primarily PADD’s 1 and 2. As

in other refining regions, PADD 3 capacity utilization increased substantially during the 1990’s,

both due to refinery capacity reduction and to demand growth (Figure 4.3).

Assessment of Summer 1997 Motor Gasoline Price Increase 31

Energy Information Administration

5,000

5,500

6,000

6,500

7,000

7,500

8,000

Jan-86Jan-87Jan-88Jan-89Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97

Thousand Barrels per Day

Capacity

Gross Inputs to

Distillation

Figure 4.3 Monthly PADD 3 Operable Refinery Capacity and Gross Inputs

Source: Energy Information Administration, 1986-1996: Petroleum Supply Annual, DOE/EIA-0340(86-88)/2, Table 11,

DOE/EIA-0340(89-96)/2, Table 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 28.
In summer 1997, refinery inputs in PADD 3 were high in June, but slightly lower in July and

August. In September, inputs increased again, and utilization of operable capacity reached 100.2

percent (Appendix D).

The analysis of PADD 3 production indicated this region was also operating close to its maximum

capability. PADD 3 refinery inputs increased in summer 1997 over prior years, but the input

increase was not matched by a proportionate increase in gasoline production (Table 4.3). Only in

September was refinery gasoline production significantly higher in 1997 than in 1996.

With gasoline production in summer 1997 about the same as that in summer 1996, despite higher

refinery inputs, gasoline yield declined from 48.1 percent to 46.7 percent (Figure 4.4). The yield

decline did not appear to be the result of refiners running crude oil in excess of the capability of

their downstream processing facilities. Most of the yield decline over the two summers can be

explained by refiners shifting to produce higher yields of distillate products and running heavier

crude oils.

32 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 4.3 PADD 3 Summer Refinery Inputs and Gasoline Production

May-Sept 1995 May-Sept 1996 May-Sept 1997

Operable Capacity (MB/D) 6934 6983 7090

Crude Input (MB/D) 6512 6737 7003

Crude Gravity (°API) 31.9 31.7 31.2

Net Unfinished Oil Inputs (MB/D) 392 346 289

Gross Inputs to Distillation (MB/D) 6552 6757 7005

Operable Utilization Rate (%) 94.5% 96.8% 98.8%

N-Butane + Oxygenate + Net Blending

Stock Inputs (MB/D)

82 80 56

FCC Feed Percent (1) 34.9% 35.7% 35.5%

Hydrocracker Feed Percent (1) 7.2% 7.5% 7.2%

Coker Feed Percent (1) 10.7% 11.1% 10.7%

Adjusted Gasoline Production (MB/D) (2) 3316 3404 3407

Adjusted Gasoline Yield (1) 48.0% 48.1% 46.7%

Jet, Kerosene & Distillate Yield (1) 30.2% 32.0% 32.3%

Total Light-Product Yield (1) (3) 78.3% 80.1% 79.0%

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 9 and

16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 16 and 28.

Notes: (1) Yields and percents are calculated on the basis of percent of crude oil plus net unfinished oil inputs.

(2) Adjusted production equals refinery gasoline production minus inputs of butane, oxygenates and net inputs of gasoline

blending components. (3) Light products are gasoline, jet fuel, kerosene, and distillate.
From the PADD-level data, FCC feed rates as a percent of crude oil and unfinished feed charge did

not decline in the summer of 1997, compared to prior summers (Table 4.3). This indicated that

processing limits on this unit played no role in the lower yields.

The increase in distillate yield during the summer of 1997 stemmed from increased jet fuel

production at the expense of gasoline. This is part of an increasing trend in jet production. Over the

past decade (1987-1997), PADD 3 refiners have increased kerosene jet fuel production from 10.0

to 11.4 percent of crude and unfinished feed charge.

In PADD 3, average crude gravity dropped from 31.7 in summer 1996 to 31.2 in summer 1997,

while the feed rate to cokers declined 0.4 percentage points to average 10.7 percent of crude oil and

unfinished oil inputs. These changes could have accounted for an estimated drop of 0.5 to 0.7

percent in gasoline yield. Coking capacity has been steadily rising in PADD 3, and volume inputs

were up in April and May, but then fell off considerably in June. Unscheduled shutdowns may

explain the decline in coker input levels and associated impact on light-product yields in summer

1997, but that has not been quantified.

Operating data from a selected set of eleven PADD 3 refiners5 were monitored to better detect

changes of unit throughput limits and potential gasoline yield impacts. The eleven refineries did

Assessment of Summer 1997 Motor Gasoline Price Increase 33

Energy Information Administration

42

43

44

45

46

47

48

49

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Volume Percent

1997

1996

1995

Figure 4.4 PADD 3 Adjusted Gasoline Yield

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 9 and

16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 16 and 28.

Note: Adjusted Yield is derived from Adjusted Production which equals refinery gasoline production minus inputs of

butane, oxygenates, and net inputs of gasoline blending components divided by crude oil plus net inputs of unfinished oils.

5 These eleven refineries represented 2,286,000 barrels per calendar day of atmospheric crude oil distillation capacity.

This is almost one-third of operable capacity in PADD 3 in 1997.
not exhibit a common pattern. Two refineries showed gasoline yield increases in summer 1997

versus 1996. Four refineries showed similar yield patterns for the summers of 1996 and 1997,

while five refineries showed decreased gasoline yields in 1997. Of these last five, two showed

declining yields as a result of increased kerosene jet fuel yields; two ran lower gravity crude oils,

which accounted for some of the yield loss; and the last showed a yield decline that could not be

explained. Overall downstream unit limitations did not appear to be a factor causing light-product

yield declines for the 11 refineries. In some cases, downstream capacity appeared to be the primary

factor in determining overall refinery throughput. (Crude input was less than distillation capacity,

and appeared to be limited by maximum inputs of downstream units.)

PADD 3 refineries were operating at high throughput levels in summer 1997. The relative

production levels of gasoline versus distillate light products were based on refiners’ anticipation of

demand levels. Gasoline yield in July and August could have been a bit higher, had the high

gasoline demand that occurred been anticipated. In September, refinery capacity utilization was

100.2 percent, downstream units were operating at high input rates, and the adjusted gasoline

production was 73 thousand barrels per day more than the May-through-September average.

Providing an estimate of maximum gasoline production capability requires solving the problem of

imprecision of capacity figures, estimating normal unit shutdown levels, and taking into

consideration the competition of distillate co-production from the product barrel. Recognizing

these limitations, it appears that in the summer of 1997, PADD 3 refiners were operating near the

limits of gasoline production capability, and that production for the summer was less than 100

thousand barrels per day below the maximum achievable production level under the assumed

conditions.

PADD 5 Major Refining Centers Approached Production Limits

Production from refineries within PADD 5 supplies almost all of the region’s product needs. Most

of the capacity is located in three areas: Los Angeles, San Francisco, and the Puget Sound area in

Washington State (Table 4.4). Capacity utilization has grown in PADD 5 at a similar rate as in

PADD’s 1 and 3, but the operable utilization rate on a total PADD-level basis is lower than for those

in other PADD’s (Figure 4.5).

PADD 5 has the set of most complex refineries in the United States, with the greatest upgrading

capabilities of any U.S. refining region. As Table 4.5 shows, coking capability is very high, and the

combination of hydrocracking and FCC capabilities provide a high level of flexibility to change the

mix of light products.

Light-product yield in PADD 5 refineries has been increasing over the last decade as a consequence

of increasing downstream upgrading facilities (Figure 4.6). Today, light-product yield from PADD

5 refineries is higher than that of refineries in PADD’s 1 and 3, despite PADD 5 refiners using the

heaviest crude oil (lowest API gravity) of any of the PADD’s.

34 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
Table 4.6 contains an overview of PADD 5 refining operations for the summers of 1995 through

1997. Gasoline yields were about the same for all three summers. Total light-product yields,

however, were increasing, mainly as a result of increasing jet fuel yield. As in other parts of the

country, jet fuel is one of the fastest growing petroleum products. Capacity utilization was higher in

summer 1997 than for the prior two summers, but the 93.5 percent utilization figure may give the

Assessment of Summer 1997 Motor Gasoline Price Increase 35

Energy Information Administration

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96

Thousand Barrels per Day

Capacity

Gross Inputs to

Distillation

Figure 4.5 Monthly PADD 5 Operable Refinery Capacity and Gross Inputs

Source: Energy Information Administration, 1986-1996: Petroleum Supply Annual, DOE/EIA-0340(86-88)/2, Table 11,

DOE/EIA-0340(89-96)/2, Table 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 28.

Table 4.4 PADD 5 Refining Capacity Locations

Number of

Refineries

Operable Capacity

(MB/CD)

Percent of Total

PADD 5 Capacity

Alaska 6 283.3 9.7%

California 24 1,911.3 65.2%

Hawaii 2 147.5 5.0%

Nevada 1 7.0 0.0%

Oregon 1 0.0 0.0%

Washington 7 582.6 19.9%

Total PADD 5 41 2,931.7 100.0%

Source: Energy Information Administration, Petroleum Supply Annual, DOE/EIA-0340(96)/1, Table 39.

Note: MB/CD is thousand barrels per calendar day.
impression that capacity was pushed less strongly on the West Coast than in refining centers on the

East and Gulf Coasts and in the Midwest. However, when capacity utilization in PADD 5 is viewed

on the basis of the major refining centers within the PADD, a very different picture emerges.

The capacity utilizations for the larger refineries in the Los Angeles and San Francisco Bay areas

were quite high in the summer of 1995, dipped slightly in summer 1996, but rose above the 1995

utilizations in summer 1997. During the May to September period of 1997, utilizations for the Los

Angeles and San Francisco refineries were uniformly high, except for the month of June, when

36 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

60

65

70

75

80

85

90

Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96

Volume Percent

Figure 4.6 Monthy PADD 5 Light-Product Yield

Source: Energy Information Administration, 1986-1996: Petroleum Supply Annual, DOE/EIA-0340(86-88)/2, Tables 8 and

11, DOE/EIA-0340(89-96)/2, Tables 13 and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues,

Tables 24 and 28.

Note: Light-product yield is light product refinery production (gasoline, jet fuel, kerosene, and distillate) as a percent of

crude oil plus unfinished oil inputs.

Table 4.5 Operable Refinery Upgrading Capacity in Summer 1997

Coking Hydrocracking Fluid Catalytic Cracking Distillation

Region Percent Distillation Capacity Barrels/Stream Day

PADD 1 5.2 3.6 39.0 1727

PADD 2 9.8 4.2 34.7 3625

PADD 3 11.2 9.0 36.6 7484

PADD 5 18.8 16.6 25.7 3099

Source: Energy Information Administration, Petroleum Supply Annual, DOE/EIA-0340(96)/1, Table 38, Petroleum Supply

Monthly DOE/EIA-0109 (97/09), Table 28.

