DOE/EIA-0613

July 1997

Motor Gasoline Assessment

Spring 1997

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 of any

other organization.
Contacts and Acknowledgments

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

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

jcook@eia.doe.gov. Questions for this report can be directed to:

John Zyren (202) 586-6405, jzyren@eia.doe.gov

Dave Costello (202 586-1468 dcostell@eia.doe.gov

Aileen Bohn (202) 586-4255, abohn@eia.doe.gov

Charles Riner (202) 586-6610, criner@eia.doe.gov

EIA would like to acknowledge the contributions of Lamar Gowland and Diana House of the Office

of Oil and Gas and Jon Rasmussen of the Office of Energy Markets and End Use in preparing this

report. In addition, EIA would like to thank the following contract employees for their assistance:

Jaime Chan, John Hackworth, Joanne Shore, and Andy Stowe.

Motor Gasoline Assessment Spring 1997 ii

Energy Information Administration
Contents

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

2. Spring 1996 versus Spring 1997 ................................ 3

Crude Markets Reversed between 1996 and 1997....................... 5

U.S. Gasoline Demand Remained Sluggish .......................... 9

U.S. Gasoline Production Stayed Flat, But Import Growth Was High ........... 10

U.S. Stocks Remained Well Below Average......................... 10

Prices Rose in Spring 1996 and Fell in Spring 1997 ..................... 11

Financial Performance in 1997 Reflected Higher Gasoline Spreads............. 12

3. Analysis of Gasoline Supply.................................. 15

U.S. Supply Bolstered By Imports .............................. 15

Regional Supply Patterns Varied Significantly ....................... 21

Implications of Supply Evolution .............................. 23

4. California - A Unique Situation................................ 25

5. Prices Vary By Region, Class of Trade, and Grade...................... 33

Class of Trade Prices and Wholesale Spreads Varied Regionally .............. 33

Resale Price Spreads Showed More Strength in First Quarter 1997 than in 1996 . . . . . . 35

Consumers Coped with High Prices By Downgrading. . . . . . . . . . . . . . . . . . . . 36

6. Insights from Modeling Gasoline Prices and Updated Outlook . . . . . . . . . . . . . . . 41

Components of Gasoline Price Changes in 1996 and 1997 . . . . . . . . . . . . . . . . . 41

Price Movements Through the Distribution System . . . . . . . . . . . . . . . . . . . . . 42

Updated Outlook for Summer 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Appendix A: Spot Gasoline Price Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Appendix B: Using STIFS to Explore Price Behavior . . . . . . . . . . . . . . . . . . . . . 53

Gasoline Price Modeling in STIFS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Recent Predictive Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Appendix C. Quantitative Explanation of Motor Gasoline Market Price Passthrough . . . . . 59

Appendix D: Resale Gasoline Price Spreads . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Appendix E: Petroleum Administration For Defense Districts (PADDs) ............ 69

Motor Gasoline Assessment Spring 1997 iii

Energy Information Administration
Tables

Table 2.1 Spring 1997 and Spring 1996 Summary Market Comparisons ........... 4

Table 2.2 Motor Gasoline Demand ............................... 9

Table 2.3 Total Gasoline Production ............................. 10

Table 3.1 Changes in Non-Crude Oil Gasoline Feedstock Volumes

(Annual Averages) ................................. 16

Table 3.2 Imports by Geographic Area ............................ 18

Table 3.3 Supply Patterns, First Quarters 1996 and 1997................... 19

Table 3.4 Regional Gasoline Supply Profiles ......................... 22

Table 3.5 Total Gasoline Stocks at Beginning of April .................... 24

Table 4.1 Transportation Costs and Time Required to Import Fuels

to California .................................... 27

Table 5.1 Regional Three-Year Average Distribution Level Price Differences ....... 34

Table 6.1 Components of Gasoline Price Change, 1996-1997 ................ 42

Table 6.2 Projected Components of Gasoline Price Change, 1996-1997 ........... 47

Table B.1 Summary Measures of Gasoline Price Predictive Accuracy:

January 1995 to April 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table B.2 Actual and Predicted Motor Gasoline Prices . . . . . . . . . . . . . . . . . . . . 55

Table C.1 Ordinary Least Squares Regression Results

Weekly Prices to May 19, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Table C.2 Polynomial Distributed Lag Estimation Results

Weekly Prices to May 19, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Table C.3 Cumulative Passthrough to Retail for 10-Cent Change in Spot Price

(Comparison of OLS and PDL Estimation Results) . . . . . . . . . . . . . . . . 63

Motor Gasoline Assessment Spring 1997 iv

Energy Information Administration
Figures

Figure 2.1 Weekly Conventional Gasoline and Crude Oil Prices ................ 3

Figure 2.3 Spring 1997 Gasoline Price Summary ........................ 6

Figure 2.2 Spring 1996 Gasoline Price Summary ........................ 6

Figure 2.4 Spot Crude Oil Prices (FOB)............................. 7

Figure 2.5 World Petroleum Supply and Demand........................ 7

Figure 2.6 Light-Heavy Crude Oil Price Differentials ..................... 8

Figure 2.7 Total Gasoline End-of-Month Stocks........................ 11

Figure 2.8 Spot Gasoline Spread (New York Harbor Regular Conventional

Minus West Texas Intermediate).......................... 12

Figure 3.1 1996 Gasoline and Blending Stock Imports .................... 17

Figure 3.2 New York Harbor-Rotterdam Regular Gasoline Price Differences ........ 18

Figure 3.3 Motor Gasoline Yield From Crude Oil ....................... 20

Figure 3.4 Distillate and Kerosene-Jet Yields Combined ................... 20

Figure 4.1 California Gasoline and Crude Oil Prices ..................... 25

Figure 4.2 Spring 1996 PADD 5 RFG Weekly Supply and Demand ............. 27

Figure 4.3 PADD 5 Total Gasoline Stocks. . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Figure 4.4 Spring 1997 PADD 5 RFG Weekly Supply and Demand . . . . . . . . . . . . . 30

Figure 5.1 PADD 1 Wholesale Prices for Regular Conventional Gasoline . . . . . . . . . . 34

Figure 5.2 PADD 1 Resale Gasoline Spread (Resale Regular Conventional

Minus Refiners’ Cost of Imported Crude Oil) . . . . . . . . . . . . . . . . . . . 36

Figure 5.3 Oxygenate Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Figure 5.4 Oxygenate Production and Stock Draw Down Combined . . . . . . . . . . . . . 37

Figure 5.5 Premium and Regular Conventional Gasoline Prices . . . . . . . . . . . . . . . 38

Figure 5.6 Gasoline Grade Market Shares and Gasoline Price. . . . . . . . . . . . . . . . . 38

Figure 6.1 STIFS Price Response to 10% Crude Oil Price Change . . . . . . . . . . . . . . 43

Figure 6.2 PADD 1B Regular Conventional Gasoline Prices . . . . . . . . . . . . . . . . . 44

Figure 6.3 Projected Refiners’ Acquisition Crude Oil Prices . . . . . . . . . . . . . . . . . 46

Figure 6.4 Projected Gasoline Prices 1997........................... 46

Figure A.1 GC Spot Regular Conventional Minus WTI .................... 49

Figure A.3 NYH Spot Regular Conventional Minus WTI ................... 50

Figure A.2 GC Spot Regular Conventional Minus Arab Light ................. 50

Figure A.4 NYH Spot Regular Conventional Minus Brent................... 51

Figure B.1 Retail Gasoline Price (Actual versus Predicted) .................. 56

Figure B.2 Wholesale Gasoline Price (Actual versus Predicted)................ 56

Figure D.1 Resale Regular Conventional - Refiner’s Cost Imported PADD 1 ......... 65

Figure D.2 Resale Regular Conventional - Refiner’s Cost Imported PADD 2 ......... 66

Figure D.3 Resale Regular Conventional - Refiner’s Cost Imported PADD 3 ......... 66

Figure D.4 Resale Regular Conventional - Refiner’s Cost Imported PADD 4 ......... 67

Figure D.5 Resale Regular Conventional - Refiner’s Cost Imported PADD 5 ......... 67

Motor Gasoline Assessment Spring 1997 v

Energy Information Administration
1. Introduction

The springs of 1996 and 1997 provide an excellent example of contrasting gasoline market

dynamics. In spring 1996, tightening crude oil markets pushed up gasoline prices sharply, adding to

the normal seasonal gasoline price increases; however, in spring 1997, crude oil markets loosened

and crude oil prices fell, bringing gasoline prices down. This pattern was followed throughout the

country except in California. As a result of its unique reformulated gasoline, California prices

began to vary significantly from the rest of the country in 1996 and continued to exhibit distinct

variations in 1997. In addition to the price contrasts between 1996 and 1997, changes occurred in

the way in which gasoline markets were supplied. Low stocks, high refinery utilizations, and high

imports persisted through 1996 into summer 1997, but these factors seem to have had little impact

on gasoline price spreads relative to average spread.

Chapter 2 summarizes and contrasts the events of the two springs, illustrating the interactions

between U.S. gasoline markets, which did not change appreciably, and crude oil markets, which

went from tight to loose.

Chapter 3 takes a deeper look at what has recently been changing in gasoline supply, focusing

particularly on imports and the yield changes seen over the past several years.

Chapter 4 focuses on California, which is becoming an almost isolated market. In 1996, the

uncertainties surrounding the ability to supply its new, unique, reformulated gasoline (CaRFG)

pushed prices to record highs as refineries stumbled getting the program underway. In a dramatic

turnaround, prices plummeted in the fall as oversupply caused dumping of gasoline and a price war

in southern California. As 1997 unfolded, new refinery problems again brought supply concerns

that increased prices.

Chapter 5 looks across regions to explore gasoline price behavior by class of trade. Resale price

spreads over crude oil cost are also inspected to see if there is any major difference between the

patterns of 1996 and 1997 from the information provided by the spot price spreads in Chapter 2.

The chapter ends with an observation of consumers’ propensity to switch gasoline grades when

prices rise.

Chapter 6 concludes the report with a more in-depth look at some of the features of gasoline prices:

the Energy Information Administration (EIA) Short-Term Integrated Forecasting System is used to

further quantify the relationship between crude oil and gasoline market factors; the lag relationship

between retail prices and spot prices is quantified; and, finally, an updated outlook for what to

expect for the remainder of the summer is provided.

Motor Gasoline Assessment Spring 1997 1

Energy Information Administration
2. Spring 1996 versus Spring 1997

Retail conventional regular gasoline prices in spring 1996 rose sharply, increasing by 19 cents

between mid-February and mid-May (Figure 2.1). While gasoline prices frequently increase this

time of year, the speed and magnitude of the increase in 1996 alarmed many consumers. The spring

1996 price increases resulted from a combination of factors, some of which were unusual but not

unprecedented. Rising crude oil prices and the normal seasonal increase in gasoline prices

accounted for most of the retail price increase. However, gasoline markets were also affected by

unusual factors, including a late-winter cold spell which caused refiners to focus on production of

distillate (heating oil, diesel fuel and kerosene-jet fuel) instead of gasoline longer than usual;

lower-than-normal gasoline stocks; continuing high gasoline demand and high refinery capacity

utilization; and the persistent expectation that prices would fall several months in the future, which

discouraged production of gasoline in excess of demand to build stocks.

The petroleum markets in spring 1997 completed the story of the spring 1996 runup with a price

reversal, providing an excellent opportunity to watch the oil market dynamics when crude market

factors move in the opposite direction. Table 2.1 summarizes major market factors for comparison.

Motor Gasoline Assessment Spring 1997 3

Energy Information Administration

0

10

20

30

40

50

60

70

80

90

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

Cents Per Gallon

U.S. Average Regular Retail Excluding Taxes

New York Harbor Regular Spot

WTI Spot

Figure 2.1 Weekly Conventional Gasoline and Crude Oil Prices

Source Energy Information Administration, Form EIA-878, “Motor Gasoline Price Survey,” Standard and Poor’s Platt’s.

Note: WTI-West Texas Intermediate.
4 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Market Factor January-April 1996 January-April 1997

World Petroleum

Supply/Demand Balance

Winter stock draw was high Winter stock draw was low

Good world economy supports

petroleum demand

Good world economy supports

petroleum demand

Cold weather increases winter

demand more than expected (3.0

percent higher than in winter

1994-95)

Winter demand held in check by

milder weather (1.8 percent higher

than in winter 1995-96)

Supply growth less than expected Supply growth strong

Crude Supply Iraqi entry into market delayed Iraq began sales December ‘96

Non-OPEC additions expected, but

did not arrive

Non-OPEC supply increased, and

more expected

Light crude was abundant Abundance of light crude grew

Crude Markets Began 1996 under $20/barrel. Began 1997 about $26/barrel after

high-demand fourth quarter.