Note: Tosco’s Trainer refinery is included in PADD 1, but is not listed in Petroleum Supply Annual 1996 data.
refinery inputs dropped by about 50 thousand barrels per day. Refinery utilizations were also very

high for the Puget Sound refineries, which primarily provide product to the Pacific Northwest, but

are also capable of providing some gasoline blending components to California for producing

CaRFG.

The low overall operable utilization rate stemmed from several sources. California contains

several small refineries that have experienced deactivation and reactivation in recent years, and

other small refineries that are capable of producing very small volumes of gasoline for the state.

Alaska has a reported refinery capacity level of nearly 300 thousand barrels per day, but the

utilization rate for the state is quite low. Regardless, the gasoline produced in Alaska could not be

expected to contribute significantly to the West Coast market for logistical reasons.

The monthly light-product yields from 1995 through 1997 in PADD 5 are shown in Figures 4.7 and

4.8. PADD 5 gasoline yields tend to fall off in February and March, as distillate production is

favored and because many refineries plan unit shutdowns for maintenance during this period.

Gasoline yields usually increase in the April to July period, and distillate yields decrease. In June

1997, because of surplus gasoline supply and weak prices, West Coast refiners reduced refinery

inputs about 50 thousand barrels per day, and also reduced gasoline yield, while slightly increasing

Assessment of Summer 1997 Motor Gasoline Price Increase 37

Energy Information Administration

Table 4.6 PADD 5 Summer Refinery Inputs and Gasoline Production

May-Sept 1995 May-Sept 1996 May-Sept 1997

Operable Capacity (MB/D) 2900 2909 2927

Crude Input (MB/D) 2581 2512 2580

Crude Gravity (°API) 25.5 25.8 26.0

Net Unfinished Oil Inputs (MB/D) 35 27 4

Gross Input (MB/D) 2662 2592 2738

Operable Utilization Rate (%) 91.8% 89.1% 93.5%

N-Butane + Oxygenate + Net Blending

Stock Inputs (MB/D)

95 134 164

FCC Feed Percent (1) 28.1% 28.0% 28.9%

Hydrocracker Feed Percent (1) 17.4% 17.0% 16.5%

Coker Feed Percent (1) 18.5% 17.7% 20.0%

Adjusted Gasoline Production (MB/D) (2) 1233 1177 1209

Gasoline Yield (1) 47.1% 46.4% 46.8%

Jet, Kerosene & Distillate Yield (1) 33.5% 34.9% 35.2%

Total Light-Product Yield (1) (3) 80.7% 81.3% 82.0%

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 13

and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 24 and 28.

Notes: (1) Yields and percents are calculated on the basis of percent of crude oil plus net unfinished oil inputs.

(2) Adjusted production equals refinery gasoline production minus inputs of butane, oxygenates and net inputs of gasoline

blending components. (3) Light products are gasoline, jet fuel, kerosene, and distillate.
38 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

42

43

44

45

46

47

48

49

50

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Volume Percent

1997

1996

1995

Figure 4.7 PADD 5 Adjusted Gasoline Yield

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Tables 13

and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 24 and 28.

Note: Adjusted Yield is derived from Adjusted Production which equals refinery gasoline production minus inputs of

butane, oxygenates, and net inputs of gasoline blending components divided by crude oil plus net inputs of unfinished oils.

29

30

31

32

33

34

35

36

37

38

39

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Volume Percent

1997

1996

1995

Figure 4.8 PADD 5 Distillate, Kerosene, and Jet Kerosene Yields

Source: Energy Information Administration, 1995-1996: Petroleum Supply Annual, DOE/EIA-0340(95-96)/2, Table 13.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Tables 24.

Note: Yield is calculated as a percent of crude oil and unfinished oil inputs.
that for distillate. PADD 5 gasoline production in June was 40-50 thousand barrels per day lower

than it might have been had these changes not been made. In July, August, and September, gasoline

yields were pushed up and distillate yields decreased. While gasoline production could have been

increased in June, the potential for any added production in July and August is difficult to estimate

precisely, but is judged to be fairly small. It might have been possible from a process equipment

standpoint to increase gasoline production at the expense of jet fuel and other distillate in the summer

months, but market requirements might have precluded this option.

When data for specific California refineries were reviewed, no light-product yield degradation was

evident with increasing utilization. For the PADD as a whole and for the specific refineries analyzed,

as utilization has increased over time, light product yields have grown. This has occurred because

availability and throughput levels for one or more of the major conversion units have also risen over

the period. Generally for PADD 5, the availability of downstream conversion capacity has increased

relative to distillation capacity, providing the yield improvement.

The analysis of refinery data also showed the impact of unit outages on refinery yields. Since 1995, a

number of significant outages of major downstream units have occurred, and the review showed the

negative impact on gasoline and other light-product yields during these outage periods. In short,

refinery operation usually continues during a unit outage, but the yields of light products are reduced.

In the summer of 1997, the impact of outages on gasoline production for the specific refineries that

were reviewed was only minor.

In conclusion, the larger refineries in California producing RFG and the refiners in the Puget Sound

area ran at high utilizations in the summer of 1997. Refinery unit outages for these refineries resulted

in only minor impacts on production of light products. Average monthly gasoline production was

high for the summer period, while gasoline yields were about the same. However, early in the

summer, gasoline yields were lower than in 1996, due to a shift in product mix to more jet fuel and

less gasoline. The total light-product yield did not deteriorate. Thus, the lower gasoline yield early in

the summer was not the result of refiners operating at high refinery utilization rates. It is estimated

that the major California refinery group could only have produced 30-40 thousand barrels per day

more of gasoline during summer 1997, assuming no major unit outages during the period.

Conclusions from Production Analysis

The analysis provided clear indications that in summer 1997, gasoline production from U.S.

refineries was approaching the upper limit (See Sidebar - Production of Incremental Gasoline Barrels

at High Capacity Utilization).

• Refinery utilization was high in the major refining areas within the continental United States.

• As capacity utilization increased, gasoline yields declined, but total light product yields were

stable, as jet and other distillate yields increased at the expense of gasoline.

• Despite uncertainty caused by the lack of precision of reported unit capacity data, maximum U.S.

summer gasoline capability is estimated to be at most 200 thousand barrels per day more than the

Assessment of Summer 1997 Motor Gasoline Price Increase 39

Energy Information Administration
40 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Production of Incremental Gasoline Barrels at High Capacity Utilization

A generally held hypothesis about the economics of refining is that, as refinery operations

approach high utilization rates, the incremental or marginal product barrel would contain a

lower yield of high-value, light products (gasoline and distillate fuels). This would occur for two

possible reasons:

• Inputs to primary distillation units would rise to a level exceeding the capacity of downstream

units to handle the full volume of the intermediate streams to be processed, and the last (or

incremental) barrels would be processed without the benefits of all downstream conversion

units; or

• The last barrel to be produced would be produced by less well-equipped refineries that had

either operated at lower throughput levels, or had been reactivated because the production

(albeit high cost) of these marginal refineries was needed to meet demand.

Based on the analysis of this study, despite reaching quite high utilization rates, there is no

evidence to indicate the hypothesis has been fulfilled by either of the two possible routes. As

U.S. capacity utilization has increased, many refiners have invested in debottlenecking and

added capacity to downstream units to achieve balanced operations for the refinery.

Consequently, most refineries have little or no distillation capacity in excess of downstream

capacity. Changing the mix of crude oils charged has also been used to achieve balanced

utilization of units as capacity utilization increases.

From detailed analyses of individual refineries, as capacity utilization has risen, yield of

high-quality, light products has almost always been maintained. In the few cases when yields

have dropped, it is usually traceable to clear causes such as use of heavier, poorer quality

crude oils. Yields have also been observed to drop temporarily because of outages of

important units. Refiners in some areas have improved yields through downstream unit

capacity additions and improved process technology.

In those cases where primary distillation capacity exceeds the capacity of the more expensive

downstream conversion units (such as FCC and coking), refiners appear to limit refinery input

based on the downstream unit capacity, and will not operate at higher distillation utilizations

where yield levels would decline.

Finally, reactivations that occurred during recent years have not been short-term to take

advantage of short-term strong markets.

Does this mean that, since light-product yields have not fallen off at high capacity utilization,

there is no market impact when operating at high levels? No, the impact is that the market can

expect less contribution from refinery production in a high demand period, and imports and

inventory reduction will have to fill the market need. Imports can be a source of higher prices in

that this alternative can potentially be high cost, depending on availability and the market

situation in the region from which they come. Imports also can have long lead times that add to

market worries and upward price pressure during times of market stress.
summer 1997 production level, assuming similar distillate production levels and no unusual

summer outages.

• At the high utilization rates experienced during the summer 1997, U.S. refiners had limited ability

to increase gasoline production to meet any surges in demand. When the market tightened, added

production was relatively small and slow to arrive, and the tight gasoline market was only resolved

over time by a combination of falling demand, increased production, and imports.

Assessment of Summer 1997 Motor Gasoline Price Increase 41

Energy Information Administration
5. Focus on Imports

Gasoline and gasoline blending component imports into the United States in 1997 began the year

very high, but fell off sharply in June and July. The drop from June to July alone was 125 thousand

barrels per day. While normally such a drop might not have drawn much attention, demand surged

in July 1997, growing 211 thousand barrels per day over June. The drop in imports was one of the

supply factors that contributed to the tightening markets in July.

Background on U.S. Imports

PADD 1 Accounts for Most U.S. Imports

Most gasoline imports are used to help meet East Coast (PADD 1) demand, with PADD 1 receiving

over 95 percent of total U.S. gasoline imports the since the beginning of 1995. In 1996 and 1997

imports supplied 17 percent of total East Coast gasoline demand, making them an important source

of supply to this region.

PADD 1 is a major RFG consuming area, with RFG representing over 38 percent of the region’s

1997 gasoline demand. Imports supplied a large share, about 31 percent, of this RFG. Production

and stocks from inside the PADD filled another 39 percent of RFG demand, and the remaining 30

percent was met by refinery production from other regions, particularly the Gulf Coast (PADD 3).

Conventional gasoline demand in PADD 1, occurring mostly in the southeast, was met primarily

from production in PADD 3, with only about 8 percent coming from imports.

Since PADD 1 is a major RFG-consuming area and the largest user of imports, it is not surprising

that a large share of U.S. imports are RFG and blending components, which are largely used to

make RFG. RFG and blending components comprised 53 percent of U.S. total gasoline imports in

1995, but increased to 68 and 71 percent in 1996 and 1997 respectively (Figure 5.1).

Europe Is a Major Swing Source of Imports

Canada, the Virgin Islands (considered a source of U.S. imports in EIA data) and Venezuela are

three of the largest countries and territories supplying gasoline imports to the continental United

States, and thus to PADD 1 (Table 5.1). These areas find it economic to export large quantities of

product to the United States regularly, forming a base level of imports that ranged annually from

162 to 212 thousand barrels per day between 1990 and 1995. Generally these three sources supply

over 50 percent of U.S. gasoline imports. In 1996 and 1997, they increased their gasoline exports to

the United States to 278 and 288 thousand barrels per day respectively, and accounted for 35

percent of the import volume growth in 1996. Of the these three supply sources, Venezuela has

contributed the most to growth in imports since 1995.

Europe, the single most important regional source of gasoline imports, tends to be a swing

exporting area, providing very high flows of product from time to time. In 1995, Europe only

Assessment of Summer 1997 Motor Gasoline Price Increase 43

Energy Information Administration
provided 68 thousand barrels per day of imports (22 percent share). However, since 1996, Europe

has increased substantially its export volumes to the United States, providing 151 thousand barrels

per day (30 percent share) in 1996 and 141 thousand barrels per day (28 percent share) in 1997. Of

the190 MB/D increase in imports in 1996 over 1995, Europe accounted for 44 percent of the

addition.

44 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

0

100

200

300

400

500

600

700

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels per Day

Finished Gasoline excl. RFG

Gasoline Blending Components

Reformulated Gasoline

Figure 5.1 Composition of Total Gasoline Imports

Source: Energy Information Administration, 1991-1996: Petroleum Supply Annual, DOE/EIA-0340(91-96)/2, Table 3.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 4.

Table 5.1 U.S. Total Motor Gasoline Imports

(Thousand Barrels per Day)

1990 1991 1992 1993 1994 1995 1996 1997

Canada 55.8 70.1 64.5 55.6 49.3 66.4 93.1 82.6

Virgin Islands 52.8 48.2 50.0 56.3 117.7 107.4 104.9 112.6

Venezuela 78.1 53.0 65.3 50.1 33.4 37.7 80.1 92.4

Europe 130.2 93.3 90.2 48.9 128.5 67.6 151.0 140.7

Middle East & Africa 38.5 33.8 28.6 15.8 4.8 11.3 27.4 32.9

South & Central America 45.4 29.9 30.2 40.6 32.4 14.5 21.6 22.7

Other 2.9 4.7 6.5 7.3 9.9 7.7 24.8 20.7

Total 403.7 333.0 335.3 274.6 375.9 312.7 502.8 504.6

Source: Energy Information Administration, 1990-1996: Petroleum Supply Annual, DOE/EIA-0340(90-96)/1, Table 21.

1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 35.

Notes: South & Central American values exclude Venezuela.
One of the reasons Europe has been a major source of imports to the United States is that Europe has

an excess supply of gasoline. This excess stems from a mismatch between European refinery

configurations and the current product demand mix. Many of the conversion facilities installed

(i.e., fluid catalytic cracking units and cokers) in European refineries produce more gasoline than

diesel, whereas diesel demand has been growing faster than gasoline demand.

Prices in Europe relative to the United States were not always conducive to large flows of product to

this country. Figure 5.2 shows the spot price differences between Rotterdam (the spot market price

reflecting trade in oil products in northern and western Europe) and New York Harbor. From 1992

through 1993, the price fluctuated between 0-4 cents per gallon. In order to cover transportation

costs, U.S. prices generally would have to exceed European prices by about 4-5 cents per gallon.

Such price differences only occurred for short time periods prior to 1994. U.S. prices began to

strengthen relative to Europe in 1994, helping explain the strong imports in that year. Although the

price differences continued to grow in 1995, imports from Europe fell back. It is thought that the

uncertainties surrounding the beginning of the RFG program hindered more flow from Europe that

year. As the RFG program stabilized, imports from Europe increased considerably in 1996.

Assessment of Summer 1997 Motor Gasoline Price Increase 45

Energy Information Administration

-6

-4

-2

0

2

4

6

8

10

12

14

16

1/4/911/4/921/4/931/4/941/4/951/4/961/4/97

Cents per Gallon

Figure 5.2 Weekly Average Spot Gasoline Price Difference Between NY Harbor

and Rotterdam

Source: DRI Platts Regular, Conventional Spot Gasoline Prices.
The Role of Imports in Summer 1997

In July 1997, U.S. demand surged 211 thousand barrels per day over June. At the same time,

imports fell back by 125 thousand barrels per day, putting even more pressure on domestic supply.

Much of the decline can be traced to falling import volumes from Europe, one of the largest U.S.

sources of swing supply.

While in recent years, Europe has accounted for a large part of the growth in gasoline imports to the

United States, in June and July 1997, it accounted for most of the decline. Market conditions

changed between Europe and the United States during 1997, as reflected by the difference in price

between the two regions. The U.S.-European price differential remained at elevated levels (6 cents

per gallon) through early 1997, but dropped later in the year. During the first half of the year,

European imports reached record levels, averaging 215 thousand barrels per day in the first quarter

and 181 thousand barrels per day in the second. However, during the second quarter, imports were

beginning to fall off (Figure 5.3).

Both European and U.S. prices were falling in early summer, but U.S. prices fell faster than in

Europe, causing the price difference between the areas to narrow. U.S. gasoline prices weakened

mainly as a result of gasoline margins declining. Gasoline price spreads on the East Coast softened

in May and June of 1997 as production and imports exceeded demand, and stocks built from the low

levels at the beginning of the year to end June at more normal levels (Chapter 2). New York Harbor

gasoline spot price spreads (gasoline minus crude oil price) fell from about 3.6 cents per gallon

above five-year-average levels in March to 2.0 cents below average levels in June as supply grew

(Figure 5.4). European prices were also dropping in June, but not as fast as in New York. The New

York Harbor minus Rotterdam price difference averaged just over 2 cents for the month, well under

what is needed to cover transportation costs. European imports dropped from 219 thousand barrels

per day in May to 149 thousand barrels per day in June and 74 thousand barrels per day in July.

Although U.S. gasoline prices strengthened again in July and August relative to Europe, imports

did not recover to the levels seen earlier in the year. With the gasoline season nearing its end,

buyers and sellers were not expecting high prices to continue, and were reluctant to commit to any

additional imports that late in the season.

Refinery problems were reported in both Europe and Venezuela in late July and August, which

added to concerns over supply. Price, however, produces some strong incentives to overcome such

problems quickly. For example, when August ended, Venezuelan imports had only dropped 3

thousand barrels per day from July, and European imports had increased almost 48 thousand barrels

per day, in spite of the reported refinery problems. In order to take advantage of the attractive U.S.

prices in August, Venezuela seemed to get around its refinery problems by exporting more blending

components in place of finished gasoline. The mix of gasoline imports from Venezuela moved

from 47 percent blend stocks in July, to 88 percent blend stocks in August. Venezuela returned to a

more normal mix in September when its refinery problems were resolved.

46 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
Assessment of Summer 1997 Motor Gasoline Price Increase 47

Energy Information Administration

Figure 5.3 Monthly Total Gasoline Imports By Geographic Source

Source: Energy Information Administration, 1994-1996: Petroleum Supply Annual, DOE/EIA-0340(94-96)/2, Table 21.

1997: Petroleum Supply Monthly, DOE/EIA-0109 (97)/various issues, Table 35.

0

50

100

150

200

250

Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels per Day

Canada

Virgin Islands

0

50

100

150

200

250

Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels per Day

Venezuela

0

50

100

150

200

250

Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels per Day

Europe

Other
The Role of Exports in Summer 1997

This chapter focused on imports because gasoline exports played very little role in adding to

gasoline market tightness in July and August in most of the United States. The exception was the

West Coast, which experienced an increase in gasoline exports that contributed to the markets

tightening in that part of the country. The role of West Coast exports is covered in Chapter 3.

Most exports from the area east of the Rocky Mountains leave from PADD 3 and travel to Mexico

and Central and South America. July exports from the Gulf Coast region increased 27 thousand

barrels per day over June, and in August they increased another 35 thousand barrels per day,

partially offsetting the 65 thousand barrels per day increase in imports during August. The biggest

export increases from July to August went to Mexico, Colombia, and the Netherlands Antilles.

48 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

0

5

10

15

20

25

Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents per Gallon

Actual Average 1992-96

Figure 5.4 Monthly Average Spot Gasoline Price Minus Crude Oil Price

Source: DRI Platts Spot Prices for New York Harbor Regular Conventional Gasoline and West Texas Intermediate Crude

Oil.
6. Focus on Gasoline Prices

While spot, rack, DTW and retail prices showed movements during the late summer 1997 price

runup typical of past price runups, the futures market displayed more speculative interest than

usual. The noncommercial traders did not start the price changes, but followed the movements by

participating in a larger percentage of the trades than occurred in prior runups, such as that in spring

1996.

The movements of gasoline prices through the distribution system from spot to retail during the

summer 1997 price runup followed patterns previously observed, with retail prices picking up

about 50 percent of their movement from spot price changes over the prior month. Class of trade

prices indicated that throughout much of 1997, margins were better for the downstream business

than in 1996, but most of the gains accrued to refiners rather than retailers, who generally

experienced margins only slightly better than in 1996.

Noncommercial Traders Were Active During The August Price Rise

In contrast to earlier gasoline price rises, the August 1997 rise attracted a great deal of speculative

interest in energy futures markets. There are many large speculative funds that follow price trends

in commodity futures markets, and in August 1997 they were attracted to the petroleum futures

markets. Questions naturally arise about how speculators affect prices. In particular, this chapter

shows that speculators definitely did not start the upward trend in gasoline prices in August 1997,

but that they helped sustain the upward price trend once it started.

One of the most important determinants of futures market prices is the relative levels of stocks

available for delivery against the expiring contracts.1 Stocks are an important barometer of the

tightness of the gasoline markets and potential for price increases. When demand is high and

outpacing supply, stocks will fall. If stock levels are low during high demand seasons, there is little

cushion to absorb supply/demand imbalances. Under these conditions, buyers tend to bid up prices

to assure supply. Figure 6.1 shows that stocks in August 1997 were much lower than in August

1996. Gasoline stocks were very low for reasons already discussed: strong demand straining

supply, which was affected by refinery problems in the U.S. and in major import source regions

(Europe and Venezuela).

The upward price pressure from tight market conditions can manifest itself in the futures markets in

a situation called “backwardation,” in which prices for nearby contract deliveries are higher than

for more distant deliveries. In August, backwardation in the gasoline futures market was especially

steep, i.e., contracts for gasoline to be delivered in September were 6 cents higher than contracts for

Assessment of Summer 1997 Motor Gasoline Price Increase 49

Energy Information Administration

1 Only reformulated gasoline is deliverable against futures contracts.
delivery in October. Tight market conditions frequently also cause abnormal relative prices. For

example, close to Labor Day, spot prices of conventional gasoline nationally rose above those of

reformulated gasoline. Conventional prices had not been this strong relative to RFG since the

Colonial Pipeline break in Texas in October 1994 temporarily drove up the price of conventional

gasoline. Exceptional tight market situations like this, i.e., strong demand, low stocks, and steep

backwardation, frequently lead to a sharp upward price trend in the spot market.