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

Futures market backwardation was

steep

Term structure of crude futures

flattened

Modest light-heavy price differentials Very small light-heavy price

differentials

U.S. Winter Distillate Began winter with normal stocks, but

ended March with lower than normal

stocks due to cold weather

Began winter with record low stocks,

met demand with extra production,

and stocks ended winter at normal

levels due to mild weather

April: With little or no discretionary

stocks, late cold weather caused

refiners to re-focus on distillate

production

April: Although demand was strong,

no unexpected re-focusing on

distillate production

U.S. Gasoline

Supply/Demand Balance

Stocks were low Stocks were very low

Demand growth modest (1.1 percent) Demand growth low to modest (0.8

percent)

Demand level high (7,601 thousand

barrels per day)

Demand level high (7,710 thousand

barrels per day)

Production growth modest Production growth modest

Imports high (met 5.8 percent of

demand)

Imports very high (met 7.7 percent of

demand)

Gasoline Market Increasing crude oil prices pushed

gasoline prices up

Falling crude oil prices brought

gasoline prices down

Spreads mainly at or below seasonal

norms

Spreads slightly above seasonal

norms

Table 2.1 Spring 1997 and Spring 1996 Summary Market Comparisons

Source: Energy Information Administration
In qualitative terms, the supply/demand balance for gasoline in spring 1997 was almost the same as

in spring 1996: demand growth was low to modest; levels of gasoline production from January

through April supplied about 97 percent of demand in both years; imports were very high in 1996

and even higher in 1997; and stocks were low. Prices, on the other hand, behaved very differently.

Prices rose dramatically during spring 1996, but fell during spring 1997, even though gasoline

price spreads were slightly higher in 1997 (Figures 2.2 and 2.3).

The explanation of the spring 1997 price decline lies mainly with crude oil price and normal

seasonal spread changes — the main factors behind the spring 1996 price increase. West Texas

Intermediate (WTI) crude oil prices in April 1997 averaged 9 cents lower than in April 1996. New

York Harbor spot gasoline prices also averaged 9 cents lower in April 1997 than in April 1996.

From December 1996 through April 1997, crude oil prices fell 13.5 cents per gallon, and spot prices

fell 11.3 cents as the impact from declining crude prices was moderated by normal increases in

seasonal spreads.

Crude Markets Reversed between 1996 and 1997

In early 1997, crude oil markets finally seemed to be ending the tight supply/demand cycle that

drove prices up in 1996. During the winter of 1995-96, oil product demand was high due to cold

weather, while supplies of crude oil were less than expected. Prompt markets were tight during

spring 1996, pushing crude oil prices higher, when a late cold snap caused prices to leap even higher

and to peak in April. Strong backwardation in crude oil futures persisted through 1996 as buyers

kept expecting the tight prompt markets to loosen with new supplies and lower demand. With

buyers expecting prices to fall, the building of stocks was discouraged.

Winter 1996-97 was almost a mirror image of winter 1995-96. As winter 1996-97 began, world

petroleum stocks were still low, so increased demand in the fourth quarter, coupled with sluggish

supply growth, again pushed crude prices up, reaching levels at the end of December that were

higher than they were in April 1996 (Figure 2.4). But the weather in winter 1996-97 was not as

severe as the prior winter. In addition, Iraqi production entered the market in December and other

supplies were increasing, taking the pressure off prices. In the first week of January 1997, WTI was

over $26 per barrel, but prices soon fell, tumbling throughout the first quarter. By the first week in

April, the price of WTI had dropped $7 per barrel.

During winter (fourth and first quarters), world demand normally exceeds supply, and stocks of

crude and product are drawn down (Figure 2.5). In winter 1996-97, the draw was much smaller

than normal, reflecting the increasing supply and mild weather restraining demand. Preliminary

estimates for the first quarter of 1997 indicate a stock build of 0.1 - 0.2 million barrels per day.1 In

contrast, first quarter 1996 experienced a stock draw of 1.8 million barrels per day, while crude

prices climbed $3 per barrel.

Motor Gasoline Assessment Spring 1997 5

Energy Information Administration

1 International Energy Agency, Monthly Oil Market Report, May 9, 1997, p. 51; Oil Market Intelligence, May 1997, p. 3.
6 Motor Gasoline Assessment Spring 1997

Energy Information Administration

60.5 59.8

52.8 49.9 47.0 49.8

61.5

67.6

67.2

62.0

56.3

60.7

0

10

20

30

40

50

60

70

80

90

Dec-96 Jan-97 Feb-97 Mar-97 Apr-97 May-97

Cents Per Gallon

1991-96 Average Spread (NYH Gasoline Minus WTI)

West Texas Intermediate Crude (WTI)

Actual NYH Spot Gasoline Price

Figure 2.3 Spring 1997 Gasoline Price Summary

Source: Standard and Poor’s Platt’s

45.3 44.8 45.5

50.8

56.0

50.6

64.3

52.1

49.9

52.8

65.3

58.3

0

10

20

30

40

50

60

70

80

90

Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96

Cents Per Gallon

1991-96 Average Spread (NYH Gasoline Minus WTI)

West Texas Intermediate Crude (WTI)

Actual NYH Spot Gasoline Price

Figure 2.2 Spring 1996 Gasoline Price Summary

Source: Standard and Poor’s Platt’s
Motor Gasoline Assessment Spring 1997 7

Energy Information Administration

0

5

10

15

20

25

30

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Dollars per Barrel

WTI

Brent

Arab Light

Arab Heavy

Figure 2.4 Spot Crude Oil Prices (FOB)

Source: Standard and Poor’s Platt’s

60

62

64

66

68

70

72

74

76

1Q-91 1Q-92 1Q-93 1Q-94 1Q-95 1Q-96 1Q-97

Million Barrels Per Day

S tock S upply

Build

S tock

Draw

Demand

0

Figure 2.5 World Petroleum Supply and Demand

Source: Energy Information Administration, International Petroleum Statistics, DOE/EIA-0520, Table 2.1; 1991 Data:

January 1996 issue; 1992-1996 Data: May 1997 issue; 1997 first quarter estimate of actual and second quarter projection:

Oil Market Intelligence Update, June 2, 1997, p. 1.
Crude supply in the first quarter of 1997 increased about 3 million barrels per day over the first

quarter of 1996. Organization of Petroleum Exporting Countries (OPEC) contributed the largest

portion of the increase. While many of OPEC’s members increased production, Iraq showed the

largest single increase at about 0.6 million barrels per day. Non-OPEC production increased 1.1

million barrels per day in first quarter 1997 over first quarter 1996, with Latin America (Mexico,

Brazil, Argentina, and Colombia) making the largest contribution to non-OPEC production

additions. North Sea production increased only about 0.2 million barrels per day as some new field

start ups experienced delays.

Light-heavy crude price differentials declined noticeably in the first quarter 1997, ending a brief

upward trend that began about two years earlier (Figure 2.6). Low differentials tend to depress

refiners’ margins. The production increases of light crude oil in the Atlantic Basin exceeded

regional market demand, and the light-heavy differential contracts when the supply surplus grows.

When the differential reached a low point in April 1997, the West African crude oils became very

attractive to the Asian market. Increased shipments to Asia have been reported, and the light-heavy

differential has begun to increase again.

From March to April 1996, demand for crude oil declined over 2 million barrels per day, in spite of a

cold snap that temporarily required more distillate production. In 1997, April demand is estimated

to be about equal to March demand, and the rate of stock build remains steady. As U.S. and

8 Motor Gasoline Assessment Spring 1997

Energy Information Administration

-2

0

2

4

6

8

10

Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Dollars Per Barrel

Bonny Light - Arab Heavy

Brent - Dubai

Bonny Light - Arab Light

Figure 2.6 Light-Heavy Crude Oil Price Differentials

Source: Standard and Poor’s Platt’s
European refiners ended their spring maintenance, refinery runs jumped sharply. The stagnating

stock build, good U.S. gasoline margins, and increasing demand for Atlantic Basin light crude oils

in April 1997 combined to increase crude oil prices somewhat. The price of WTI increased by $2

per barrel from early April 1997 to late May; however, most market observers view this price

upturn as temporary, and expect supply/demand fundamentals to weaken crude prices in the second

and third quarters as production exceeds demand and a healthy stock build occurs.

Due to the looser world petroleum supply/demand balance, the April 1997 upturn in crude oil prices

was nothing like the jump that occurred in April 1996. World petroleum stocks are higher in 1997,

reflecting higher supply relative to demand. The futures market in 1997 is also much different,

reflecting the turnaround in crude oil markets. In 1997, term structures through April were

relatively flat compared to the steep backwardation experienced in April 1996, which resulted both

from tight prompt markets and expectations of new supply arriving in the near future.

U.S. Gasoline Demand Remained Sluggish

Gasoline demand in spring of 1996 grew slowly over demand in 1995 ( 0.5 percent first quarter) as a

result of higher prices and bad weather, which discouraged driving (Table 2.2). But with refinery

utilization averaging over 92 percent and stocks running below normal, analysts were watching the

seasonal demand increases for signs of strength that might temporarily overextend the supply

system. Although average demand showed sluggish growth, demand in April popped up almost 218

thousand barrels per day (MB/D) higher than in 1995. (At the same time, distillate demand had

surged with a late cold snap that caused refiners to refocus on distillate briefly, when they normally

would be gearing up for the spring increase in gasoline demand.) The increase in April gasoline

demand sent signals that the weak first quarter performance might be at an end, but the signal

proved false. Demand growth remained relatively low throughout the year, averaging 0.8 percent

(preliminary estimate)2

, but total average demand pushed gasoline levels consumed to a new high

(7,849 MB/D).

Motor Gasoline Assessment Spring 1997 9

Energy Information Administration

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Annual Annual

Growth

1993 7,044 7,573 7,754 7,525 7,476 1.4%

1994 7,215 7,709 7,827 7,647 7,601 1.7%

1995 7,477 7,921 7,955 7,796 7,789 2.5%

1996 7,511 7,985 8,001 7,896 7,849 0.8%

1997 7,589

Table 2.2 Motor Gasoline Demand

Source: 1993-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 3; 1996-1997, Petroleum Supply

Monthly, DOE/EIA-0109, Table 4 (various issues).

2 As this document was being finalized, revised data for 1996 became available. It showed demand increasing 1.3% from

1995 to 1996.
The first quarter 1997 started very much like the first quarter 1996. First quarter demand was

slightly stronger, growing 1 percent over demand in first quarter 1996; this is still only a modest

growth rate. April 1997 demand topped the strong 1996 April demand, but as in 1996, preliminary

data shows May demand to be sluggish. The economy remains strong, however, and with gasoline

prices weaker than last year, summer demand could still show more strength than the first few

months would indicate.

U.S. Gasoline Production Stayed Flat, But Import Growth Was

High

Production during first quarter 1996 was only 0.7 percent above that during 1995 (Table 2.3).

Production met 97.2 percent of demand, with stocks and imports filling in the remainder. In 1997,

production grew only 0.3 percent over that in 1996 and supplied 96.4 percent of demand in spite of

operable capacity increasing 200 MB/D. However, in April, 1997 production was much higher

than in April 1996, and May production may be 300 MB/D higher than that during May 1996.

Imports in 1997 are much higher than in 1996, which itself was a high import year. Venezuela and

Canada both exported about 30 MB/D more to the United States in 1996 than in 1995, but Europe

contributed the largest amount of increase, accounting for almost 46 percent of the total import gain

from 1995 to 1996. Europe continues to be a major source of the import growth in first quarter

1997, as it produces more gasoline than it needs internally. (See Chapter 3)

U.S. Stocks Remained Well Below Average

Gasoline stocks in 1996 began the year lower than average and did not recover prior to the start of

the spring gasoline driving season (Figure 2.7). Inventories dropped below normal levels in August

10 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Quarter 1 Quarter 2 Quarter 3 Quarter 4 Annual Annual

Growth

1993 7,091 7,340 7,413 7,590 7,360 4.3%*

1994 6,885 7,333 7,399 7,620 7,312 -0.7%

1995 7,238 7,683 7,724 7,701 7,588 3.8%

1996 7,292 7,674 7,699 7,704 7,593 0.1%

1997 7,315

Table 2.3 Total Gasoline Production

Note: Field-blended gasoline was not available until the end of 1992. Thus, the growth shown from 1992 to 1993 is

slightly overstated; however refinery production alone grew 3.5 percent between 1992 and 1993.

Source: 1993-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 3; 1996-1997, Petroleum Supply Monthly,

DOE/EIA-0109, Table 4 (various issues).
1995 and stayed lower than average through the winter. During April 1996, in spite of strong

demand, production and imports were adequate to hold stocks steady when they normally fall at

that time of year.

Stocks recovered to more normal levels over the course of summer 1996, but an unusually large

demand in October dropped stocks back well under average, where they remained into 1997 in spite

of very strong imports supplementing production. In first quarter 1997, stocks were even lower

than they had been during first quarter 1996. Total stocks in 1997 were averaging about 4 days less

supply than the average days supply during the 1991 through 1996 period.

Prices Rose in Spring 1996 and Fell in Spring 1997

Retail prices averaged 17.9 cents higher in December 1996 than in 1995, but by April 1997, were

3.3 cents lower than in April 1996. Retail regular conventional prices, which lag behind the change

in spot prices, had fallen 5.5 cents from December 1996 through April 1997. Thus, consumers in

spring of 1997 experienced falling gasoline prices after the dramatic increase in prices experienced

in spring 1996.

Motor Gasoline Assessment Spring 1997 11

Energy Information Administration

180,000

190,000

200,000

210,000

220,000

230,000

240,000

Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels

Actual

Average 1991-96

0

Figure 2.7 Total Gasoline End-of-Month Stocks

Source: 1994-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340 Table 2 (various issues); 1996-1997, Petroleum

Supply Monthly, DOE/EIA-0109 Table 2 (various issues); April-May 1997, Weekly Petroleum Status Report,

DOE/EIA-0208, Table 10.
Spot gasoline spreads (gasoline prices minus crude oil prices) showed more strength in 1997 than in

1996, due mainly to the tighter balance between supply and demand as evidenced by the low stocks

(Figure 2.8 and Appendix A). By April, the spreads fell back a bit relative to average as refiners

came back on stream following maintenance and demand continued to remain only slightly higher

than demand in 1996. During May, production and imports rose high enough to begin replenishing

stocks, which still remained lower than normal, but built more than usual during the month.