Once a price trend is established, speculative money funds tend to follow it.2 Figures 6.2 and 6.3

show that this trend-following occurred during the gasoline price runup.3 Figure 6.2 shows that the

spot price of reformulated gasoline was 56 cents per gallon at the end of June. As it rose sharply

toward 78 cents per gallon on August 19, noncommercials followed the price trend by increasing

their percentage holdings of the total open interest, or number of contracts outstanding. In early

August, large noncommercials with contracts to buy gasoline held over one-fourth of all

50 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

170

175

180

185

190

195

200

205

210

215

220

1/5/963/1/96

4/26/966/21/968/16/96

10/11/96

12/6/961/31/973/28/975/23/977/18/979/12/9711/7/97

1/2/98

Millions of Barrels

Figure 6.1 1997 Weekly U.S. Blending Component & Finished Gasoline Stocks

Source: Energy Information Administration, Weekly Petroleum Status Report, DOE/EIA-0208(96-98)/various issues,

Table 10.

2 Dale, C. and Zyren, J., “Noncommercial Trading in the Energy Futures Market," Petroleum Marketing Monthly,

DOE/EIA-0380(96/05)(Washington, DC, May 1996), pp. xiii-xxiv., and “Petroleum Futures Markets: Volatile Prices,

Controversial Functions, Stagnant Volumes,” Chapter 6 of Energy Information Administration, Petroleum 1996: Issues and

Trends, DOE/EIA-0615(Washington, DC, September 1997), pp. 101-119.

3 Holders of large numbers of commodity futures contracts must have their brokers report their holdings to the

Commodity Futures Trading Commission (CFTC). The CFTC, in turn, publishes this data weekly, where it is examined

carefully by futures market traders. “Noncommercials” are traders who do not have an interest in making or taking delivery

of the physical commodity, i.e., they are speculators.
outstanding contracts, a much higher percentage than normal and one which did not occur at any

time earlier in the year. Noncommercials began to liquidate their positions after prices started to

fall in late August, again trying to follow a trend.

Assessment of Summer 1997 Motor Gasoline Price Increase 51

Energy Information Administration

55

60

65

70

75

80

85

Jan 07

Feb 04

Mar 04

Apr 01Apr 29

May 27

Jun 24

Jul 22

Aug 19

Sep 16

Oct 14

Nov 11

Cents per Gallon

5

10

15

20

25

30

Percent of Total Open Interest

RFG Spot Prices

Long Contracts

Figure 6.2 1997 Noncommercial Holdings of Gasoline Futures

Contracts & RFG Spot Prices

Source: Spot Prices: Reuters RFG regular grade weekly averages. Long Contract Volumes: Commodity Futures Trading

Commission.

0

5

10

15

20

25

30

Jan 07

Feb 04

Mar 04

Apr 01Apr 29

May 27

Jun 24

Jul 22

Aug 19

Sep 16

Oct 14

Nov 11

Percent of Total Open Interest

Long

Short

Figure 6.3 1997 Noncommercial Holdings of Gasoline Futures Contracts

Source: Commodity Futures Trading Commission.
While some noncommercials bought futures contracts, others were selling them, so the question

naturally arises as to what was the net position of noncommercials during the price runup. Figure

6.3 shows that while long, or buying, positions of noncommercials followed the price trend, the

short, or selling, positions were relatively stable. Thus, Figure 6.2 shows an accurate picture of how

rapidly noncommercials followed the price trend. They weren’t, for example, pursuing a complex

trading strategy such as building large long and short positions simultaneously, which would have

left their net positions relatively small.

Finally, noncommercials are frequently attracted to similar markets that they believe may move

together. But, Figure 6.4 shows that noncommercials were relatively inactive in the crude oil

futures market in August during the large increase in gasoline prices. They did follow crude oil

price movements in late September and early October, but much of the activity in the crude oil

market then was due to external factors such as the Iraq situation rather from internal pressure from

improving gasoline prices.

In summary, noncommercials, or speculators, did not play a large role during the spring 1996 or fall

1996 gasoline price rises, so their increased activity was new to the August 1997 price runup. But

there is no evidence from the graphs that noncommercials had any role in starting the price rise,

although their net purchases of gasoline futures contracts helped sustain the upward price

movement after it started. Large noncommercial money funds can be expected to be attracted as

trend-followers to such situations as they arise again in the future.

52 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

18.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

Jan 07

Feb 04

Mar 04

Apr 01Apr 29

May 27

Jun 24

Jul 22

Aug 19

Sep 16

Oct 14

Nov 11

Dollars per Barrel

5

7

9

11

13

15

17

19

21

23

Percent of Total Open Interest

Spot Crude Oil Price

Long Contracts

Figure 6.4 1997 Noncommercial Holdings of Sweet Crude Oil Futures

Contracts and Crude Oil Spot Prices

Source: Spot Prices: Reuters West Texas Intermediate Crude Oil weekly averages. Long Contract Volumes: Commodity

Futures Trading Commission.
Increased Margins in 1997 Benefitted Refiners

Class of trade prices (spot, rack, dealer tank wagon or DTW, and retail) provide information on

where in the distribution chain prices increased, and who benefitted from the increase (See

Sidebar - Class of Trade Prices). Rack prices are prices paid for product sold from within the

refinery or terminal loading racks. Only limited distribution and storage costs are included in this

price. DTW price represents the prices paid by retailers for gasoline. Thus the difference between

retail price (excluding taxes) and DTW price is the money retailers have available to cover the cost

of their operations and return on investment. The difference between rack price and crude oil

costs represents the dollars refiners have to cover production costs and some storage and

distribution costs. DTW price includes additional marketing, distribution and storage costs

beyond those covered in the rack price.

During 1996, consumers saw large increases in gasoline prices, both in the spring and in the fall.

Most of these increases were used to pay for higher feedstock cost because the price of crude oil,

from which gasoline is produced, was rising. Thus, the refiners and retailers benefitted little from

the price rises. Table 6.1 shows that, with the exception of PADD 5, on an annual basis, the 1996

Assessment of Summer 1997 Motor Gasoline Price Increase 53

Energy Information Administration

Class of Trade Prices

Spot Price — Represents a price agreed to by a wholesale buyer (e.g., distributor) and seller

(e.g., refiner) for a single cargo of product. It can vary significantly day to day.

Rack Price — Refers to the wholesale price charged by wholesalers at their refineries or

company terminals to open dealers or distributors. Rack prices are usually determined on a

daily basis and are influenced by competitors’ prices as well as by spot and futures market

prices. Rack prices cover refining costs, including the cost of feedstocks and some storage

costs.

DTW (Dealer Tank Wagon) Price — Is that charged by distributors and refiners to their

retailers. These prices include transportation costs to the dealers’ stations and other

business costs (promotions, dealer incentives, etc.) beyond the basic rack price. DTW

prices are established by considering competitors’ prices and spot, futures, and rack prices.

EIA DTW and Rack Prices — Include both branded and unbranded prices. Branded prices

generally carry an arrangement for security of supply, trademark, credit cards, and

advertising, thereby carrying a premium over unbranded prices. However, when markets are

tight, volumes available to unbranded dealers may diminish and unbranded prices then can

exceed branded prices.

Retail Price — Is the price paid by the consumer at the gasoline station. It includes the DTW

price paid by the retail station for fuel, additional station operation costs, dealer margins and

taxes.
rack spreads (rack price minus crude oil price) and DTW spread (DTW price minus crude oil price)

did not vary much from previous years. Retail margins (retail price minus DTW price) also did not

show any large changes in 1996, again with the exception of PADD 5. The increases in PADD 5

during 1996 can be traced back to California’s introduction of its new CaRFG. Not only is this fuel

more expensive to produce, but the region experienced supply problems that drove regional

gasoline prices up relative to crude oil.

54 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table 6.1 Class of Trade Margins for Conventional Gasoline

(Cents per Gallon)

Rack - Refiners’

Imported Crude Oil

Price

DTW - Refiners’

Imported Crude Oil

Price

Retail - DTW

PADD 1 (East Coast)

1994 19.3 29.4 6.5

1995 18.1 27.0 8.0

1996 18.0 25.6 7.4

1997 20.8 28.7 7.8

PADD 2 (Midwest)

1994 19.6 26.9 7.4

1995 17.7 24.2 8.3

1996 19.3 25.3 7.4

1997 21.7 27.2 8.1

PADD 3 (Gulf Coast)

1994 18.1 25.5 9.7

1995 17.0 26.2 9.0

1996 17.5 25.5 8.2

1997 20.4 28.1 8.3

PADD 4 (Rocky Mountains)

1994 27.1 32.1 10.4

1995 24.1 29.0 10.7

1996 25.9 31.2 9.9

1997 30.1 35.4 10.6

PADD 5 (West Coast)

1994 23.7 33.9 9.3

1995 23.6 32.6 10.3

1996 29.6 38.4 13.5

1997 28.7 37.9 13.5

Source: Energy Information Administration, 1994-1996: Petroleum Marketing Annual, DOE/EIA-0487(94-96), DTW,

Retail Prices — Table 32, All Grades; Refiners Acquisition Price of Crude — Table 1. 1997: Petroleum Marketing

Monthly, DOE/EIA-0380(97)/various issues, Rack, DTW, Retail Prices — Table 32, All Grades; Refiners Acquisition Price

of Imported Crude Oil — Table 1.

Note: Retail prices are sales to end users through retail outlets, excluding taxes.
Crude prices were relatively flat during the rise in gasoline prices in late summer 1997. As a result,

refiners and/or retailers benefitted from the gasoline price increase. Figure 6.5 shows the monthly

margin contribution to refiners (rack minus crude oil price) and to retailers (retail minus DTW

price). The rack spread (rack price minus crude oil cost) shows the typical seasonal gasoline

market behavior in 1995 and 1996. In the spring, as refiners finish their maintenance and

turnarounds, gasoline production begins to increase along with summer driving demand. The

seasonally low stock cushion coupled with the uncertainty of being able to bring production back

on line quickly enough to meet demand causes the market to tighten during this period. This spring

period usually determines how much return (if any) refiners will earn for the year.

In 1997, the spring rack spread peaked and began its normal fall in June. The late summer price

increase, however, produced a very different picture than in the prior two years. Refiners received

an additional contribution to cover their costs and return on investment. Figure 6.5 also shows that

the retail margin (retail price minus DTW) did not vary much. Thus retailers received little, if any,

of the late-summer price increase, which is consistent with the market event. Rack prices went up

because wholesale buyers were looking for more supply. That is, the price incentive was acting at

the appropriate location in the supply chain.

Price Movement from Spot to Retail Was Typical

As spot prices change at major buying centers on the U.S. Gulf Coast (USG) and New York Harbor

(NYH), prices further along the distribution chain begin to reflect those changes. Motor gasoline

Assessment of Summer 1997 Motor Gasoline Price Increase 55

Energy Information Administration

0

5

10

15

20

25

30

Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97

Cents per Gallon

Rack - Refiners' Imported

Crude Oil Price

DTW - Rack

Retail - DTW

Figure 6.5 U.S. Conventional Gasoline Class of Trade Margins

Source: Energy Information Administration, 1995-1996: Petroleum Marketing Annual, DOE/EIA-0487(95-96), Table 32.

1997: Petroleum Marketing Monthly, DOE/EIA-0380 (97)/various issues, Table 32.

Note: Retail prices are sales to end users through retail outlets, excluding taxes.
prices travel relatively quickly through the system to the retail level. In a prior study, EIA explored

how retail prices at the end of the distribution chain reflect spot price changes at the major buying

centers on the USG and NYH.4 That analysis investigated changes in weekly retail gasoline prices

as a function of changes in spot prices. In general, the results showed that about 50 percent of a spot

price change was passed through to retail within 4 weeks, with an additional 30 percent

pass-through occurring in the next 4 weeks. That is, if spot price rose 10 cents from one week to the

next, retail customers would only have seen about 5 cents of the increase 4 weeks later, and about 8

cents of the increase 8 weeks later.

The time lag of the retail price response behind spot price movements is easily visible on graphs

such as Figure 6.6 that show retail prices rising slower and peaking later than spot prices. This lag

effect, which means that the current retail price change is a moving average of prior spot price

56 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

120

125

130

135

140

145

150

155

160

6/9/97 7/24/97 9/9/97 10/24/97 12/10/97

Retail Cents per Gallon

50

55

60

65

70

75

80

85

90

Spot Cents per Gallon

LA Spot CaRFG

Retail CaRFG

Figure 6.6 Lag Between Retail and Spot Prices

Source: Retail Prices: Energy Information Administration, Retail Outlet, Regular, Reformulated Gasoline Prices, Form

EIA-878, “Motor Gasoline Price Survey.” Spot Prices: Reuters daily prices.

4 Energy Information Administration, Motor Gasoline Assessment Spring 1997, DOE/EIA-0613, (Washington DC: July

1997), pp. 42-45.
changes, creates a distortion that makes it seem as though the retail price is staying up longer than it

should.

The speed of price pass-through results reported in the previous study were updated for this study.

Table 6.2 summarizes the updated speed of price pass-through results. The results are very similar

to the previous study for PADD’s 1A, 1B, 1C, 2, and 3. Additionally, this study also investigated

the behavior of RFG spot and retail prices in PADD 5. Spot Los Angeles RFG prices were used to

explain PADD 5 retail RFG prices. The price pass-through results are very much in line with those

of the other PADD’s (except for PADD 2). There was a 56 percent price pass-through to retail of

spot price changes after 4 weeks, increasing to 85 percent after 8 weeks.

The August price increase provides another opportunity to study price pass-through movements.

An important question addressed in the current study is whether or not regular conventional retail

gasoline prices exhibited normal historical behavior during the August price runup. The results

showed that the answer was yes in most cases (see Appendix E for a detailed discussion of the

methodology and results). The statistical results showed that for all areas except PADD 1A, there is

no difference in pass-through behavior for the period before the August runup and the period during

and after the August runup; the different PADD 1A result could be due to the low percentage of

conventional gasoline relative to total gasoline sales in this area (around 13.4 percent from August

through October 19975

).

Assessment of Summer 1997 Motor Gasoline Price Increase 57

Energy Information Administration

Table 6.2 Cumulative Pass-Through to Retail for a 10-Cent Change in Spot

Price (Cents per Gallon)

Time PADD 1A PADD 1B PADD 1C PADD 2 PADD 3 PADD 5

4 weeks 4.95 4.78 5.34 7.90 5.00 5.56

8 weeks 7.85 8.01 8.49 10.02 7.94 8.48

Source: Energy Information Administration calculations.

5 Form EIA-782C, “Monthly Report of Prime Supplier Sales of Petroleum Products Sold for Local Consumption,” survey

results.
Appendix A

Petroleum Administration For Defense Districts

(PADD) Definitions

PADD 1

Subdistrict 1A: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.

Subdistrict 1B: Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania.

Subdistrict 1C: Florida, Georgia, North Carolina, South Carolina, Virginia, West Virginia.

PADD 2

Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North

Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Wisconsin.

PADD 3

Alabama, Arkansas, Louisiana, Mississippi, New Mexico, Texas.

PADD 4

Colorado, Idaho, Montana, Utah, Wyoming.

PADD 5

Alaska, Arizona, California, Hawaii, Nevada, Oregon, Washington.

Assessment of Summer 1997 Motor Gasoline Price Increase 59

Energy Information Administration
Appendix B

Why Do Prices Vary Regionally?

California Case Study

In recent years, retail gasoline prices in California have tended to be higher than average U.S. retail

prices. What might be the cause of this difference? Four factors that affect price can be explored to

provide some insights into the answer: state and local taxes, costs of feedstocks used to produce

gasoline, costs of operations excluding feedstock costs, and profitability.

State and local taxes have been higher in California than in many other states. For example, in 1996

California state and local taxes (including sales tax) ran about 5-6 cents per gallon higher than the

U.S. average state and local tax. However, after taxes are removed, California gasoline prices are

still higher than in other parts of the country. Annual average California prices, excluding taxes, ran

about 1.3 cents per gallon higher than U.S. average prices (all formulations) prior to the Gulf War

(1983-1990). From 1992 through 1995, the period between the Gulf War and when the CaRFG

program began, California prices averaged 3.9 cents higher than U.S. average. Since the CaRFG

program began in 1996, they have averaged 5.6 cents higher than average U.S. prices (Figure B.1).

In this period, California prices have been more volatile — moving up and down more than average

U.S. prices.

Assessment of Summer 1997 Motor Gasoline Price Increase 61

Energy Information Administration

0

20

40

60

80

100

120

Jan-83Jan-84Jan-85Jan-86Jan-87Jan-88Jan-89Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97

Price (Cents per Gallon)

-20

0

20

40

60

80

100

Price Difference (Cents per Gallon)

California

U.S.

Average

Difference:

CA - US

Figure B.1 California and U.S. Retail Regular Gasoline Prices

Source: Energy Information Administration, 1983-1996: Petroleum Marketing Annual, DOE/EIA-0487(83-96), Table 31.

1997: Petroleum Marketing Monthly, DOE/EIA-0380(97)/various issues, Table 31.
A factor often cited in discussions of California gasoline prices is higher operating costs, excluding

feedstock (e.g., crude oil) costs. Companies operating in the West experience higher refining and

marketing costs. Figure B.2 shows refining and operating costs of major oil companies having 70

percent or more of their refining capacity on the West Coast. These companies represent 52 percent

of PADD 5 capacity, and 58 percent of California’s capacity. Only 7 percent of the “Other Majors”

capacity shown in the figure is located in PADD 5. This figure shows that from 1990 through 1995,

it cost companies $1.50 to $2.00 per barrel (3.5-5.8 cents per gallon) more to operate1 in the West

than elsewhere. In 1996, it cost them $3.20 per barrel (7.6 cents per gallon) more.

Costs can be higher in the West for a number of reasons. For example, CaRFG is more expensive to

produce than other gasolines. The California Energy Commission has reported that CaRFG costs

between 5 and 8 cents more per gallon to produce than Federal RFG. The refineries in the West are

the most complex in the country (Chapter 4), which by itself, would indicate higher operating costs,

since complexity increases both investment and operating cost.

Crude oil costs counter the operating cost differences to some extent. The refineries in the West

were designed to process heavier crude oils, which are less expensive on a per barrel basis than

62 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

0

5

10

15

20

1988 1989 1990 1991 1992 1993 1994 1995 1996

Cents per Gallon of Products Sold

California Refiners

Other Majors

Figure B.2 Annual Refining and Marketing Operating Cost Comparison

Source: Energy Information Administration, Financial Reporting System, Form EIA-28.

1 These costs reflect unit operating costs to produce all products. Operating costs do not include depreciation or purchase

costs of crude oil or other feedstocks, or costs of products purchased and not produced. Most of the cost difference between

the Western companies and those operating elsewhere stems from refining and distribution costs. Marketing cost

differences were small.
lighter crude oils. For example, Line 632 crude oil spot prices averaged over 2 cents per gallon

lower than refiners’ average imported cost of crude oil in 1996, and California refinery crude inputs

average even lower gravity (25-26 degrees API) than Line 63, which runs 28-30 degrees API.

Another important feedstock, MTBE, costs more in the West since much of this oxygenate must be

shipped from other locations. Los Angeles spot MTBE prices averaged almost 8 cents higher than

those on the Gulf Coast during 1997. This difference could add about 1 cent per gallon to the price

of reformulated gasoline on the West Coast versus that on the Gulf Coast.

Based on feedstock costs reported to EIA through the Financial Reporting System, and on crude oil

and MTBE price comparisons, the net effect of higher increased operating costs with lower

feedstock costs is higher costs to produce gasoline in California.

The final factor considered is that of profits. Figure B.3 shows that the companies operating in

California have not been able to earn higher profitability than companies operating outside of the

area. Profitability is about the same for both groups of companies shown. Apparently, despite the

higher market concentration on the West Coast, there is still adequate competition, and

refiner/marketers cannot extract higher profits from consumers (Side Bar - Market Concentration

Assessment of Summer 1997 Motor Gasoline Price Increase 63

Energy Information Administration

-5

0

5

10

15

20

1988 1989 1990 1991 1992 1993 1994 1995 1996

Percent

California Refiners

Other Majors

Figure B.3 Annual Return on Investment Comparison

Source: Energy Information Administration, Financial Reporting System, Form EIA-28.

2 Line 63 prices represent a price assessment for a blend of crude oils in a range of 28-30 degrees API gravity and sulfur

content 1.02 percent that is delivered at Hynes station on Four Corners ’ pipeline line 63.
in California). The data indicate that in the West, prices are higher, production costs are higher, and

refinery investment per barrel is higher, but return on investment is about the same.

The operating costs discussed above reflect very little of the costs incurred to operate retail

establishments in California. Retailers pay a “dealer tank wagon (DTW) price” for gasoline. The

DTW price represents the costs and profits to produce and get the gasoline to the retail

establishment. Retailers sell the product to consumers at a price higher than DTW to cover their

costs and profits. Table B.2 shows the retail markup (retail price excluding taxes minus DTW

price) for California versus the United States for the last several years. The comparison is for all

grades, all formulations. Individual years can vary, as in 1996 when the CaRFG transition was

occurring, but California is generally in line with the rest of the United States As is discussed in

Chapter 6, PADD 5 retail minus DTW prices average well above the other PADD’s, but California

is not the source of the PADD 5 aggregate difference. Retail margins in areas like Alaska, Hawaii,

and rural areas run higher than the U.S. Average.