Spreads stayed below average in May, failing to regain their earlier first quarter strength relative to

normal levels. With the exception of California (Chapter 5), prices regionally followed the national

pattern. Chapter 5 illustrates some regional price differences in more detail.

Financial Performance in 1997 Reflected Higher Gasoline Spreads

On a year-over-year basis, higher oil and natural gas prices in the first quarter 1997 led to large

gains in income for the major integrated petroleum companies. Income from U.S. oil and gas

production was up 31 percent.3

12 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

5

10

15

20

25

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure 2.8 Spot Gasoline Spread (New York Harbor Regular Conventional

Minus West Texas Intermediate)

Source: Standard and Poor’s Platt’s

3 Financial News for Major Energy Companies, http://www.eia.doe.gov/emeu/perfpro/news_m/
Income from the majors’ U.S. refining and marketing operations increased 19 percent above

income first quarter 1996. Nine of fourteen majors reported higher U.S. downstream income, citing

improved margins and greater throughput as contributing factors. While distillate spreads were

much worse first quarter 1997 than in first quarter 1996 due to warmer weather, gasoline spreads

were better, pulling margins higher.

Income gains from foreign downstream operations increased 21 percent as a result of improved

margins in Europe and Latin America. Generally, though, refining margins in the Asia Pacific area

worsened first quarter 1997 compared to first quarter 1996.

Independent energy companies also experienced improvements during first quarter 1997 over their

income in first quarter 1996. Independent oil and gas producers’ income more than doubled in the

first quarter as a result of higher oil and natural gas prices. Independent refiners’ earnings increased

23 percent over last year’s earnings.4

Motor Gasoline Assessment Spring 1997 13

Energy Information Administration

4 Financial News for Independent Energy Companies, http://www.eia.doe.gov/emeu/perfpro/news_i/
3. Analysis of Gasoline Supply

Gasoline is supplied from refinery production, imports, and from draw down of inventory. In recent

years, there have been important changes in all three of these supply components. Refinery

production is the dominant source of gasoline supply, with only about 5 percent of supply coming

from imports; however, changes in import volumes can have important impacts on refinery

production as was the case in 1995 and 1996. When viewed on an annual basis, the volume

supplied from stock changes is very minor (19 MB/D, or less than 0.3 percent of supply in 1996),

but the build and draw cycle of gasoline stocks is an important indicator of the supply/demand

pressure in gasoline markets. (See Chapter 2)

U.S. Supply Bolstered By Imports

Refinery gasoline production in recent years has been impacted by two factors. First, changing

environmental regulations have changed the use of feedstocks other than crude oil that contribute to

gasoline production. Second, since the beginning of the reformulated gasoline (RFG) program,

there has been an increase in imports of gasoline blending components, which are used by blenders

and refiners to produce finished gasoline. Moreover, both the environmental requirements for

gasoline products and imports have affected the seasonal patterns of gasoline production, a fact that

has required yield adjustments between gasoline and distillate.

The annual volume data for the other refinery feedstocks that contribute to gasoline production are

shown in Table 3.1. Butane use in gasoline has been decreasing due to progressively more stringent

limits on vapor pressure imposed by EPA and individual States. Butane has a high octane number

but also is the highest vapor pressure component of material blended into gasoline. It is added to

gasoline until the maximum vapor pressure limit is reached. The butane data in Table 3.1 represent

butane produced from gas plants that is brought into refineries. Butane is also produced in

refineries. Refinery-produced butane is the first source of supply put into gasoline. Refineries now

build butane stocks in the summer when vapor pressure limits are low and butane use is low. These

stocks are then used during the winter when vapor pressure limits increase.

Oxygenate use in refineries has increased dramatically. A modest amount was used in the 1980’s

for octane enhancement. Then in 1992, oxygenated gasoline requirements during the winter

months and in 1995 RFG requirements year round resulted in significant oxygenate demand. In

1995 and 1996, about 254 MB/D of oxygenates were brought into refineries. Oxygenate use

represents 3.4 percent of finished gasoline production.

Production of finished gasoline from refineries, including both refiners and blenders, increased in

1996 over 1995 by 80 MB/D, going from 7,459 to 7,539 MB/D, but this increase is traceable to the

increases in blending stock inputs. Blending component input to refineries and blenders

experienced a large change from 1995 to 1996. In 1995, more blending components were produced

Motor Gasoline Assessment Spring 1997 15

Energy Information Administration
than were used by refineries with a net production of 28 MB/D. In 1996, blending component use

by refiners and blenders was higher than production, with net input averaging 97 MB/D.

When gasoline production is adjusted for butane, oxygenates, and blending stock net inputs, the

resulting yield of gasoline from crude oil inputs declined 1.1 percent, from 51.2 percent to 50.1

percent between 1995 and 1996. The decrease in the yield of gasoline from crude oil in 1996 was

part of a shift in yield by refiners to increasing distillate yield (diesel, heating oil and jet fuel), while

16 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Net Inputs to Refiners and Blenders of Non-Crude Oil

Feedstocks for Gasoline Production

Gasoline Yield Percent of

Crude Oil Input

N-Butane

Refinery Use

Other HC’s &

Oxygenates

Blending

Component

N-Butanes+

Oxygenates

& Other

HCs+

Blending

Components

Total

Finished

Mogas

Finished

Mogas -

N-Butane -

Oxy & Other

HC -

Blending

Components

Year MB/D MB/D MB/D MB/D Vol %

Yield

Vol % Yield

1981 126 50 154 331 51.3 48.7

1982 169 52 173 394 53.8 50.4

1983 102 53 134 288 54.3 51.8

1984 105 45 115 265 53.6 51.4

1985 84 55 187 326 53.5 50.7

1986 69 58 203 330 53.1 50.5

1987 57 64 131 252 53.2 51.3

1988 46 53 85 184 52.5 51.1

1989 12 59 42 114 52.0 51.1

1990 71 78 26 175 51.9 50.6

1991 71 87 54 211 52.4 50.8

1992 32 131 -2 161 52.7 51.4

1993 57 192 28 278 53.7 51.6

1994 32 199 -40 190 51.8 50.4

1995 31 294 -28 297 53.4 51.2

1996 31 310 97 437 53.2 50.1

Table 3.1 Changes in Non-Crude Oil Gasoline Feedstock Volumes

(Annual Averages)

Source: Energy Information Administration, 1981-1995, Petroleum Supply Annual, DOE/EIA-0340, Volume 2, Table 3

(various issues); 1996, Petroleum Supply Monthly, February, 1997, DOE/EIA-0109, Table 5.

Note: HC means hydrocarbons, Oxy means oxygenates; Oxygenate use was not reported to EIA separately from other

hydrocarbons until 1993.
decreasing gasoline yield. This occurred because imports of finished gasoline and blending

components increased significantly from 202 MB/D in 1995 to 355 MB/D in 1996, allowing lower

production from crude oil in refineries, despite growth in product demand.

Imports grew substantially in both 1996 and 1997 (Figure 3.1). The major increases in import

volumes came from Europe, Venezuela, Canada and the Middle East/Africa (Table 3.2). Weak

gasoline markets in other areas encouraged gasoline imports to the United States. Gasoline

supplies have been in excess in Europe because much of the conversion facilities installed (i.e.,

fluid catalytic cracking units and cokers) produce more gasoline than diesel, and diesel demand has

been growing faster than gasoline demand. The gasoline price difference between the United States

East Coast (New York Harbor) and Rotterdam was in the 0-4 cents-per-gallon range from 1991 to

1994, but it has been in the 3-8 cents-per-gallon range since then (Figure 3.2). Since transportation

costs are in the 3-5 cents-per-gallon range, Europe to United States movements are economically

attractive. Gasoline from the Middle East (principally Saudi Arabia) has been finding its way to

U.S. markets because Asian refining growth has impacted the need and economics for gasoline

imports. Finally, any strength in U.S. gasoline markets attracts some increases in imports from

traditional Western hemisphere sources, such as Venezuela, Virgin Islands, and Canada.

Motor Gasoline Assessment Spring 1997 17

Energy Information Administration

0

100

200

300

400

500

600

700

800

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 3.1 1996 Gasoline and Blending Stock Imports

Source: 1994-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 3 (various issues); 1996-1997, Petroleum

Supply Monthly DOE/EIA-0109, Table 4 (various issues); April-May 1997, Weekly Petroleum Status Report,

DOE/EIA-0208, Table 10 (various issues).
18 Motor Gasoline Assessment Spring 1997

Energy Information Administration

-5

0

5

10

15

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Figure 3.2 New York Harbor-Rotterdam Regular Gasoline Price Differences

Source: Standard and Poor’s Platt’s

Imports (Thousand Barrels

Per Day)

Import Shares (Percent)

1994 1995 1996 Q1 1997 1994 1995 1996 Q1 1997

Canada 49.3 66.4 93.7 82.6 13.1% 21.2% 20.0% 13.8%

Virgin Islands 117.7 107.4 105.1 115.0 31.3% 34.3% 22.4% 19.2%

Venezuela 33.4 37.7 64.9 87.0 8.9% 12.0% 13.8% 14.5%

Europe 130.5 67.6 139.3 224.6 34.7% 21.6% 29.7% 37.5%

Middle East & Africa 4.8 11.3 27.6 33.1 1.3% 3.6% 5.9% 5.5%

South & Central

America

30.3 14.5 16.5 22.6 8.1% 4.7% 3.5% 3.8%

Other 9.9 7.7 22.3 34.4 2.6% 2.5% 4.7% 5.7%

Total 375.9 312.7 469.5 599.2 100.0% 100.0% 100.0% 100.0%

Table 3.2 Imports by Geographic Area

Source: Energy Information Administration, 1994-1995, Petroleum Supply Annual, DOE/EIA-0340, Table 21 (various

issues); 1996-1997, Petroleum Supply Monthly, DOE/EIA-0109, Table 35 (various issues).
The patterns of supply that were observed when 1996 to 1995 were compared are continuing in

1997. Table 3.3 shows that the volume of imports are increasing, with much of the increase coming

in the form of gasoline blending components. A comparison of gasoline supply data for first quarter

1997 to first quarter 1996 shows crude input to refineries declined in 1997, but the growth in

imports increased production from refiners and blenders and the volume of product supplied to

consumers.

A shift of refinery yield patterns from gasoline to distillate continued in 1997 with the yield of

gasoline from crude oil down slightly compared to the first few months of 1996, and the yield of

distillate plus jet fuel about the same (Figures 3.3 and 3.4). In the past, when winters were

unusually cold, high distillate production to meet winter demand was accomplished through high

refinery runs and high co-production of gasoline, resulting in a first quarter gasoline stock build —

mainly from a high January build. First quarter 1997 saw a small first quarter gasoline stock build,

which derived mainly from imported blending components.

Gasoline stocks are also an important part of the gasoline supply picture. Gasoline stocks usually

peak at the end of January and are then drawn down from February to the end of August. With

lower demand and strong co-production of gasoline with distillate, stocks begin to rebuild after

August. In the past, gasoline stock levels were shown to be an important factor in determining the

price of gasoline relative to the price of crude (i.e., the price spread, which is gasoline price minus

crude oil price). A 1995 EIA study analyzed factors affecting the gasoline spread and found that:

The result of the exploration comes as no surprise to many market analysts. Stock levels of gasoline

relative to normal levels seems to be the most important variable in explaining short-term gasoline

spread movements. Of little importance in explaining spread variations are demand, capacity

utilization (which is a measure of production capability to provide more gasoline), and a number of

other variables... [Stocks are an important factor in spread movements because] in essence, stocks

are a yardstick for short-term, supply-demand balance tightness, and the supply-demand balance

Motor Gasoline Assessment Spring 1997 19

Energy Information Administration

Refinery

Crude Oil

Input

Refinery

Finished

Gasoline

Production (*)

Gasoline Imports Gasoline

Product

Supplied Finished Blending

Components

Quarter 1 1996 13,664 7,512 319 74 7,224

Quarter 1 1997 13,647 7,565 315 263 7,266

Change -17 +53 -4 +189

Table 3.3 Supply Patterns, First Quarters 1996 and 1997

(Thousand barrels per day)

Source: Energy Information Administration, Petroleum Supply Monthly, DOE/EIA-0109, Table 4 (various issues).

Note: Refinery finished gasoline production includes production from both refineries and gasoline blenders.
20 Motor Gasoline Assessment Spring 1997

Energy Information Administration

45

47

49

51

53

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

Volume Percent Crude Oil

0

1997

1996

1995

Figure 3.3 Motor Gasoline Yield From Crude Oil

Source: 1994-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 3 (various issues); 1996-1997, Petroleum

Supply Monthly, DOE/EIA-0109, Table 4 (various issues).

30

32

34

36

38

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

Volume Percent Crude Oil

0

1995

1996

1997

Figure 3.4 Distillate and Kerosene-Jet Yields Combined

Source: 1994-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 3 (various issues); 1996-1997, Petroleum

Supply Monthly, DOE/EIA-0109, Table 4 (various issues).
seems to be the most significant market factor explaining gasoline spread variations under and over

the normal seasonal swings.1

But while gasoline stock levels have been shown to be an important factor in determining gasoline

price spreads, a comparison of the stock-price relationship for gasoline with the stock-price

relationship for two other oil products, heating oil and propane, also gives some important

perspectives. For heating fuels, stocks are an important part of winter fuel supply. In the peak

demand months of December through February, typically 12 percent of winter diesel and heating

oil demand is met by draw down of stocks. In the case of propane, about 20 percent of the peak

winter demand which occurs during December through February usually is met from stock draw.