In conclusion, both taxes and the higher cost of refining on the West Coast seem to explain much of

California’s higher prices for gasoline.

64 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Market Concentration In California

Gasoline markets are generally more concentrated in the West than on the East Coast. Table

B.1 shows two measures of concentration for California and PADD 1. The first is the

aggregate market share of reformulated gasoline sales for the top five market share holders.

The second is the Herfindahl-Hirschman Index (HHI) for all gasoline sales. This index gives

higher weighting to large-share companies. It is used by the Antitrust Division of the

Department of Justice (DOJ) and Federal Trade Commission (FTC) as a guide when

considering proposals for horizontal mergers. It can go from near zero, in perfect competition,

to 10,000, which is a monopoly. According the DOJ/FTC guidelines, an HHI index below

1,000 indicates the market is unconcentrated. An index of from 1,000 to 1,800 indicates

moderate concentration. Above 1,800 indicates high concentration. This table shows that

California is not highly concentrated.

Table B.1 Market Concentration Comparison (Preliminary 1997 Estimates)

California PADD 1 (East Coast)

Top 5 Share Percent (RFG Only) 73.5% 53.2%

HHI Index (All Gasoline) 1290 640

Source: Energy Information Administration, EIA Form-782.

Notes: HHI - Herfindahl-Hirschman Index.
Assessment of Summer 1997 Motor Gasoline Price Increase 65

Energy Information Administration

Table B.2 Retail Minus DTW Price Comparison

(Cents per Gallon)

1994 1995 1996 1997

U.S. 6.8 6.4 6.4 6.3

California 6.4 6.6 8.5 6.3

Source: Energy Information Administration, 1994-1996: Petroleum Marketing Annual, DOE/EIA-0487(94-96), Table 31.

1997: Petroleum Marketing Monthly, DOE/EIA-0380(97)/various issues, Table 31.

Note: Retail price is sales to end users through retail outlets, excluding taxes.
Appendix C

Analyzing Refinery Data

Chapter 4 is an analysis of how the yield or percentage of gasoline that is being produced by U.S.

refineries may be affected by the capacity of the process units within the refinery. For those with

limited technical understanding of refining, this appendix provides background information on the

fundamentals of how crude oil is transformed into refined products. The discussion includes several

demonstrations of how those fundamentals are applied in developing the results of Chapter 4.

A Simple Description of Crude Oil Refining

Crude oil is a mixture of thousands of individual hydrocarbon compounds, ranging from very

simple low molecular weight compounds such as propane (C3H8), which is a gas at room

temperature, to heavy complex compounds with 400 or more carbon atoms and a boiling range of

1,000°F to 1,500°F. Each compound in crude oil has its own boiling temperature, and a crude oil is

often characterized by a distillation curve as illustrated in Figure C.1. There are many different

types of crude oils. The figure shows a light crude oil that has more compounds that boil at lower

temperatures and a relatively small fraction that boil above 1,000°F. The heavy crude oil, by

contrast, has more compounds that are in the high boiling range. This high boiling material poses a

problem for the refiner because it requires expensive processing facilities for producing the high

valued transportation and heating fuels the market desires. The compounds in the high boiling

material must be broken into lower molecular weight compounds, and the high boiling material

often also contains impurities, such as sulfur and heavy metals, that must be removed. Another

attribute of the heavy versus light crude oil is specific gravity (or density stated as pounds per

gallon). Crude oil gravity is measured by API gravity1

, which is inversely related to density; thus,

high API values indicate light crude oils, and low API values indicate heavy crude oils.

Distillation is the first step in refining. Distillation separates crude oil into a set of distillation cuts

as shown in Figure C.2, based on the boiling temperature of the components in the crude oil. For

example, the kerosene cut is a material consisting of components with boiling points between

350°F and 450°F. The cut range for specific distillation products is not a fixed temperature range.

Product specifications give refiners some latitude in varying the “cut” temperature, and allows

them to change the mix of products they produce to meet their product demand. The extent to which

cut ranges overlap is shown in Table C.1. An example will demonstrate how this aspect of refining

can be observed in the refinery data EIA collects.

Assessment of Summer 1997 Motor Gasoline Price Increase 67

Energy Information Administration

1 API gravity is an arbitrary scale expressing the gravity or density of liquid petroleum products. The measuring scale is

calibrated in terms of degrees API; it may be calculated in terms of the following formula:

Degrees API = (141.5/specific gravity)-131.5
68 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

-

200

400

600

800

1,000

1,200

0 20 40 60 80 100

Cumulative Volume Percent

Boiling Temperature(Degrees Fahrenheit)

Light Crude Oil

(38 degrees API)

Heavy Crude Oil

(27 degrees API)

0

Figure C.1 Distillation Curves for Two Crude Oils

Source: Energy Information Administration.

Figure C.2 Crude Oil Distillation and Refinery Stream Flow

Source: Energy Information Administration.
In many refineries, the heavy gas oil (or vacuum gas oil) cut which goes to the fluid catalytic

cracking unit (FCC) has a different cut temperature range in the winter than the summer. In the fall

and winter when heating oil demand is high, refiners may wish to make more heating oil and less

gasoline. This can be done by setting the cut temperature for distillate at 450-650°F, and then in

summer changing it to 450-610°F. During the summer, the heavy gas oil volume increases as the

cut temperature range is expanded from 650-1050°F to 610-1050°F. This diverts more volume to

the FCC unit, where it will be converted into gasoline. Figure C.3, shows that as the FCC feed rate

increases seasonally, gasoline yield increases and distillate yield declines. This figure includes data

aggregated over many refineries, and while the correlation is not perfect, the underlying

relationship is evident.

Assessment of Summer 1997 Motor Gasoline Price Increase 69

Energy Information Administration

Table C.1 Overlapping Temperature Ranges for Distillation Products

Product Temperature Range °F

Gases (Butanes & Lighter) <90

Light Straight Run Naphtha 90-200

Naphtha 160-360

Kerosene 330-520

Distillate 420-650

Heavy Gas Oil 610-1050

Source: Energy Information Administration

25

30

35

40

45

50

55

Jan-87Jan-88Jan-89Jan-90Jan-91Jan-92Jan-93Jan-94Jan-95Jan-96Jan-97

Volume Percent of Crude & Unfinished Oils

Gasoline Yield

FCC Feed Rate

Distillate, Kerosene, & Jet Fuel Yield

Figure C.3 PADD 3 FCC Feed Rate and Light-Product Yields

Source: Energy Information Administration, 1987-1996: Petroleum Supply Annual, DOE/EIA-0340(87-88)/2, Tables 6 and

11, DOE/EIA-0340(89-96)/2, Tables 9 and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues,

Tables 16 and 28.
Kerosene jet fuel yield, which as been rising in the United States, can be increased by expanding its

boiling range in both directions, taking from the gasoline cut and/or the distillate oil cut at the upper

end of the kerosene boiling range. Chapter 4 discusses this occurrence at the PADD level and at

individual refineries.

Using crude oils with different API gravities can affect light-product yields and the requirement for

downstream conversion units. Looking back at Figure C.1, the difference between the light crude

oil and the heavy crude oil is that the heavy crude contains more material boiling above 1,000°F

(heavy residuum cut), and correspondingly less in the naphtha and distillate boiling range. The

heavy gas oil (650-1,000°F), which is the primary feed to the FCC unit, is quite often about 25-30

percent of the crude oil, whether it is a heavy or light crude oil (at least for crude oils in the

20-40°API gravity range).

To illustrate analyzing the impact of a shift to heavier crude, consider the PADD 3 data for the past

decade, which is shown in Table C.2. From 1987 to 1997, the average gravity of the crude oils used

in PADD 3 refineries has dropped by 2.1 degrees. Based on typical relationships for residual cut

volumes and API gravity, for each degree change in gravity, the residual content will change by

about 1.4 volume percent. This indicates that between 1987 and 1997, residual content rose about

2.9 percent. The primary destination of residual oil is a coking unit (coker). Coker feed rate

between 1987 and 1997 increased 2.6 percentage points. Thus, increases in coking capacity would

have been available to accommodate most of the additional material to be processed. (Chapter 4

described the impact on light-product yields when coking feed rate decreased and gravity declined

from summer 1996 to summer 1997.)

70 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table C.2 PADD 3 Annual Average Refinery Data

Average Crude

Gravity (°API)

FCC Feed Rate Hydro-cracker

Feed Rate

Coker Feed

Rate

Light-Product

Yield

1987 33.5 33.9 6.3 8.3 82.7

1988 33.2 34.6 5.7 8.8 82.8

1989 33.4 34.5 5.9 8.8 82.0

1990 33.1 35.2 5.9 8.6 83.1

1991 32.9 35.6 6.3 9.3 82.5

1992 32.4 35.3 6.2 9.7 82.1

1993 32.3 35.6 6.5 9.8 85.0

1994 32.2 34.5 5.9 10.2 83.7

1995 31.9 34.5 7.0 10.7 83.5

1996 31.7 35.3 7.0 11.2 84.2

1997 31.4 35.3 6.5 10.9 82.4

Sources: Energy Information Administration, 1987-1996: Petroleum Supply Annual, DOE/EIA-0340(87-89)/2, Tables 6

and 11, DOE/EIA-0340(90-96)/2, Tables 9 and 16. 1997: Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues,

Tables 16 and 28.

Note: Feed rates and yields are in units of percent of crude oil and unfinished oils.
When refineries use a heavier crude oil, even when there is adequate coking or other bottoms

conversion capacity to handle the increases in residual material, some decline in light-product yield

can be expected. The impact on light-product yield of the shift from light to heavy crude oil can be

illustrated by considering what happens when exchanging 1 percent of the barrel that would be in

the light product range with 1 percent in the residuum range. Originally, the 1 percent in the light

range will contribute virtually its full 1 percent to light-product yield. After the switch, the 1

percent heavy material goes to the coker, where a significant fraction of this heavy material ends up

as coke and light gases. Thus, the light-product yield from the heavy feed to the coker will

contribute less than 1 percent to the light-product yield. Table C.2 shows light-product yields in

PADD 3 staying about the same for the past decade. This constancy may be an indication that some

other process changes have occurred in PADD 3 refineries that would improve light-product yields

and offset the impacts of declining crude oil gravity. In fact, all units and all yields were analyzed,

but that is beyond the scope of this overview discussion.

In Chapter 4 and in this Appendix, the discussion of yields is restricted to only those factors that

have large impacts on light-product yields at the PADD level. There are other factors that affect

yields such as turnarounds, operational factors, technology changes, and changes in product

specifications. In some years, the number of turnarounds and length of outages for key units are

greater and affect yields more adversely than in other years. Yields are also affected by changes in

opeational variables, unit improvement at turnarounds, improvements in catalysts and use of new

catalyst additives. All of these and other factors can cause variation in yields when comparing

individual refinery data or aggregate PADD-level data year to year. Product specifications changes

can have a large impact on yields; however, with the exception of California, no signficant product

changes occurred in the 1995-1997 period analyzed in the report.

Examples from Chapter 4 of Using Refinery Data

The discussion to this point has dealt with changes in product mix and crude oil gravity, but much of

the focus of Chapter 4 was on determining if capacity limits of conversion units, such as FCC’s,

hydrocrackers, and cokers were reached, and if light-product yields declined as refinery utilization

rates increased. To detect if any capacity limits were reached, causing light yields to decline,

trends for light yields were observed, along with feed rate to conversion units. If the feed rates to

FCC units, hydrocrackers, or cokers stayed the same or rose (after adjusting for crude gravity

charge), then it is likely that no yield impacts from capacity limitations occurred. The yields

themselves, for both light and other refined products, were analyzed to see if reported results were

consistent with expectations.

All the yields and throughput rates used in this report are stated as percent of crude and unfinished

oils. The meaning of unfinished oils and how they fit into refinery operations merit commentary.

Unfinished oils can be any of the intermediate streams shown in Figure C.2, such as naphtha, heavy

gas oil, or residual oil. The precise breakdown of the material is not available in the EIA refinery

input data. There is a clue that the material is mostly FCC feedstock (heavy gas oil) and coker feed

(residual oil), which are purchased by a few refineries with FCC’s, coking units, or other residual

processing capacity beyond their primary distillation units. Most of the unfinished oil used by

Assessment of Summer 1997 Motor Gasoline Price Increase 71

Energy Information Administration
PADD 3 refineries is imported, and imported unfinished oil is broken down by components. Table

C.3 shows that, in 1996, imports of heavy gas oil and residual oil (residuum) were 131 and 105

thousand barrels per day respectively, totaling 236 thousand barrels per day. Net refinery inputs of

unfinished oils were 293 thousand barrels per day. Thus, the conclusion is that unfinished oils input

to refineries are mostly FCC and coking feedstocks, and should be part of the yield and unit

throughput calculations.

72 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table C.3 PADD 3 Unfinished Oil in 1996

Unfinished Oil

Inputs

Imports of Unfinished Oils

Naphtha & Light Oils Heavy Gas

Oil

Residual

Oil

Thousand Barrels per Day 293 47 131 105

Percent of Imports 16.6% 46.3% 37.1%

Source: Energy Information Administration, Petroleum Supply Annual, DOE/EIA-0340(96)/1, Tables 9 and 20.
Appendix D

EIA Capacity Utilization Data

EIA collects refinery capacity data monthly for atmospheric crude oil distillation units (barrels per

calendar day), and on a biannual basis, for both atmospheric and vacuum distillation and

downstream refinery units (barrels per stream day). Monthly data is also collected on inputs to

fluid catalytic cracking (FCC), hydrocracking, and coking units.

When EIA reports refinery capacity utilization, it is based on gross input to atmospheric crude oil

distillation units divided by refinery operable distillation capacity. The operable capacity is defined

as the sum of the operating and idle capacity. The operating capacity is that which is operating at

the beginning of the period. The idle capacity is that which is not operating and not under active

repairs, but which is capable of being placed in operation within 30 days, or capacity which is under

repairs that can be completed within 90 days. The idle capacity component can be important in

interpreting maximum production capability. Table D.1 is a summary of data used in Chapter 4.

For PADD’s 1 and 5, the utilization as a percent of operable capacity is lower than utilization as a

percent of operating capacity because of the idle capacity. For PADD’s 1 and 5, the same idle

capacity was reported every month, but it never came on stream. From analyzing past data, when a

short-term market stress event occurs, this idle capacity may be unlikely to come into production,

and hence, the capacity utilization based on operable capacity may provide an unrealistic

perspective of what production response might be.

Historically, only the capacity data for atmospheric distillation units is collected on a barrels per

calendar day basis. Capacity data for other units is collected on a barrels per stream day basis.

Assessment of Summer 1997 Motor Gasoline Price Increase 73

Energy Information Administration

Table D.1 Comparison of Summer 1997 Average Operable and Operating

Capacity Utilization

PADD 1 PADD 2 PADD 5

Operable Capacity (MB/CD) 1642 3447 2927

Idle Capacity (MB/CD) 80 0 50

Operating Capacity (MB/CD) 1562 3447 2877

Gross Inputs to Distillation

(MB/CD)

1554 3524 2738

Capacity Utilization Percent

Operable

94.6% 102.2% 93.5%

Capacity Utilization Percent

Operating

99.5% 102.2% 95.2%

Source: Energy Information Administration, Petroleum Supply Monthly, DOE/EIA-0109(97)/various issues, Table 28.

Notes: Summer is defined as May through September; MB/CD - Thousand barrels per calendar day.
Stream day capacity is an engineering design throughput rate that represents operational capability,

while calendar day capacity represents an annual average capacity that accounts for expected and

unexpected unit outages. A stream day factor is an estimate of the fraction of time that a production

unit is available for service. A unit is not in service 100 percent of the time because of planned and

unplanned outages; hence, the calendar day capacity is equal to the stream day capacity times the

stream day factor.

The stream day factor is an estimate, based on experience with various types of process units. Typical

estimates used for refinery process units are 0.95 for distillation and FCC, and 0.92-0.93 for cokers.

There is sometimes a bit of confusion when unit utilization data are used. When utilization is reported

on the basis of calendar day capacity, a reported capacity utilization of 102 percent for several months

is not an unreasonable number. Part of the unit downtime assumed in the stream day factor is

scheduled outage when planned maintenance occurs. Refiners will arrange to do the planned

maintenance at times of the year when product demands are low, such as February and March. Thus,

for individual refiners, throughput could be 104-105 percent of calendar-day capacity if they have no

unplanned unit outages; however, utilization on a stream day basis should never exceed 100 percent.

When a refinery unit is built, it may have a design maximum unit throughput rate (capacity) of 100

thousand barrels per stream day. But in practice, the actual maximum capacity is only determined by

pushing the unit to maximum in daily operation. The refinery may find that the unit can be run at 105

thousand barrels per stream day. The refiner may also find that throughput can be increased to 110

thousand barrels per stream day by making small changes to the unit (e.g., different tower packing,

larger pumps, changes to heaters). These types of changes are called debottlenecking, because they

involve making a change in some component section of the overall unit that has been limiting unit

throughput. In recent years, as average refinery utilization has risen, refiners have been testing the

actual limits of unit capacity, and have done many debottlenecking projects. However, refiners have

not been uniform in reporting changes in stream-day capacity to EIA; thus, the data is not precise.

This situation can be illustrated by the following example of FCC capacity utilization for 11 specific

PADD 3 refineries whose performance was reviewed for this report.

FCC capacity utilization data must be interpreted with some care, as demonstrated by the results of

the 11 individual PADD 3 refineries summarized in Table D.2. One group of the PADD 3 refineries

operated FCC units above 100 percent of the stream day capacity for the 5 month summer period in

1997, which may indicate an understatement of reported capacity.1 A second group of refineries in

the set of 11 that experienced no shutdowns operated at 94.7 percent of capacity, and the third group

of refineries with shutdowns during the summer 1997 operated at 89.1 percent of capacity for the

period.

Thus, the FCC input capacity limits in PADD 3 are not precisely known, but by examining data for

individual refineries, it was possible to develop reasonable maximum production limits for the

74 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

1 FCC capacity is only collected by EIA every two years. Summertime 1997 FCC utilization estimates are based on

January 1, 1997 capacity reported to EIA in 1996. Actual capacity in 1997 may be higher. Also, based on comparing prior

capacity and input data, there has been some capacity understatement.
PADD’s. Such analysis was used in the study summarized in Chapter 4. EIA will continue to work

with respondents to improve capacity data quality so that aggregate values can be as useful as

possible to analysts.

Assessment of Summer 1997 Motor Gasoline Price Increase 75

Energy Information Administration

Table D.2 FCC Operations for Eleven PADD 3 Refineries in Summer 1997

Description of Operating

Status in Summer

Group Capacity Description Average

Input

MB/D

FCC

Capacity

MB/SD

Capacity

Utilization

Percent Stream

Day Capacity

Units with No Shutdowns Group 1 > 100% Stream Day

Capacity

353.8 339.0 104.4

Group 2 < 100% Stream Day

capacity

350.5 370.0 94.7

Units with Shutdowns Group 3 244.5 274.5 89.1

Total 949.8 983.5 96.5

Source: Energy Information Administration, Inputs: Form EIA-810. Capacity: Petroleum Supply Annual,

DOE/EIA-0340(96)/1, Table 38.

Notes: Summer is defined as May through September; MB/D - Thousand barrels per day; MB/SD -Thousand barrels per

stream day.
Appendix E

Quantitative Explanation Of Motor Gasoline

Price Pass-Through

By using industry and EIA data, an analysis was undertaken to explore the speed of price change

pass-through from the spot market to the retail market for individual PADD and subPADD districts.

The results reported below update the preliminary results published in the Motor Gasoline

Assessment, Spring 1997 (DOE/EIA-0613, July 1997), and include an analysis of PADD 5, which

was not examined in the prior work. These results will be used to form the basis for further research

on pricing mechanisms in petroleum product markets.

Estimates showed that the price pass-through from spot market to the retail level is complete by

three months, with about 50 percent of the change occurring within 4 weeks and 80 percent within 8

weeks. The price pass-through speed for PADD 5 was found to be similar to most of the other areas

studied.

The speed of adjustment of motor gasoline retail prices as a function of spot prices was estimated

using weekly EIA data from the Form EIA-878, “Motor Gasoline Price Survey.” The gasoline

prices used were those of PADD 1A, 1B, and 1C, PADD 2 and PADD 3 conventional regular

gasoline and PADD 5 reformulated regular gasoline. The U.S. Gulf Coast (USG) conventional

regular, New York Harbor (NYH) conventional regular and Los Angeles reformulated regular

(LARFG) spot prices were weekly averages, calculated from daily prices obtained from Platt’s.

Investigation of the time series properties of the price data was performed in order to assist in

specifying the appropriate form of the model; for example, data with unit root properties are best

analyzed using first differences, whereas stationary series can be estimated in level form.

Augmented Dickey-Fuller test could not reject the hypothesis that the retail gasoline data had a unit

root, whereas the averaged spot data rejected the unit root hypothesis at the 5-percent level but not

at the 1-percent level. Since all series had a strong autoregressive component, first differences were

used for the regression analysis. The retail prices and the weekly averages of the spot prices were

defined to correspond to the same week, so that the retail prices were estimated as a function of

lagged spot prices.