By contrast, gasoline stocks in the peak demand months of March through August supply about 2

percent of demand. The history of price spikes is consistent with the importance of stocks in

meeting supply. The Mont Belvieu spot price of propane doubled in December 1989, and Conway

prices doubled in November/December 1996. In cold winter months, distillate price has jumped 25

percent. (The normal peak winter distillate spread of 10.5 cents per gallon rose to 26.1 in December

1989.) The extra boost in gasoline prices when markets tighten is generally less. In 1991, gasoline

markets tightened and spreads increased 6 cents per gallon above seasonal averages, and in April

1995, spreads were 3 cents per gallon above usual. This represents a 5-10 cents-per-gallon increase

in gasoline prices. What this comparison shows is that when there is greater reliance on stocks to

meet peak demand, one can expect greater market concern when stocks are low compared to normal

levels and, thus, greater price swings when markets tighten.

The pressing question in gasoline markets the past couple of years has been what will be the

consequence of the downward trend in gasoline stocks. Each year for the past several years the

United States has entered the driving seasons with lower beginning stocks. Does this mean greater

price volatility? Will low stocks levels mean higher price spreads? From the perspective of

gasoline supply, the potential impact of other supply components may be working to change the

situation. Stocks provide the most immediate and accessible source of short-term supply and, thus,

have great importance in market-price relationships. But it is worth hypothesizing that gasoline

imports may be having a growing impact on market pricing. From a supply perspective, imports are

not accessible as quickly as stocks from regional locations, but imports may be able to supply

product more rapidly than gearing up refinery production and pushing product through the

distribution system.

Regional Supply Patterns Varied Significantly

The supply patterns for the five U.S. Petroleum Administration for Defense Districts (PADDs) vary

significantly (Table 3.4 and Appendix E). Almost 60% of PADD 1’s gasoline supply comes from

other PADDs, primarily PADD 3. PADD 1 also receives almost all of the gasoline imported into the

United States. PADD 3 is a large producer of gasoline, producing almost three times what it

demands. It acts as a supplier for PADD 1 and, to a lesser extent, for PADD 2. On a “net” basis,

Motor Gasoline Assessment Spring 1997 21

Energy Information Administration

1 John Zyren, “What Drives Motor Gasoline Prices”, Petroleum Marketing Monthly, Energy Information Administration,

DOE/EIA-0380, June 1995, p. xviii.
PADDs 4 and 5 are self-sufficient. Reformulated gasoline is consumed in all PADDs but PADD 4;

however, RFG is only a large share of market in PADDs 1 and 5.

PADD 1 experienced a large drop in adjusted gasoline production (i.e., total production remaining

after increases due to blending stock component inputs are removed) from 1995 to 1996. Finished

22 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Reformulated

1993 1994 1995 1996 1995 1996

PADD 1

Adjusted Production * 745 739 813 700 534 517

Net Receipts 1,493 1,423 1,564 1,577 396 361

Net Imports 247 351 297 441 116 173

Dec (Inc) in Stocks (11) 18 10 9 7 9

Total 2,474 2,531 2,684 2,727 1,053 1,060

PADD 2

Adjusted Production * 1,787 1,781 1,842 1,819 218 237

Net Receipts 499 537 493 550 2 0

Net Imports 1223 00

Dec (Inc) in Stocks (5) (4) 15 3 7 1

Total 2,282 2,316 2,352 2,375 227 238

PADD 3

Adjusted Production * 3,303 3,261 3,380 3,413 657 606

Net Receipts (2,066) (2,036) (2,121) (2,215) (397) (367)

Net Imports (68) (64) (93) (93) (3) 1

Dec (Inc) in Stocks (4) 11 (3) 11 (2) 3

Total 1,165 1,172 1,163 1,116 255 243

PADD 4

Adjusted Production * 233 241 240 244 0 0

Net Receipts 15 11 8 9 0 0

Net Imports 0001 00

Dec (Inc) in Stocks (0) (1) 2 (1) 0 0

Total 248 251 250 253 0 0

PADD 5

Adjusted Production * 1,273 1,273 1,279 1,296 475 820

Net Receipts 59 65 54 77 0 6

Net Imports (19) (14) (5) 3 1 8

Dec (Inc) in Stocks (8) 8 11 (4) -15 30

Total 1,305 1,332 1,339 1,372 461 864

Table 3.4 Regional Gasoline Supply Profiles

(Thousand Barrels per Day)

Source: Energy Information Administration, 1993-1995, Petroleum Supply Annual, Volume 1, DOE/EIA-0340, Tables 5,

7, 9, 11, 13; 1996, Petroleum Supply Monthly, February 1997, DOE/EIA-0109, Tables 8, 12, 16, 20, 24.

Notes: (*) Adjusted Production: Field production of finished motor gasoline and blending components + finished motor

gasoline refinery production - refinery inputs of blending components. Net imports and receipts include finished gasoline

and blending components.
gasoline production for PADD 1 dropped by 53 MB/D from 1995 to 1996. The drop occurred

because of the shutdown and loss of production from the Marcus Hook refinery, and would have

been greater if use of imported blending components had not increased. From 1995 to 1996,

adjusted gasoline production declined 113 MB/D, or 60 MB/D more than the loss of finished

gasoline production. The decline was made up by increased input of blending components in PADD

1. As 1997 began, PADD 1 finished gasoline production was up 104 MB/D over production in first

quarter 1996. Crude oil inputs were up slightly (27 MB/D), but the major component of increase

came from the large increase in imports of gasoline blending components.

Most blending component imports into PADD 1 were brought in by blenders and traders rather than

refiners. These blenders and traders were responsible for all but 7 MB/D or less of gasoline

blending component imports in 1996 and in the first quarter of 1997. Like a large share of the

finished gasoline imports, gasoline blending component imports were delivered to terminals in

consumption areas. At these terminals, the components were blended with other streams and the

finished gasoline was delivered to nearby markets.

Over the past few years, PADD 1 has shown supply flexibility to meet changes in demand without

significant price impacts. When RFG was required in 1995, the new demand for RFG and increases

in conventional gasoline demand were met by increased refinery production within the PADD and

increased movements from PADD 3. Imports in 1995 declined relative to those in 1994. In 1996,

PADD 1 refinery production was diminished by the loss of the Marcus Hook refinery. The demand

increase was met mostly by increased imports and small increases in inter-PADD receipts.

PADD 5 provides a sharp contrast to PADD 1. As a result of ample import potential, the loss of the

Marcus Hook refinery in PADD 1 seemed to have little impact on prices. In California, an

explosion and fire at the Shell Martinez refinery on April 1, 1996 had a large impact on prices. The

accident damaged the hydrotreating units and virtually shut down the refinery’s gasoline

production capacity for one month. PADD 5 normally supplies all of its own gasoline demand, but

without Martinez, supply had to come from alternative sources. The problem was further

compounded because the production volumes that were lost were the new ultra-low sulfur gasoline

(CaRFG). The low-sulfur limit made finding even blending components difficult. The lack of

short-term alternatives for this fuel was reflected in large price increases. (See Chapter 4)

Implications of Supply Evolution

In summary, the major gasoline supply concern in 1997 is the low level of gasoline stocks at the

beginning of the summer driving season. The United States has been experiencing lower stocks in

the past several years, but stocks can reach a point where significant supply problems are

encountered briefly (Table 3.5). No one knows where that point is. The United States also has been

increasing its refining capacity utilization, which heightens concern about supply availability.

While stocks and refinery utilization are important factors in the supply picture, the abundance of

and price of imports causes this analysis to conclude that 1997 will be a relatively normal price year

in U.S. gasoline markets. The stock situation suggests the possibility that events could occur to

Motor Gasoline Assessment Spring 1997 23

Energy Information Administration
cause upward price pressures, but stock levels have been improving, and the current weak price

spreads imply the market considers supply problems to be a low probability case.

24 Motor Gasoline Assessment Spring 1997

Energy Information Administration

1991 1992 1993 1994 1995 1996 1997

Stocks 220 224 213 215 211 203 197

Table 3.5 Total Gasoline Stocks at Beginning of April

(Million Barrels)

Source: Energy Information Administration, 1991-1994, Petroleum Supply Annual, DOE/EIA-0340, Table 2 (various

issues); 1996-1997, Petroleum Supply Monthly, DOE/EIA-0109, Table 2 (various issues).
4. California - A Unique Situation

The gasoline markets during 1996 and 1997 demonstrated dramatic differences between the East

Coast and the West Coast — the two largest areas using RFG. California not only experienced the

same market pressures in 1996 as did the rest of the country, but also experienced additional market

pressures due to their introduction and use of a unique reformulated fuel, CaRFG. Retail regular

prices of RFG rose 39 cents per gallon from the beginning of January 1996 to early May (Figure

4.1). Crude prices, normal seasonal increases, and the increased costs of making the new RFG

might account for about 23 cents of the increase, but the additional 16 cents was due to supply

problems that occurred as the new RFG program began in spring 1996. The supply problems led to

buyers bidding prices up based on the uncertainty of supply adequacy.

California introduced its own new and unique Phase 2 reformulated gasoline (CaRFG) during the

spring of 1996. CaRFG has more stringent requirements than Federal RFG, making it more difficult

and more expensive to produce than Federal RFG. The California Energy Commission estimates

the additional cost to produce CaRFG over Federal RFG at between 5 and 8 cents more per gallon.

Motor Gasoline Assessment Spring 1997 25

Energy Information Administration

0

20

40

60

80

100

120

Jan-95 Jan-96 Jan-97

Cents Per Gallon

Retail Regular RFG Excluding Taxes

LA Spot RFG

Spot WTI

ANS Crude Oil

Figure 4.1 California Gasoline and Crude Oil Prices

Source: Spot Prices: Standard and Poor’s Platt’s; Retail Prices: Energy Information Administration, Form EIA-878 “Motor

Gasoline Price Survey.”

Note: ANS - Alaskan North Slope.
Although the higher costs translate to higher prices, consumers will benefit from significant smog

reduction.

In hindsight, increased price volatility in California compared to that on the East Coast is not

surprising given that:

• Most of PADD 5’s product is produced by refineries within the PADD, compared to PADD 1,

which receives 50 percent of its RFG and 74 percent of all of its gasoline from other PADDs and

imports. While refineries serving both PADDs are running at high utilizations, PADD 1 has

greater flexibility of supply from its multiple supply sources, should problems occur in any one

supply source.

• Transportation of product from other PADDs and foreign sources to PADD 5 is more costly than

delivering product to PADD 1 from outside sources. The increased transportation cost alone

could drive price up 10 cents per gallon in PADD 5 when internal supplies run short in order to

attract any outside supplies.

• With the advent of CaRFG, fewer supply sources exist outside of PADD 5 that can readily

produce the product, thereby increasing the difficulty of solving supply/demand imbalances and

increasing price volatility.

The pattern of increased price volatility in California has been seen several times during 1996 and

1997. The first was in second quarter of 1996, when CaRFG was introduced. Average CaRFG

demand was projected at 896 MB/D for the first year (March 1, 1996, through February 28, 1997),

taking into consideration the fuel efficiency loss (about 1-2 percent lower than Federal RFG

efficiency). Average production was projected at 906 MB/D, providing a 10 MB/D cushion. While

not large, this cushion was expected to be adequate.1 Some supply potential exists outside of

California; however, most refiners are not equipped to produce the new fuel in any large amounts, if

at all. Refineries in California were expected to use 85-90 percent of their gasoline capacity to

produce the new fuel.

Just when the CaRFG program was beginning, supply problems developed as a number of

California refineries experienced operating problems and had to shutdown for repairs. On April 1,

1996, the Shell Martinez refinery in California, which has over 100 MB/D of gasoline capability,

had a fire that closed the refinery for most of April. Martinez was not able to return to full operation

until June. Immediately following the fire and initial shutdown, retail prices in California rose

about 10 cents per gallon.2 During the same period (April through June), several other refineries

experienced explosions and mechanical problems and, for short periods of time, over 100 MB/D of

CaRFG supply were affected. The 100 MB/D represented about 12 percent of California’s spring

gasoline demand. Fortunately, other refineries were able to increase production quickly enough to

26 Motor Gasoline Assessment Spring 1997

Energy Information Administration

1 California Air Resources Board and California Energy Commission’s February 1996 Supply/Demand Analysis.

2 California Energy Commission and California Air Resources Board, Motor Vehicle Fuel Price Increases, Joint Report

to the Legislature, January 1997.
keep production from falling on a weekly average much more than 50 MB/D, but this was still

enough of a drop to put extra pressure on prices (Figure 4.2).

Motor Gasoline Assessment Spring 1997 27

Energy Information Administration

0

200

400

600

800

1,000

3/1 3/8 3/15 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31

Thousand Barrels per Day

Net Imports + Net Receipts of Blending Components & RFG

RFG Production

RFG Demand

Figure 4.2 Spring 1996 PADD 5 RFG Weekly Supply and Demand

Source: Energy Information Administration, Production: Form EIA-800; Product Supplied, Net Imports and Net Receipts:

Petroleum Supply Monthly DOE/EIA-0109, Table 24 (various issues).

Note: Demand, net imports and net receipts are only available monthly and thus are shown as a constant value over the

weeks in a given month. All blending component net imports and net receipts are included, which probably overstates the

supply of product for CaRFG somewhat, since some of these components may be for conventional gasoline.

Market Cost (Cents Per

Gallon)

Shipping Time

(Days)

Initial Lead Time (1)

Plus Shipping

Time(Days)

Washington State 3 to 4 4 to 6 11 to 16

Gulf Coast/Caribbean 5 to 10 14 21 to 24

Other U.S. 8 to 12 14 21 to 24

Foreign 10 to 12 23 to 30 30 to 40

Table 4.1 Transportation Costs and Time Required to Import Fuels

to California

Source: California Energy Commission, California Air Resources Board, Motor Vehicle Fuel Price Increases, January

1997, p. 13.

Note: (1) Initial lead time of seven to ten days would typically be needed to produce product for shipping.
Many refineries outside of California cannot produce CaRFG or appropriate blending components.

Those refineries on the Gulf Coast (and other distant areas) that can produce CaRFG would not

normally be doing so and would not have readily available supplies on hand. It takes time to adjust

operations to provide the product and even more time to ship the product by tanker to California

(Table 4.1). The long time delays would discourage such refiners from responding to refinery

problems in California since normally the supply problems would be resolved by the time the

long-distance product arrived. Prices would have receded, and the extra costs of producing CaRFG

and hauling it to California might not be recovered. The transportation costs alone from the Gulf

Coast add 5 to 10 cents per gallon.

California reported that external supplies did arrive during the spring of 1996 from Washington

state, the Gulf Coast, the Caribbean, and even Finland, and that these supplies have been providing

an average of 30-50 MB/D of CaRFG or CaRFG blending components since March 1996.

The loss of production as the program began was compounded by low gasoline stocks. In late 1995,

PADD 5 gasoline stocks had been running well below average (Figure 4.3). PADD 5 stocks ended

January 12.4 percent below their average levels for the month. With the need to empty tanks of old

fuel in preparation for the new RFG, stocks did not recover until March, when they ended the month

only 0.4 percent below typical March levels, an amount which represented about 1.3 days less

supply than the normal 22.1 days supply for the month. In April, stocks fell back again as refinery

28 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

10,000

20,000

30,000

40,000

Jan-94 Jan-95 Jan-96 Jan-97

Thousand Barrels

Finished Gasoline Excl RFG

Blending Components

RFG

1991-96 Average

Figure 4.3 PADD 5 Total Gasoline Stocks

Source: Energy Information Administration, 1994-1995, Petroleum Supply Annual, Volume 2, DOE/EIA-0340, Table 12;

1996-1997, Petroleum Supply Monthly, DOE/EIA-0109, Table 22 (various issues).
problems evolved and both conventional and CaRFG prices responded to the supply difficulties.

Stocks recovered as the refineries made repairs and went on line. Inventories stayed at or above

normal during the June through October period.

Spot prices shot up in April 1996 with retail right behind, driven by a sudden tightening in the

supply/demand balance, declining inventories, and uncertainty over the duration of the supply

shortfall. Unlike the supply situation in the rest of the country, the supply problems in California

affected spreads strongly. Conventional gasoline prices were also affected by the supply problems,

since California refiners also serve neighboring States.

The price increase experienced in California in the spring of 1996 reflected a market stress

situation, illustrating price response when supply disruptions occur in a very tight market. With

little or no immediate supply alternatives, the loss of expected supply resulted in the market bidding

prices up at panic rates. Gasoline price spreads over the cost of crude oil were much higher than

normal, unlike spreads in the rest of the country. (See Chapter 5). Consumers in California paid as

little as $1.14 during early January for regular RFG. But prices rose to a peak during early May at

almost $1.54 due to crude price increases, the normal spring price increases, the changeover to

CaRFG, and refinery operating difficulties.

As summer of 1996 progressed, supply returned to normal and prices fell. By fall, high gasoline

production and above-normal stock levels began to add downward pressure to prices. Refiners

began dumping product on the market, partially to get rid of the extra summer specification

gasoline before winter, and prices plummeted. A price war in southern California brought retail

prices in some areas below $1.00 per gallon.3 CaRFG prices actually dropped below U.S. average

conventional regular prices in November and December.

During December, production problems at several refineries (Mobil-Torrance,

Ultramar-Wilmington, and Chevron-Richmond) put an end to the price decline. Weekly average

spot CaRFG prices had bottomed out at under 63 cents per gallon in November 1996, but by year

end had climbed to over 75. At the end of January, a large explosion and fire in a hydrocracking unit

at Tosco’s Avon refinery continued to keep pressure on prices as other refiners prepared to take

units down for spring maintenance (Figure 4.4). In mid-January, production averaged 885 MB/D.

By the first week in February, it had dropped 166 MB/D to average 719 before beginning to recover.

Weekly average spot prices of CaRFG topped 80 cents per gallon in January. Prices sank back in

February to just over 73 cents per gallon, but a large stock draw and the threat of a strike and

potential shutdown of three refineries towards the end of March sent weekly prices shooting up to

over 85 cents per gallon. Finally, as no strike occurred and as refineries came back on stream from

maintenance and repairs, the market fell back to under 65 cents per gallon in May. During

November, retail regular RFG averaged as little as $1.16 per gallon. It climbed fairly steadily,

peaking in April at over $1.38, and by the beginning of June had dropped to under $1.34 as the

second spring transition for CaRFG came to a close.

Motor Gasoline Assessment Spring 1997 29

Energy Information Administration

3 United Communications Group, Oil Price Information Service (Rockville, MD: November 18, 1996), p. 4.
Although prices are now easing, another transition is facing California refiners. They are preparing

to send RFG to Phoenix, Arizona this year. Phoenix receives much of its gasoline supply from

California refineries but until now has not required RFG. Initial findings indicate the transition

should be no problem (See Box).

30 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

200

400

600

800

1,000

1/3 1/10 1/17 1/24 1/31 2/7 2/14 2/21 2/28 3/7 3/14 3/21 3/28

Thousand Barrels per Day

Net Imports & Net Receipts Blending Components & RFG

RFG Production

RFG Demand

Figure 4.4 Spring 1997 PADD 5 RFG Weekly Supply and Demand

Source: Energy Information Administration, Production: Form EIA-800; “Product Supplied, Net Imports and Net

Receipts:” Petroleum Supply Monthly, DOE/EIA-0109, Table 24 (various issues).
Motor Gasoline Assessment Spring 1997 31

Energy Information Administration

RFG in Phoenix

During 1996, Phoenix, Arizona, currently classified as a moderate ozone nonattainment

area,continued to exceed National Ambient Air Quality Standards for ozone, thereby risking

reclassification in a more serious nonattainment category. Responding to a request from the

governor of Arizona, the U.S. Environmental Protection Agency (EPA) issued a rule requiring

RFG at retail stations in the Phoenix area by August 4, 1997. The August 4, 1997 start date at

the retail level mandated a July 3, 1997 date for RFG to be available at terminals in Phoenix.

Low RVP ( low Reid vapor pressure, i.e., 7 pounds per square inch) gasoline has been and will

continue to be supplied to the Phoenix market in the summer, so that starting August 4, 1997,

consumers will be purchasing low RVP RFG.

California refiners now supply much of the Phoenix market. Early in the discussions, concerns

were expressed about California’s ability to supply this area with RFG in light of the problems

refiners have had periodically in supplying CaRFG. In assessing the feasibility of supplying

RFG to the Phoenix area, EPA reviewed logistics, cost, the potential for price spikes, supply

and diversity of supply issues. Much of the discussion that follows is taken from the Notice of

Final Rulemaking.*

Logistics: Arizona is supplied petroleum products by pipelines from refiners to the east and

west of the state. The western pipeline delivers 70 MB/D of gasoline to Phoenix. The pipeline

from the east provides 25 MB/D. Both pipelines have unused capacity. The Phoenix area

consumes 70 MB/D of gasoline on average. Other volumes delivered to Phoenix will remain

as conventional gasoline intended for consumption in surrounding areas.

To assure a smooth transition to the program, Arizona developed an outreach program. The

program includes training, an emergency response plan, and information dissemination.

Shipments of RFG produced in California and bound for Phoenix began June 1997.

Production: EPA believes at least 6 refiners in California and 2 to 3 refiners to the east would

be providing RFG to Phoenix with the combined capacity of these sources exceeding the 70

MB/D average demand. The multiplicity of sources in both the west and east reduces the

probability of a supply disruption in the event of a refinery or pipeline outage.

Prices: According to the Oil Price Information Service, the spot prices for Phoenix RFG fell

from 67 cents to 60 cents per gallon during May 1997. The difference between Phoenix RFG

and California CaRFG gasoline fairly consistently ranged between 1.3 and 1.7 cents per

gallon, with Phoenix RFG costing less due to less stringent requirements.**

*Federal Register June 3, 1997, 62-FR 3026.0.

** United Communications Group, Oil Price Information Service (Rockville, MD, various issues).
5. Prices Vary By Region, Class of

Trade, and Grade

While gasoline prices across the nation experienced supply/demand pressures described in Chapter

2, regional prices responded somewhat differently. The most dramatic regional variation was in

California (Chapter 4). Class of trade (i.e., retail, dealer tank wagon (DTW), and rack) responses to

the crude price increases in 1996 were not unusual on a PADD basis, and regional resale price

spreads were consistent with the spot price spreads observed in Chapter 2. One interesting turn of

events was that, as prices increased, consumers responded by shifting to cheaper grades of gasoline,

which they have not done since the price increases experienced during the Gulf War.

Class of Trade Prices and Wholesale Spreads Varied Regionally

Class of Trade Prices Displayed Expected Variations in 1996

Regional prices vary by class of trade, that is from one level of distribution to the next. Figure 5.1

shows the spot, rack, dealer tank wagon (DTW), and retail prices (excluding taxes) for PADD 1.

• Spot price represents a price agreed to by a buyer and seller for a single cargo of product. It can

vary significantly day to day.

• Rack price refers to the wholesale price charged by refiners 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 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 and futures 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 wholesale

price paid by the retail station for the fuel, additional station operating costs, dealer margins, and

taxes.

Price varies in response to local competition as well as underlying costs. Consumers can find large

price variation within small geographic regions due to competitive differences alone.

Motor Gasoline Assessment Spring 1997 33

Energy Information Administration
The three-year average in spread between retail, DTW, rack, and spot prices for each of the five

PADDs is shown in Table 5.1. Rack minus spot has less meaning for some regions. For example,

PADDs 2 and 4 are located quite far from major spot markets, such as the Gulf Coast or Los

Angeles.

34 Motor Gasoline Assessment Spring 1997

Energy Information Administration

PADD 1 PADD 2 PADD 3 PADD 4 PADD 5

Retail-DTW 6.6 7.5 7.0 9.1 11.1

DTW-Rack 7.2 5.4 8.0 4.5 9.1

Rack-Spot 3.4 N/A 4.6 N/A 5.3

Table 5.1 Regional Three-Year Average Distribution Level Price Differences

(Conventional Regular Gasoline - Cents Per Gallon)

Note: Spot prices used were as follows: PADD 1 - New York Harbor; PADDs 2 and 3 - Gulf Coast; and PADD 5 - Los

Angeles.

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380, Table 32 (various issues).

0

20

40

60

80

100

Jan-94 Jan-95 Jan-96 Jan-97

Cents per Gallon

Retail Excluding Tax minus DTW

DTW minus Rack

Rack minus Spot

NYH Spot

Figure 5.1 PADD 1 Wholesale Prices for Regular Conventional Gasoline

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380, Table 32 (various issues).
In general, the PADDs did not show highly unusual price behavior at the retail and DTW levels.

Quarterly and annual spreads of retail-DTW and DTW-rack exhibited some of the typical lag

effects that occur when underlying crude costs change, but, for the year, the spreads were not much

different than the spreads observed in 1994 and 1995. (On a shorter term basis and at a more local

level, variations can be much larger than those seen on a regional average.)

PADD 5 stands out with retail minus DTW price and DTW minus rack price being the largest price

differences of any of the PADDs. This does not necessarily imply that distributors and dealers make

more profit in this region. It may reflect cost differences more than any other factor. Even with the

unusually high spring prices in California in 1996, the price level differences were lower or about

the same as in the prior two years, with the exception of retail minus DTW, and this difference was

only about 1 cent higher. In PADD 5, the annual averages hide some large rack-spot price variations

that took place in 1996. Rack prices were below spot prices during February through April and

again in December but soared above spot in between. The average rack-spot difference over the

year, though, was not much different than in prior years. Rack relative to spot in PADD 5 showed

the most volatility in 1996 compared to the other distribution level differences. However, swings in

retail-DTW and DTW-rack were not much different than in the prior two years.

Resale Price Spreads Showed More Strength in First Quarter 1997

than in 1996

Another price variable that displays regional differences is resale price minus refiners’ acquisition

cost of imported crude oil. Resale price is a wholesale price collected by EIA that includes spot,

rack and DTW prices. The refiners’ acquisition price of imported crude oil used is not regional, but

is the average for the United States (Figure 5.2 and Appendix D). PADDs 1 through 3 have similar

seasonal patterns that bottom out in December and peak in May. These three PADDs also show a

small resurgence in August as they descend from their May peak. Like the spot price spreads

discussed in Chapter 2, resale spreads for all PADDs showed stronger first quarter 1997 results than

they did in the first quarter 1996.

In 1996, the spreads in PADD 2 may have been boosted by the runup in ethanol price that occurred.