The interpretation of the regression model depends on the form of the lag parameters in the model.

For example, the estimated model has the form:

∆∆ ∆ ∆ y b x b x b x cz e t = + +⋅⋅⋅+ + + 1 12 2 0 t t k tk −− − t t

Assessment of Summer 1997 Motor Gasoline Price Increase 77

Energy Information Administration
or more succinctly

Equation E1:

∆ ∆ y b x cz e t i

i

k

= ++ t i t t

=

∑ −

1

0

This model can be interpreted as follows. The lagged form shown in this model means that a

change (∆) in the independent variable (X) will affect the change in the dependent variable (Y) for a

number of time periods. In particular, a change in X during the time period (t-k-1) not only affects

the change in Y during the period (t-k), but also for a number of time periods in the future (i.e.,

(t-k+1), (t-k+2), all the way to (t)). More formally, ∆Xt-k-1 affects not only the change in ∆Yt-k, but

also in ∆Yt-k+1,∆Yt-k+2, ..., ∆Yt. The other parameter Zt-k has an immediate effect on the change in

∆Yt-k and a permanent change in the level of Yt-k during time period (t-k).

The equation actually estimated for this study is

Equation E2:

∆∆ ∆ RP SPOT D OCT NYHUSG AR MA Term t i

i

k

= ++ + ti t

=

∑ β − −

1

1 04 93 , s U+ t

Where:

∆ is the week to week change

RPt is the Monday motor gasoline retail price for week t

SPOTt is the average gasoline spot price for week t

D04OCT93 is the dummy variable for the Federal tax increase in October, 1993

NYHUSGt is the difference between NYH and USG gasoline spot prices for week t

Ut is the random error term at time t

AR, MA are autoregressive (AR) and moving average (MA) terms

Table E.1 shows the parameter estimates for the various regions. The estimation method used was

Ordinary Least Squares. The AR, MA terms are used to make the regression residuals test as

random. The lag length was chosen by using the one which minimized the Akaike and/or

Schwarz-Bayes information criterion value; this also provided parameter estimates for the spot

price which did not increase when another lag was added to the equation. A priori, one would

expect to see an approximately 1:1 eventual pass-through of spot price changes and would also

expect the influence of a spot price change to decrease monotonically over time after the first or

78 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration
Assessment of Summer 1997 Motor Gasoline Price Increase 79

Energy Information Administration

Table E.1 Ordinary Least Squares Regression Results (Weekly Prices to

December 22, 1997)

Start Date April 5,

1993

April 5,

1993

April 5,

1993

October 5,

1992

October 5,

1992

September 18,

1995

Independent

Variable

NYH

conv/reg

NYH

conv/reg

USG

conv/reg

USG

conv/reg

USG

conv/reg

LARFG

RFG

Change in Retail Price (dependent variable)

Parameter PADD 1A PADD 1B PADD 1C PADD 2 PADD 3 PADD 5

∆SPOT(t-1) 0.155*** 0.125*** 0.151*** 0.390*** 0.118*** 0.154***

(0.021) (0.015) (0.015) (0.028) (0.017) (0.034)

∆SPOT(t-2) 0.129*** 0.133*** 0.172*** 0.213*** 0.189*** 0.191***

(0.021) (0.015) (0.015) (0.028) (0.017) (0.033)

∆SPOT(t-3) 0.099*** 0.109*** 0.105*** 0.105*** 0.099*** 0.114***

(0.021) (0.015) (0.015) (0.028) (0.017) (0.033)

∆SPOT(t-4) 0.112*** 0.112*** 0.106*** 0.082*** 0.094*** 0.096***

(0.021) (0.015) (0.015) (0.028) (0.017) (0.033)

∆SPOT(t-5) 0.114*** 0.093*** 0.104*** 0.064** 0.076*** 0.103***

(0.021) (0.015) (0.015) (0.028) (0.017) (0.033)

∆SPOT(t-6) 0.076*** 0.083*** 0.082*** 0.061** 0.080*** 0.054

(0.021) (0.015) (0.015) (0.028) (0.017) (0.033)

∆SPOT(t-7) 0.052** 0.070*** 0.048*** 0.088*** 0.074*** 0.088***

(0.021) (0.015) (0.015) (0.027) (0.017) (0.033)

∆SPOT(t-8) 0.047** 0.076*** 0.080*** 0.064*** 0.047

(0.021) (0.015) (0.015) (0.017) (0.033)

∆SPOT(t-9) 0.048** 0.047*** 0.043*** 0.027 0.062*

(0.021) (0.015) (0.015) (0.017) (0.033)

∆SPOT(t-10) 0.033 0.029* 0.018 0.024

(0.021) (0.015) (0.015) (0.017)

∆SPOT(t-11) 0.025* 0.036** 0.048***

(0.015) (0.014) (0.017)

∆SPOT(t-12) 0.021 0.037*** 0.042**

(0.015) (0.014) (0.017)

D04OCT93 4.405*** 4.443*** 4.566*** 4.800*** 4.761***

(0.660) (0.437) (0.409) (0.879) (0.526)

∆NYHUSG(t-1) 0.134***

(0.049)

AR(1) 0.587** 0.674*** 0.582***

(0.259) (0.113) (0.188)

MA(1) -0.432 -0.328** 0.337*** -0.119* -0.371* 0.485***

(0.288) (0.143) (0.065) (0.062) (0.215) (0.084)

MA(2) 0.289***

(0.066)

Sum of Spot Lags 0.867 0.923 0.984 1.002 0.935 0.91

Adj. R^2 0.547 0.728 0.763 0.611 0.653 0.622

F-Statistic 25.6 47.6 57.3 48.3 37.3 22.6

D.W. Statistic 2.05 2.05 1.96 2.01 2.01 2.02
second time period. The estimation results reported in the table are reasonable and are very similar

to those appearing in the previous study (Motor Gasoline Assessment, Spring 1997). These results

show, depending on the area, that anywhere between 87 to 100 percent of a spot price change is

passed through to retail within 3 months and that the lag effect does tend to decrease over time.

The cumulative price-pass-through results are shown in Table E.2. This table shows the price

pass-through effect seen at the retail level for a 10-cent-per-gallon increase in the spot price. Using

PADD 1B as an example, if the (NYH) spot price increased by 10 cents during a particular week,

then this would result in the retail price increasing by 2.6 cents per gallon within two weeks, 4.8

cents per gallon within 4 weeks, 8.0 cents per gallon within 8 weeks, and 9.2 cents per gallon within

12 weeks. The table shows that for all areas other than PADD 2, for a 10-cent initial spot price

change, there would be an approximate 5-cent pass-through after 4 weeks, increasing to an

approximate 8-cent pass-through after 8 weeks. The reason for the more rapid pass-through to

retail price for PADD 2 is not clear.

Another question that arises is whether or not the August 1997 retail price runup was anomalous.

This question was addressed in two ways. First, the regression results shown in Table E.1 were

recalculated to eliminate the differencing effect on the data. Figures E.1 through E.6 show the

Actual retail price and Fitted (model) results during this time period. The graph for each of the

areas illustrates the relatively tight fit by the model during the August period. This stability

question was also addressed quantitatively by performing Chow Forecast Tests1 with the

breakpoint at the end of July. Table E.3 displays the results of this predictive test and shows that at

the 5% significance level, there is only one rejection (PADD 1A) of the null hypothesis of model

stability before and after the chosen breakpoint. These results show that a price pass-through model

fitted for the entire data series shows no anomalous behavior (except for PADD 1A) during the

August 1997 retail price runup.

80 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

Table E.1 (Continued)

Source: Energy Information Administration calculations.

Notes: The general form of the linear model is shown in Equation E2.

All prices are in cents per gallon.

“∆” is the weekly price change.

The (t-1), (t-2), ..., (t-12) refer to lagged values.

SPOT refers to the weekly average spot price for regular, conventional motor gasoline at New York Harbor (NYH) or

U.S. Gulf Coast (USG); or it refers to the weekly average spot price for regular, reformulated motor gasoline at Los

Angeles (LARFG).

D04OCT93 is a dummy variable corresponding to the change in Federal tax on motor gasoline.

NYHUSG is the (weekly average) spot price difference between NYH and USG.

Standard errors appear in parentheses below the parameter estimates.

***indicates significant at 1% criteria (p-value < 0.01)

** indicates significant at 5% criteria (p-value < 0.05)

* indicates significant at 10% criteria (p-value < 0.10)

1 Introduction to Econometrics, 2nd edition, G.S. Maddala, Macmillan Publishing Company, 1992, pp. 174-176, provides

a description of Predictive Tests for Stability.
Assessment of Summer 1997 Motor Gasoline Price Increase 81

Energy Information Administration

Table E.3 Predictive Stability Tests for August 1997 Price Runup

Area F-Statistic p-Value

PADD 1A 2.1639 0.003

PADD 1B 1.1201 0.327

PADD 1C 1.1199 0.327

PADD 2 1.0162 0.445

PADD 3 0.9111 0.580

PADD 5 0.5020 0.966

Source: Energy Information Administration calculations.

Table E.2 Cumulative Pass-Through to Retail for a 10-Cent

Change in Spot Price

(Cents Per Gallon)

Time Elapsed PADD 1A PADD 1B PADD 1C PADD 2 PADD 3 PADD 5

2 Weeks 2.84 2.58 3.23 6.03 3.07 3.46

4 Weeks 4.95 4.78 5.34 7.90 5.00 5.56

6 Weeks 6.86 6.55 7.21 9.15 6.56 7.13

8 Weeks 7.85 8.01 8.49 10.02 7.94 8.48

10 Weeks 8.67 8.77 9.10 8.45

12 Weeks 9.23 9.84 9.35

Source: Calculations from Table E.1.
82 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

110

115

120

125

130

135

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.1 PADD 1A Model Versus Actual Results

Source: Energy Information Administration.

110

115

120

125

130

135

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.2 PADD 1B Model Versus Actual Results

Source: Energy Information Administration.
Assessment of Summer 1997 Motor Gasoline Price Increase 83

Energy Information Administration

100

105

110

115

120

125

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.3 PADD 1C Model Versus Actual Results

Source: Energy Information Administration.

100

105

110

115

120

125

130

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.4 PADD 2 Model Versus Actual Results

Source: Energy Information Administration.
84 Assessment of Summer 1997 Motor Gasoline Price Increase

Energy Information Administration

100

105

110

115

120

125

130

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.5 PADD 3 Model Versus Actual Results

Source: Energy Information Administration.

100

110

120

130

140

150

160

1/1/963/1/965/1/967/1/969/1/96

11/1/96

1/1/973/1/975/1/977/1/979/1/97

11/1/97

Cents per Gallon

Actual

Model Results

Figure E.6 PADD 5 Model Versus Actual Results

Source: Energy Information Administration.