Ethanol is most widely used in PADD 2. The average monthly price of ethanol increased 25 cents

per gallon between January and August before starting to decline. If it had been possible to pass this

cost through to consumers, it would have added 2.5 cents per gallon to the price of gasohol.

Apparently, these costs were not so easy to pass through, however, judging from the drop in ethanol

production that occurred during the summer 1996 (See Box).

PADDs 4 and 5 are both fairly self-sufficient PADDs. Both also show a seasonal shape that has a

flatter peak than other PADDs. PADD 4’s spread on average stays at about the same level from

April through August before descending to the winter December low point. PADD 5’s spread peaks

in April and stays near that level through September before declining. The strength in resale

spreads in PADD 5 in 1996 can be attributed to the difficulties in California, but the reason behind

PADD 4’s unusual spreads in 1996 is not immediately evident. PADD 4 is relatively self-sufficient,

supplying over 96 percent of its own needs.

Motor Gasoline Assessment Spring 1997 35

Energy Information Administration
Consumers Coped with High Prices By Downgrading

During the spring of 1996, the price increase in gasoline was large and obvious to consumers.

While consumers usually do not have access to an alternative to gasoline when prices rise, they can

and do shift from more expensive grades to lower-priced grades (Figures 5.5 and 5.6). The large

gasoline price decline in 1986, when crude prices fell, probably helped to push the already

36 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

5

10

15

20

25

30

35

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure 5.2 PADD 1 Resale Gasoline Spread (Resale Regular Conventional

Minus Refiners’ Cost of Imported Crude Oil)

Source:Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380, Gasoline Prices: Table 32

(various issues), Crude Oil Prices: Table 1 (various issues).

Ethanol Prices Soar in 1996, Causing Companies to Find

Alternatives

A bad corn crop brought corn prices up to $5.00 per bushel in June 1996, compared to $2.00

per bushel in October 1994. Ethanol prices on the Gulf Coast rose steadily from $1.05 per

gallon in July 1995, to as high as $1.49 in September 1996. Demand fell as prices rose and

production of ethanol was cut back from 87 thousand barrels per day in January to 39 MB/D in

June and July 1996. Prices eased in September to end the year at about $1.26 and

production picked up again. Methanol, the main feedstock for producing MTBE, increased

over 20 cents per gallon from first quarter through early 1997, but MTBE markets were loose

enough that MTBE prices did not follow. MTBE, however did show some strength during the

spring of 1996 as gasoline prices pulled MTBE prices up for a brief period second

quarter (Figures 5.3 and 5.4).
Motor Gasoline Assessment Spring 1997 37

Energy Information Administration

0

40

80

120

160

200

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

Cents Per Gallon

Ethanol

MTBE

Methanol

Figure 5.3 Oxygenate Prices

Source: “Octane Week Price Report,” Octane Week, Hart/IRI Fuels Information Services, Arlington, VA. (various issues).

-50

0

50

100

150

200

250

300

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

Thousand Barrels Per Day

MTBE

Ethanol

Figure 5.4 Oxygenate Production and Stock Draw Down Combined

Source: Energy Information Administration, Petroleum Supply Monthly, DOE/EIA-0109, Tables D2 and D3 (various

issues).
38 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

20

40

60

80

100

120

83 84 85 86 87 88 89 90 91 92 93 94 95 96 Q1

97

Cents Per Gallon

Premium

Regular

Premium Minus Regular

Figure 5.5 Premium and Regular Conventional Gasoline Prices

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380, Table 32 (various issues).

83 84 85 86 87 88 89 90 91 92 93 94 95 96

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Grade Percent Share of Market

Midgrade Share Premium Share Regular Share

Figure 5.6 Gasoline Grade Market Shares and Gasoline Price

Source: Energy Information Administration, Petroleum Marketing Annual, DOE/EIA-0487, Table 48 (various issues);

Petroleum Marketing Monthly, DOE/EIA-0380, Table 48 (various issues).
increasing share of premium still higher. However, when prices rose during the Gulf War, premium

lost share to midgrade and did not go back to its pre-Gulf War levels. The continuing overall

decline in gasoline prices through 1995 did offer enough incentive to increase the premium share of

gasoline. Then in 1996, the sharp price increase in spring caused consumers to downgrade again.

This time, premium lost share to regular. This does not suggest that premium customers moved to

regular. Many premium customers probably moved to midgrade, and a similar number of midgrade

customers downgraded to regular, thereby keeping midgrade stable.

The first quarter 1997 continued to show a decline in premium shares, with a corresponding

increase in regular. As prices weaken through the year, the premium share may bounce back

somewhat; however, judging from the situation during the post-Gulf War period, premium may not

regain its prior share.

Motor Gasoline Assessment Spring 1997 39

Energy Information Administration
6. Insights from Modeling Gasoline

Prices and Updated Outlook

Gasoline prices are affected in the short-term by supply/demand balances and underlying costs.

Chapter 2 provided information on the major factors impacting prices and graphical displays of

gasoline price and price spread behavior in response to those factors. This chapter uses the STIFS

model (regression analysis) to explore in more depth the variations in price that occurred over the

last two years. It also quantifies the lag relationship between spot prices and retail and ends with an

update of the outlook for gasoline over the remainder of the summer.

Components of Gasoline Price Changes in 1996 and 1997

Chapter 2 provided a graphic display of price behavior which is reinforced in this chapter. In order

to provide a systematic, quantitative summary of the nature of gasoline price movements seen in the

United States in recent periods, the Energy Information Administration’s Short-Term Integrated

Forecasting System (STIFS) model was used to dissect the important elements of gasoline price

dynamics since 1996.

By using STIFS, price changes can be broken down into general constituent parts as follows:

• For wholesale or refiner prices: total price change, change due to crude oil price changes, change

due to normal seasonality, change due to specific “market tightening” (i.e., higher demand, lower

stocks, etc.);

• For retail gasoline prices: changes due to changes in refiner (wholesale) prices, changes due to

normal seasonality, and other changes related to abnormal downstream (i.e., marketing and

distribution) margins.

For the sixteen-month period under consideration (January 1996 through April 1997), typical

monthly errors for the price forecasting equations in STIFS were in the 1.5- to 2.0-cents-per-gallon

range. The errors tended not to be systematic, as the mean errors or “biases” were quite small

(Appendix B). The model supported the observation that crude price changes and normal seasonal

variations explained most of the price changes in both spring 1996 and spring 1997.

In the case of evaluating year-to-year changes in price, normal seasonality falls out as a component

of change. Thus, a summary of gasoline price changes between 1995, 1996, and 1997 can be

simply tabulated, as in Table 6.1. The price being explained is an all-grade, all-formulation, U.S.

average price. The model was run by using historical actual data as inputs. The resulting variations

due to crude prices were taken from the model results. The margin represents the part of actual

price explained by remaining factors, mainly market tightness.

Motor Gasoline Assessment Spring 1997 41

Energy Information Administration
In 1996, wholesale gasoline price changes (over previous year levels) were almost entirely

attributable to changes in crude oil prices, except during the second quarter. Difficulties in meeting

supply requirements associated with increased clean air standards in California contributed largely

to higher U.S. margins in second quarter 1996 than in 1995. Consumers shifting away from

premium to regular would have countered the average price increase slightly. Retail margins over

wholesale prices in the second quarter of 1996 were also stronger than 1995 retail margins. Again,

part of this increase was due to the supply pressures and resulting higher-than-normal price spreads

in California.

First quarter 1997 gasoline spreads were stronger than spreads in 1996, consistent with the spot

spreads shown in Chapter 2 and Appendix A and with the resale spreads mentioned later in this

chapter and Appendix D. Gasoline spreads in 1996 were weak during the first quarter, rising only

from their lethargy in April and May. In 1997, spot gasoline spreads were slightly higher than

average values throughout the quarter, but they eased back in April and May as production and

imports began to outpace demand.

Price Movements Through the Distribution System

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

prices travel relatively quickly through the system to the retail level. Prior analysis by EIA showed

that nationwide monthly retail prices reflect about half of the resale price change in a given month

and half of the resale price change from the previous month.1

42 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Wholesale Retail

Crude Oil Margins Total Wholesale

Price

Margins Total

1996 Q1 3.5 -0.0 3.5 2.4 -1.0 1.4

Q2 6.9 1.7 5.2 7.6 2.5 10.1

Q3 9.3 -0.1 9.4 8.7 -0.7 8.0

Q4 14.6 0.0 14.6 14.2 -0.6 13.6

1997 Q1 9.5 2.6 6.9 11.5 -0.2 11.2

Table 6.1 Components of Gasoline Price Change, 1996-1997

(Change from Same Period Prior Year, Cents per Gallon)

Source: Energy Information Administration, Short-Term Intermediate Forecasting System simulation for gasoline prices

using June 1997 STIFS database.

1 John Zyren, “What Drives Gasoline Prices,” Petroleum Marketing Monthly, Energy Information Administration,

DOE/EIA-0380 (Washington DC, June 1995), p. xvi.
The STIFS model, which uses monthly data, picks up this effect. To illustrate how crude prices are

passed through to wholesale and then to retail prices, a 10-percent upward shift in average crude oil

prices was assumed in the model, and the resultant impact on gasoline prices was calculated. From

this scenario, the speed and timing of changes in monthly wholesale and retail gasoline prices is

shown (Figure 6.1). It is apparent from the figure that, normally, wholesale prices react quickly to

changes in crude oil prices and that retail prices, while lagging the movements in wholesale prices

somewhat, generally do fully incorporate refiner price changes after about 1 month which is

explored more fully in the next section.

Since prices generally begin to change before a month is out, a brief analysis was made by

considering weekly prices rather than monthly prices. Using weekly retail regular conventional

gasoline prices gathered by EIA’s Motor Gasoline Price Survey (Form EIA-878), EIA explored

changes in retail gasoline prices as a function of changes in spot prices. The analysis was done by

regressing the weekly change in conventional regular gasoline price as a function of the change in

weekly average spot price from prior time periods. A priori, because of pipeline structure and

import patterns, it was expected that PADD 1C (lower Atlantic Coast), PADD 2, and especially

PADD 3 would be affected by USG prices, whereas PADD 1A (New England) and PADD 1B

(Central Atlantic Coast) due to their proximity to NYH would be most affected by NYH spot prices.

Briefly, the regression results showed that NYH prices best explained PADDs 1A and 1B. PADDs

1C, 2, and 3 were best explained with Gulf Coast prices. In general, about 45 percent of a spot price

Motor Gasoline Assessment Spring 1997 43

Energy Information Administration

0

1

2

3

4

5

012345

Months Elapsed Following Crude Oil Price Change

Cents Per Gallon

Wholesale Price

Change

Retail Price

Change

Figure 6.1 STIFS Price Response to 10% Crude Oil Price Change

Source: Energy Information Administration Short-Term Integrated Forecasting System gasoline price model.
change was passed through to retail within 4 weeks, with an additional 30 percent pass-through

occurring in the next 4 weeks. Appendix C summarizes the statistics observed.

PADD 1A retail prices were best explained by NYH spot prices, with about 46 percent pass-through

after 4 weeks; after 8 weeks, the total pass-through was 78 percent. PADD 1B retail prices were

best explained by NYH spot prices, with 43 percent pass-through after 4 weeks and 72 percent after

8 weeks. PADD 1C retail prices were best explained by using Gulf Coast prices. The statistical

results showed a 50 percent price pass-through after 4 weeks and 79 percent after 8 weeks.

PADD 2 retail prices were best explained by using USG prices, but the pass-through was much

more rapid than in the PADD 1 regions. There was an 80 percent price pass-through after 4 weeks,

increasing to 104 percent after 8 weeks, after which additional price effects were not statistically

detectable. The competitive and distribution system dynamics all affect price movements, and the

specific reason for this rapid price pass-through in PADD 2 is not clear at this time.

PADD 3 retail prices were best explained by using U.S. Gulf Coast spot prices. The price

pass-through was 46 percent after 4 weeks, increasing to 74 percent after 8 weeks.

Figure 6.2 compares the NYH spot price (weekly average) and retail price of conventional regular

gasoline in PADD 1B. Close examination of the figure shows a number of interesting features:

• The retail price of gasoline shows roughly the same long-term pattern as the spot price;

44 Motor Gasoline Assessment Spring 1997

Energy Information Administration

30

40

50

60

70

80

90

100

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

Cents Per Gallon

PADD 1B Retail Excluding Taxes

NY Harbor Spot

0

Figure 6.2 PADD 1B Regular Conventional Gasoline Prices

Source: Spot Prices: Standard and Poor’s Platt’s; Retail Prices: Energy Information Administration, Form EIA-878,

“Motor Gasoline Price Survey.”
• The fluctuations in retail price are much smoother than the spot price changes (i.e., the retail

prices show less short-term (weekly and monthly) volatility than do spot prices);

• The retail price changes lag the spot price changes, as evidenced by the staggered times during

which peaks occur.

These observations can best be seen by focusing on prices during 1995 shown in Figure 6.2. The

smoothness of the retail price curve is in sharp contrast to the jittery appearance of the spot price

curve. The figure also shows that the retail price can be considered as a moving average of the spot

prices; that changes in spot prices take time before they are reflected in retail prices (a 2- to 3-week

lag); and that the price adjustment is not immediate but can take up to 8 weeks before being fully

reflected in the retail price. This is best demonstrated by comparison of the spot and retail prices for

the summer driving season. In 1995, the spot prices began increasing in early March and reached a

peak during the week of May 15, whereas the retail price responded more slowly, and reached its

peak 2 to 3 weeks later. Also, the retail price decline appeared somewhat slower than the spot price

decline, and the August and September mini-peaks in spot price were not evident in the retail price.

This demonstrates that retail prices adjust more slowly than spot prices, both on the upswing and on

the downswing.

Updated Outlook for Summer 1997

A mid-June update of the April Short-Term-Energy Outlook (STEO) bodes well for drivers.

Summer gasoline prices should stay below last year’s summer prices as a result of low crude oil

prices and normal seasonal declines from June. Crude prices, which already have fallen about

$5.00 per barrel since January, are expected to stay low throughout the summer, as supply increases

and as world crude oil demand falls to seasonal summer lows. Although crude oil prices showed

some renewed strength in April and May, as discussed in Chapter 2, this is not expected to last. The

mid-June STEO update is forecasting average refiners acquisition cost of crude oil to decline from a

first quarter average of $21.40 per barrel to $18.37 during the second quarter and to $18.33 during

the third quarter (Figure 6.3).

Retail prices have fallen since January, pulled down by crude oil prices despite the seasonal

increase in wholesale price spread (gasoline price minus crude price). Retail gasoline prices are

expected to average $1.28 per gallon during the second quarter (7 cents per gallon lower than during

the second quarter of 1996) and to average $1.27 during the third quarter (4 cents lower than during

the third quarter of 1996) (Figure 6.4).

Wholesale gasoline spreads were stronger during the first quarter of 1997 than during the first

quarter of 1996 as a result of tighter gasoline markets. But strong gasoline production and imports

during second quarter are exceeding demand and causing stocks to build when they normally fall or

hold even. With ample crude oil supplies near at hand, and growing stocks, wholesale gasoline

spreads have weakened and are expected to remain below last year’s spreads until August (Table

6.2).

Motor Gasoline Assessment Spring 1997 45

Energy Information Administration
46 Motor Gasoline Assessment Spring 1997

Energy Information Administration

15

17

19

21

23

25

Jan-95 Jan-96 Jan-97 Jan-98

$/Barrel

Actual Price

Projected Price

0

Figure 6.3 Projected Refiners’ Acquisition Crude Oil Prices

Source: Energy Information Administration, update to Second Quarter Short-Term Energy Outlook, DOE/EIA-0202,

1997.

110

115

120

125

130

135

140

Jan-95 Jan-96 Jan-97 Jan-98

Cents Per Gallon

Actual Prices

Forecast

0

Figure 6.4 Projected Gasoline Prices 1997

Source: Energy Information Administration, update to Second Quarter Short-Term Energy Outlook, DOE/EIA-0202,

1997.
Gasoline demand over the first quarter rose only 1.0 percent over first quarter of 1996. Demand

remained somewhat sluggish, partially as a result of continued high retail prices (up 11 cents per

gallon over first quarter 1996 retail prices). The economy, however, helped to counter the damping

effect of high prices. First quarter expansion was at a 10-year high according to an April 30 news

release from the Bureau of Economic Analysis. Demand is expected to be about 2.0 percent higher

this summer than last as lower prices and a strong economy encourage driving.

Continued strong production and imports should keep stocks from falling, thereby removing any

unusual price pressure.

In summary, the consumer should benefit from lower gasoline prices this summer than last, due

mainly to lower crude oil prices. If demand is weaker than forecast and stocks continue to build

beyond current projections, gasoline spreads may also be weaker than projected, bringing gasoline

prices down even further.

Motor Gasoline Assessment Spring 1997 47

Energy Information Administration

Wholesale Price Change Retail Price Change

Total Crude Oil Margins Total Whsle. Pr. Margins

1996 Q1 3.5 3.5 -0.0 1.4 2.4 -1.0

Q2 6.9 5.2 1.7 10.1 7.6 2.5

Q3 9.3 9.4 -0.1 8.0 8.7 -0.7 History

Q4 14.6 14.6 0.0 13.6 14.2 -0.6

1997 Q1 9.5 6.9 2.6 11.2 11.5 -0.2

Q2 -7.0 -5.0 -2.0 -6.0 -5.7 -0.3

Q3 -5.0 -5.9 0.9 -4.1 -5.1 1.0 Projections

Q4 -8.0 -9.6 1.6 -5.4 -7.5 2.1

Table 6.2 Projected Components of Gasoline Price Change, 1996-1997

(Change from Same Period Prior Year, Cents per Gallon)

Source: Energy Information Administration Short-Term Integrated Forecasting System gasoline price model using June

1997 STIFS database.
Appendix A: Spot Gasoline Price

Spreads

Motor Gasoline Assessment Spring 1997 49

Energy Information Administration

0

5

10

15

20

25

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure A.1 GC Spot Regular Conventional Minus WTI

Source: Standard and Poor’s Platt’s
50 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

5

10

15

20

25

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure A.3 NYH Spot Regular Conventional Minus WTI

Source: Standard and Poor’s Platt’s

0

5

10

15

20

25

30

35

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure A.2 GC Spot Regular Conventional Minus Arab Light

Source: Standard and Poor’s Platt’s
Motor Gasoline Assessment Spring 1997 51

Energy Information Administration

0

5

10

15

20

25

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure A.4 NYH Spot Regular Conventional Minus Brent

Source: Standard and Poor’s Platt’s
Appendix B: Using STIFS to Explore

Price Behavior

In order to provide a systematic, quantitative summary of the nature of gasoline price movements

seen in the United States in recent periods, the Energy Information Administration’s Short-Term

Integrated Forecasting System (STIFS) model was used to dissect the important elements of

gasoline price dynamics since 1996. In this section, the basic approach in STIFS to modeling

gasoline prices is described, and the overall efficacy of STIFS in predicting gasoline prices is

checked.

Gasoline Price Modeling in STIFS

Short-term movements in motor gasoline (and other product) prices in the United States can be

thought of as being induced by changes in several key market variables, namely: crude oil prices,

domestic gasoline inventories, and demand relative to current supply capacity. Short-run variations

in crude oil prices are determined primarily by changes in the balance of short-run supplies

(including crude oil inventories at or near refining centers) and demand for crude oil, generated by

shifts in the production requirements for petroleum products in general (not just gasoline). But

gasoline prices also typically have significant seasonal variation. The underlying seasonality of

U.S. gasoline prices stems quite naturally from the seasonality of gasoline demand here, which

tends to be relatively low during the fall and winter months and relatively high during the summer

(with approximately a 10-15 percent difference between monthly high and low demand levels).

The part of the STIFS model representing gasoline prices can be characterized as follows:

• Wholesale Prices: The wholesale or refiner price of gasoline at time t is a function of crude oil

cost at time t; the relative abundance, on a seasonally adjusted basis, of primary finished gasoline

at the outset of the month; and seasonal factors. The seasonal factors capture the impact on

refiner prices of seasonally changing demand in the face of essentially unchanged aggregate

production capacity;

• Retail Prices: The average retail gasoline price is a function of increased wholesale prices (raw

material costs to distributors and marketers) and seasonal factors that reflect downstream market

seasonality distinct from that which is transmitted through refiner prices (See Box). Typically, a

change in the retail price due to a given change in the average wholesale price is not affected

contemporaneously, hence the presence of the lag term for wholesale price in the retail price

relationship.

Motor Gasoline Assessment Spring 1997 53

Energy Information Administration
Recent Predictive Efficiency

Tables B.1 and B.2 and Figures B.1 and B.2 provide a view of how well the STIFS model would

have predicted refiner and retail gasoline prices between January 1995 and April 1997, given crude

54 Motor Gasoline Assessment Spring 1997

Energy Information Administration

STIFS GASOLINE PRICE MODEL

The STIFS model roughly incorporates these market characteristics into its gasoline

forecasting equations, as follows:

P fP K D S t

g w

t

c

tt t

, , g w = ( , ( / ), ) −1 (1)

> 0 <0 (Signs of First Derivatives)

Where:

Pt

g w, = Gasoline wholesale price (refiner to resellers), period t

Pt

c = Crude oil price (domestic refiner acquisition cost of crude), period t

Kt −1 = Finished gasoline stocks, deseasonalized, end of period t-1

Dt = Gasoline demand, deseasonalized, period t

St

g w, = Vector of seasonal factors for wholesale gasoline price

And

P fP P S t

g r

t

g w

t

g w

t

, , ,, g r = (, , ) −1 (2)

Where:

Pt

g r, = Gasoline retail price (average U.S., all grades, all service), period t

St

g r, = Vector of seasonal factors for retail gasoline price, period t

The signs of the first derivatives of each function with respect to key market variables is noted

below in expressions (1) and (2).

Linear forms of both (1) and (2) are estimated and implemented in STIFS.

Wholesale Retail

Mean Absolute Error

Cents per Gallon 1.3 1.9

Percent of Mean Actual 1.9% 1.5%

Root Mean Squared Error

Cents per Gallon 1.6 2.1

Percent of Mean Actual 2.4% 1.8%

Mean Error (Bias)

Cents per Gallon -0.1 0.1

Percent of Mean Actual -0.1% 0.0%

Table B.1 Summary Measures of Gasoline Price Predictive Accuracy:

January 1995 to April 1997

Source: EIA Short-Term Integrated Forecasting System.
oil prices and gasoline market data. Note that the retail price errors include the effects of any errors

in the wholesale price.

For the sixteen-month period under consideration, typical monthly errors for the price forecasting

equations were in the 1.5- to 2.0-cents-per-gallon range. The errors tended not to be systematic, as

the mean errors or “biases” were quite small (Table B.1).

Motor Gasoline Assessment Spring 1997 55

Energy Information Administration

Wholesale Retail

Date Actual Predicted Error Actual Predicted % Error

(cents per gallon) (percent) (cents per gallon) (percent)

9501 60.0 58.6 -2.3% 119.0 117.2 -1.5%

9502 60.3 61.3 1.7% 118.1 117.0 -0.9%

9503 60.0 61.7 2.8% 117.3 118.3 0.8%

9504 66.5 66.7 0.2% 119.7 121.3 1.3%

9505 71.8 70.7 -1.6% 125.6 126.1 0.4%

9506 68.2 68.1 -0.1% 128.1 127.4 -0.5%

9507 62.9 62.7 -0.3% 125.2 123.3 -1.5%

9508 62.0 63.0 1.6% 122.2 121.2 -0.8%

9509 62.3 61.7 -1.0% 120.6 120.6 0.0%

9510 58.8 60.8 3.4% 118.5 119.1 0.5%

9511 58.0 60.1 3.6% 116.1 118.2 1.8%

9512 59.9 60.3 0.6% 116.0 118.5 2.1%

9601 61.1 61.8 1.2% 118.6 120.0 1.1%

9602 61.6 63.5 3.1% 118.1 120.2 1.8%

9603 68.0 68.5 0.7% 121.9 123.5 1.3%

9604 76.1 74.5 -2.1% 130.5 129.4 -0.8%

9605 78.1 75.8 -2.9% 137.8 133.1 -3.4%

9606 73.0 70.9 -2.9% 135.4 131.7 -2.7%

9607 72.3 70.7 -2.2% 132.8 129.1 -2.8%

9608 71.1 71.7 0.8% 129.8 130.2 0.3%

9609 71.6 72.9 1.8% 129.3 131.2 1.5%

9610 72.8 74.5 2.3% 128.7 132.4 2.9%

9611 74.5 74.4 -0.2% 130.8 132.9 1.6%

9612 73.1 73.4 0.4% 131.8 132.9 0.9%

9701 74.8 75.6 1.1% 131.8 134.1 1.8%

9702 72.9 71.2 -2.3% 131.2 132.2 0.7%

9703 71.4(E) 68.4 -5.6% 129.3 128.2 -0.8%

9704 68.0(E) 66.6 -4.8% 128.8 126.1 -2.1%

Table B.2 Actual and Predicted Motor Gasoline Prices

Source: Energy Information Administration Short-Term Integrated Forecasting System gasoline price model using June

1997 STIFS database.

Note: E - estimated.
56 Motor Gasoline Assessment Spring 1997

Energy Information Administration

100

110

120

130

140

Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual

Predicted

0

Figure B.1 Retail Gasoline Price (Actual versus Predicted)

Source: EIA Short-Term Integrated Forecasting System.

50

55

60

65

70

75

80

Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Predicted

Actual

0

Figure B.2 Wholesale Gasoline Price (Actual versus Predicted)

Source: EIA Short-Term Integrated Forecasting System.
From Table B.2 a few observations are worth noting. There was a tendency to under predict prices

during the spring and early summer of 1996 (by about 3 percent). On the other hand, fall and winter

prices (1995-96) tended to be over-predicted (by about 1 percent). Prediction errors for this past

winter (1996-97) are generally small until one reaches February, where some noticeable under

predictions begin to appear. There is little question that, from January through March, refiner prices

(wholesale gasoline prices) have been higher than is typical, given the observed average crude oil

prices and gasoline supply indicators (Figure B.1).

Motor Gasoline Assessment Spring 1997 57

Energy Information Administration
Appendix C. Quantitative Explanation of

Motor Gasoline Market Price

Passthrough

By using industry and EIA data, an analysis was undertaken to explore the speed of price change

passthroughs from the spot market to the retail market. The results reported below are preliminary

in nature and were considered in order to form the basis for more formal research on pricing

mechanisms in product markets.

Estimates showed that the price passthrough from spot market to retail level is complete in two to

three months, with about 45 percent of the change occurring within 4 weeks and 75 percent within 8

weeks.

An attempt was made to estimate the speed of adjustment of motor gasoline retail prices as a

function of spot prices by 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 and PADD 2 and PADD 3

conventional regular gasoline. The U.S. Gulf Coast (USG) and New York Harbor (NYH) spot

conventional regular motor gasoline prices were taken from Platts and were weekly averages of

daily prices. Investigation of the time series properties of the price data was performed in order to

assist in specifying the form of the model; for example, data with unit root properties are best

analyzed by using first differences, whereas stationary series can be estimated in level form.

Augmented Dickey-Fuller tests 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.

Equation C1

∆ ∆ RP SPOT D OCT NYUSG U AR MA ter t i

i

k

= + + ++ t i t t

=

∑β − −

1

1 04 93 , ms

Where:

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 on October, 1993

Motor Gasoline Assessment Spring 1997 59

Energy Information Administration
NYHUSGt is the difference between NYH and USG gasoline spot price for week t

Ut is the random error term at time t

AR, MA are autoregressive and moving average terms.

Table C.1 shows the parameter estimates for the various regions when the Ordinary Least Squares

(OLS) estimation method is used. The OLS results are not unreasonable, except that a priori we

would expect to see an approximately 1:1 eventual pass-through of spot price changes and we

would also expect the influence of a spot price change to decrease monotonically over time after the

first few time periods. The OLS results show, depending on the area, that anywhere between 73 to

100 percent of a spot price change is passed through to retail and that, although the lag effect does

tend to decrease over time, the situation does occur where a longer lag has a larger effect than a

shorter one.

An estimation was also attempted to give the lag effect parameters a definite structure. The

Polynomial Distributed Lag (PDL) technique is often used to increase the significance of the

estimated coefficients when the independent variable is correlated with its lagged values; the PDL

method imposes an empirically determined polynomial structure on the estimated β’s. (See G. S.

Maddala, Introduction to Econometrics, 2nd edition, Macmillan Publishing Company, 1992,

Chapter 10.) Table C.2 shows the parameter estimates when PDL estimation is used. In most cases,

a linear (decreasing) function (i.e. only PDL0 and PDL1 significant) was found to provide the best

fit; only PADD 2 required a higher order polynomial (viz., cubic). PDL estimation also found that

lags of 9 to 13 weeks were also significant (except for PADD 2). As a whole, the estimation results

appear better that the OLS results because the spot price passthrough was found to be between 90

and 100 percent.

The robustness of the results displayed in Tables C.1 and C.2 can be seen in Table C.3, which shows

the cumulative spot price pass-through to the retail level. Close examination of the entries shows

that the cumulative passthrough is independent of the estimation method. The table shows that, for

all areas except PADD 2, for a 10-cent initial spot price change, slightly less than 3 cents

pass-through occurred after two weeks, increasing to between 4 and 5 cents after 4 weeks (or one

month), and increasing to between 7 and 8 cents after 2 months. The reason for the more rapid (and

complete) passthrough to retail price for PADD 2 is not clear at this time.

60 Motor Gasoline Assessment Spring 1997

Energy Information Administration
Motor Gasoline Assessment Spring 1997 61

Energy Information Administration

Start Date April 5

1993

April 5

1993

April 5

1993

October5

1992

October 5

1992

Independent Variable: NYH NYH USG USG USG

Change in Retail Price (dependent variable)

Parameter PADD 1A PADD1B PADD1C PADD 2 PADD3

∆ SPOT(t-1) 0.145*** 0.099*** 0.136*** 0.374*** 0.104***

(0.023) (0.016) (0.017) (0.032) (0.019)

∆ SPOT(t-2) 0.109*** 0.131*** 0.159*** 0.224*** 0.187***

(0.023) (0.017) (0.016) (0.032) (0.019)

∆ SPOT(t-3) 0.082*** 0.090*** 0.112*** 0.110*** 0.090***

(0.023) (0.017) (0.016) (0.031) (0.019)

∆ SPOT(t-4) 0.112*** 0.093*** 0.096*** 0.095*** 0.080***

(0.023) (0.016) (0.016) (0.032) (0.019)

∆ SPOT(t-5) 0.120*** 0.079*** 0.084*** 0.040 0.053***

(0.023) (0.017) (0.016) (0.031) (0.019)

∆ SPOT(t-6) 0.083*** 0.077*** 0.060*** 0.069** 0.073***

(0.023) (0.017) (0.016) (0.031) (0.018)

∆ SPOT(t-7) 0.059** 0.057*** 0.045*** 0.088*** 0.064***

(0.023) (0.017) (0.016) (0.032) (0.019)

∆ SPOT(t-8) 0.059** 0.067*** 0.077*** 0.043 0.076***

(0.023) (0.017) (0.016) (0.031) (0.019)

∆ SPOT(t-9) 0.062*** 0.044*** 0.048***

(0.023) (0.017) (0.016)

∆ SPOT(t-10) 0.054**

(0.023)

D04OCT93 4.366*** 4.385*** 4.560*** 4.585*** 4.729***

(0.644) (0.438) (0.413) (0.908) (0.514)

NYHUSG(t-1) -0.022 -0.044* -0.038* 0.003 -0.044**

(0.022) (0.023) (0.021) (0.025) (0.020)

AR(1) 0.720** 0.754*** 0.776*** 0.336***

(0.278) (0.093) (0.088) (0.063)

MA(1) -0.618** -0.389*** -0.433***

(0.313) (0.128) (0.127)

Sum of Spot Lags 0.885 0.739 0.816 1.044 0.726

adj. R^2 0.527 0.705 0.766 0.58 0.653

F-Statistic 19.3 43.5 59.1 37.8 46

D.W. Statistic 2.09 2.04 2.03 2.15 2.1

The general form of the linear model is shown in Equation C1.

All prices in cents per gallon.

”∆” is the weekly price change.

SPOT is the spot price of regular, conventional motor gasoline at New York Harbor (NYH) or U.S. Gulf Coast

(USG).

D04OCT93 is a dummy variable corresponding to the change in Federal tax on motor gasoline.

NYHUSG is the spot price difference between NYH and USG.

Standard errors appear in parentheses below the parameter estimates.

*** indicates significant at 1% criteria (p-value.01).

** indicates significant at 5% criteria (p-value.05).

* indicates significant at 10% criteria (p-value.10).

Table C.1 Ordinary Least Squares Regression Results

Weekly Prices to May 19, 1997
62 Motor Gasoline Assessment Spring 1997

Energy Information Administration

Start Date: April 5

1993

April 5

1993

April 5

1993

October 5

1992

October 5

1992

Independent Variable: NYH NYH USG USG USG

Change in Retail Price (dependent variable)

Parameter PADD 1A PADD1B PADD1C PADD 2 PADD3

∆SPOT(t-1) 0.135*** 0.123*** 0.143*** 0.379*** 0.130***

(0.010) (0.011) (0.011) (0.029) (0.011)

∆SPOT(t-2) 0.125*** 0.115*** 0.131*** 0.214*** 0.120***

(0.009) (0.010) (0.010) (0.017) (0.010)

∆SPOT(t-3) 0.115*** 0.107*** 0.120*** 0.119*** 0.110***

(0.008) (0.009) (0.009) (0.018) (0.009)

∆SPOT(t-4) 0.104*** 0.098*** 0.108*** 0.075*** 0.100***

(0.007) (0.009) (0.008) (0.015) (0.008)

∆SPOT(t-5) 0.094*** 0.090*** 0.096*** 0.065*** 0.089***

(0.007) (0.008) (0.008) (0.015) (0.007)

∆SPOT(t-6) 0.084*** 0.082*** 0.084*** 0.070*** 0.079***

(0.006) (0.008) (0.008) (0.018) (0.007)

∆SPOT(t-7) 0.074*** 0.074*** 0.072*** 0.071*** 0.069***

(0.006) (0.008) (0.007) (0.016) (0.006)

∆SPOT(t-8) 0.063*** 0.065*** 0.061*** 0.050* 0.059***

(0.006) (0.008) (0.008) (0.028) (0.006)

∆SPOT(t-9) 0.053*** 0.057*** 0.049*** 0.049***

(0.007) (0.008) (0.008) (0.007)

∆SPOT(t-10) 0.043*** 0.049*** 0.037*** 0.039***

(0.007) (0.009) (0.009) (0.007)

∆SPOT(t-11) 0.033*** 0.041*** 0.025*** 0.029***

(0.008) (0.010) (0.009) (0.008)

∆SPOT(t-12) 0.023** 0.032*** 0.014 0.019**

(0.009) (0.011) (0.010) (0.009)

∆SPOT(t-13) 0.013 0.009

(0.01) (0.010)

D04OCT93 4.348*** 4.415*** 4.752*** 4.528*** 4.926***

(0.638) (0.414) (0.381) (0.901) (0.524)

NYHUSG(t-1) -0.014 -0.026 -0.041** 0.003 -0.030

(0.017) (0.018) (0.020) (0.024) (0.019)

PDL0 0.074*** 0.082*** 0.084*** 0.075*** 0.069***

(0.006) (0.008) (0.008) (0.015) (0.006)

PDL1 -0.010*** -0.008*** -0.012*** -0.024** -0.010***

(0.001) (0.002) (0.001) (0.012) (0.001)

PDL2 0.017***

(0.003)

PDL3 -0.003**

(0.001)

AR(1) 0.729*** 0.334*** 0.263***

(0.100) (0.068) (0.063)

MA(1) -0.409***

(0.126)

Other ARMA terms MA(7) AR(2,6,8), MA(5)

Sum of Spot Lags 0.957 0.934 0.94 1.044 0.899

adj. R^2 0.53 0.725 0.778 0.584 0.644

F-Statistic 81.4 94.8 91.2 68.4 109

D.W. Statistic 1.86 2.04 2.06 2.16 2.03

Table C.2 Polynomial Distributed Lag Estimation Results

Weekly Prices to May 19, 1997
Motor Gasoline Assessment Spring 1997 63

Energy Information Administration

The general form of the linear model is shown in Equation C1.

All prices in cents per gallon.

“∆” is the weekly price change.

SPOT is the spot price of regular, conventional motor gasoline at New York Harbor (NYH) or U.S. Gulf Coast

(USG).

D04OCT93 is a dummy variable corresponding to the change in federal tax on motor gasoline.

NYHUSG is the spot price difference between NYH and USG.

PDL0, PDL1, PDL2, and PDL3 are the constant, linear, squared, and cubic PDL terms, respectively.

Standard errors appear in parentheses below the parameter estimates.

*** indicates significant at 1% criteria (p-value.01).

** indicates significant at 5% criteria (p-value.05).

* indicates significant at 10% criteria (p-value.10).

Time

Elapsed

Calculation

Method

PADD 1A PADD 1B PADD 1C PADD 2 PADD 3

Cents Per Gallon

2 Weeks OLS 2.54 2.30 2.95 5.97 2.91

PDL 2.60 2.38 2.74 5.93 2.50

4 Weeks OLS 4.48 4.14 5.03 8.03 4.61

PDL 4.79 4.43 5.02 7.88 4.59

6 Weeks OLS 6.51 5.70 6.46 9.12 5.87

PDL 6.57 6.15 6.82 9.23 6.28

8 Weeks OLS 7.69 6.94 7.69 10.44 7.26

PDL 7.94 7.54 8.15 10.44 7.56

Table C.3 Cumulative Passthrough to Retail for 10-Cent Change in Spot Price

(Comparison of OLS and PDL Estimation Results)
Appendix D: Resale Gasoline Price

Spreads

Motor Gasoline Assessment Spring 1997 65

Energy Information Administration

0

5

10

15

20

25

30

35

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure D.1 Resale Regular Conventional - Refiner’s Cost Imported PADD 1

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380; Gasoline Prices: Table 32

(various issues); Crude Oil Prices: Table 1 (various issues).
66 Motor Gasoline Assessment Spring 1997

Energy Information Administration

0

5

10

15

20

25

30

35

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure D.2 Resale Regular Conventional - Refiner’s Cost Imported PADD 2

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380; Gasoline Prices: Table 32

(various issues); Crude Oil Prices: Table 1 (various issues).

0

5

10

15

20

25

30

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure D.3 Resale Regular Conventional - Refiner’s Cost Imported PADD 3

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380; Gasoline Prices: Table 32

(various issues); Crude Oil Prices: Table 1 (various issues).
Motor Gasoline Assessment Spring 1997 67

Energy Information Administration

0

5

10

15

20

25

30

35

40

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure D.4 Resale Regular Conventional - Refiner’s Cost Imported PADD 4

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380; Gasoline Prices: Table 32

(various issues); Crude Oil Prices: Table 1 (various issues).

0

5

10

15

20

25

30

35

40

45

Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97

Cents Per Gallon

Actual Average 1991-96

Figure D.5 Resale Regular Conventional - Refiner’s Cost Imported PADD 5

Source: Energy Information Administration, Petroleum Marketing Monthly, DOE/EIA-0380; Gasoline Prices: Table 32

(various issues); Crude Oil Prices: Table 1 (various issues).
Appendix E: Petroleum Administration

For Defense Districts (PADDs)

PADD 1:

PADDs 1A, 1B, 1C, which are Subdistricts of PADD 1.

PADD 1A: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont.

PADD 1B: Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania.

PADD 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, Federal Offshore Gulf.

PADD 4:

Colorado, Idaho, Montana, Utah, Wyoming.

PADD 5:

Alaska (North Slope and Other Mainland), Arizona, California, Hawaii, Nevada, Oregon,

Washington, Federal Offshore California.

Motor Gasoline Assessment Spring 1997 69

Energy Information Administration