Average U.S. gasoline prices have risen sharply during 2004, beginning the year at $1.50 pergallon and peaking at $2.06 in late May. They subsequently declined to $1.87 in August asinventories increased. Among the factors causing 2004's gasoline price volatility has been a shortage of domesticrefining capacity, which has affected gasoline supply availability, creating a need for substantialimports. U.S. gasoline imports -- in the form of conventional gasoline, reformulated gasoline, andgasoline components -- currently make up slightly more than 10% of the nation's supply. Potential policy concerns raised by growing reliance on gasoline imports include theavailability of foreign supplies that meet U.S. specifications, the speed at which incremental foreignsupplies can be provided to meet shifting domestic demand, and the delivered price of importedsupplies. The nation's stressed gasoline supply capacity has attracted recent legislative interest. In the House, the Gasoline Price Reduction Act ( H.R. 4545 ) was brought to thefloor under suspension of the rules (passage requires a two-thirds vote) on June 15, but failed by236-194. The bill was intended to increase gasoline availability by limiting the number of fuel blendsrequired to meet clean air standards and by allowing waivers of fuel blend requirements duringsupply disruptions. This would have made it easier to ship gasoline between markets when neededto balance supply. On June 16, the House passed the United States Refinery Revitalization Act( H.R. 4517 ) by a vote of 239-192. This bill would provide incentives to increaserefinery capacity, focusing on areas with closed refineries or those experiencing layoffs or highunemployment. It would also charge the Department of Energy (DOE) with centralizing the processof obtaining environmental permits for new refinery projects, including additions and upgrades. Gasoline demand in the United States continues to grow. Although gasoline comprises about45% of total U.S. petroleum consumption, its incremental growth during the recent past accountsfor virtually all of the increase in total oil demand. Figure 1 shows the trend in U.S. gasoline consumption during the past decade, during whichdemand rose 20%. Growth has persisted in more recent years, although 2004 may see some late-yearslowdown because of higher prices. Between 1999 and 2003, petroleum consumption increased byhalf a million barrels per day (mbd), rising from 19.5 mbd in 1999 to 20.0 mbd in 2003. During thesame time span, gasoline consumption rose by the same amount as demand grew from 8.4 mbd to8.9 mbd. Figure 1. U.S. Gasoline Demand: 1993 - 2003 Source: Energy Information Administration, Monthly Energy Review, June 2004, Table 3.4. Gasoline use has continued to grow during the first half of 2004, as almost 9.0 mbd ofgasoline was supplied to consumers, an increase of about 1.9% over the previous year's first half.While there is some preliminary evidence that high pump prices may have begun to retard growthin gasoline demand, it is still too soon to evaluate whether this trend has shifted, and how overallpetroleum demand might track for all of 2004. Gasoline is manufactured in U.S. refineries and imported from foreign refiners as well. Figure 2 shows data for total U.S. demand and domestic production. (1) The gap between the two setsof figures is filled by imported product made by foreign refiners. Imported supply consists offinished gasoline -- which meets U.S. specifications and is market-ready -- as well as blendingcomponents. The latter have become an increasingly important part of gasoline supply, since an increasingamount of ethanol-blended gasoline is being consumed in this country. The trend toward ethanolblends may continue because it is the oxygenate used to replace the additive methyl tertiary butylether (MTBE), which has been banned in New York, California, and Connecticut, and is beingphased out in other places. Figure 2. U.S. Gasoline Production & Demand: Jan. 2003 - July 2004 Source: EIA, Weekly Petroleum Status Report, June 30, 2004, Table 10. In one form or another, the nation imports slightly more than 10% of the gasoline itconsumes, the unavoidable outcome of growing motor fuel demand and refining capacity which hasnot kept pace. This supply is necessary to fill the gap between gasoline production and demandshown in Figure 2. Figure 3 shows the imports of gasoline in detail, the total of which is rising in the time-framein this figure. Total imports peaked this summer at about 1.1 mbd; for the first seven months of2004, they averaged 900,000 barrels per day. Imports fit into three general categories: Conventional gasoline, which comprises about half of the gasoline sold in thenation and conforms to the least stringent environmental standards currently in effect. The U.S.environmental standards for this fuel include a prohibition on the use of lead, limits on summertimevolatility, and limits on manganese and sulfur content. Reformulated Gasoline (RFG) is used in major metropolitan areas in 17 statesand the District of Columbia which have significant ozone problems. In April 2004, EPA designatedareas in a total of 32 states and the District as nonattainment areas for a new ozone standard to bephased-in between 2007 and 2021 (2) . RFG has several requirements, including the mandate that itcontain sufficient oxygenates to meet a minimum oxygen requirement of 2% by weight. Theoxygenate often added is either the chemical MTBE (now banned in several states) or ethanol. RFG's peak usage is during summer months, when it comprises about 29% of nationaldemand. Gasoline components are imported with increasing frequency, amounting to50% of imports during 2004. Gasoline is a "cocktail" of hydrocarbons blended at refineries and fuelterminals. Increasingly, cocktail ingredients are available from foreign refiners, and they are beingimported to expand U.S. refinery output. Since finished gasoline is a blended product, refiners cansupplement short capacity by buying foreign components and blending them here in such a way thatU.S. specifications are met. As a result of the Clean Air Act requirements and state mandates, many different types ofgasoline are sold in the United States. In addition to conventional and RFG, there is oxygenated fuel(higher oxygen content than RFG), low volatility conventional gasoline, and a variety of state andlocal blends. These "boutique fuels" include ethanol blends, California Cleaner-Burning Gasoline(also used in Nevada and Arizona) and a number of other local formulations. As noted above, the trend toward ethanol blends may continue because it is the oxygenateused to replace the additive MTBE. Ethanol blends cannot be stored or transported by pipeline,because ethanol and gasoline do not mix well and can separate. The blend must be mixed near thepoint of final consumption. Imported components of the gasoline "cocktail" fit into the increasingly common practiceof local blending for local markets, in that "cocktail" components often come from multiple sourcesand are assembled at terminals and other gasoline distribution points. For refiners, blending gasolinefrom component parts represents a small incremental supply bonus, since they can purchaseopportunistically those components that might be available on world markets, and manufacture theremainder in their own facilities. In total, U.S. refiners do not have the capacity to make all thegasoline sold in this country, but they often do have substantial flexibility -- within overall capacityconstraints -- to make hard-to-import components tailored to U.S. specifications which foreignrefiners cannot easily provide. The trend shown in Figure 2 suggests that U.S. refiners are able to produce during an averagemonth a bit more than 8.0 mbd, while demand is trending just under 9.0 mbd this year. The actualnumbers fluctuate from month to month. Figure 3 shows total gasoline imports averaging about900,000 barrels per day. (3) Imports of finished gasoline and components -- which have averaged, respectively, about 500,000barrels per day and 400,000 barrels per day during the past 12 months -- bridge the gap betweenU.S. refinery production and demand. Without this supplement, there would be a supply shortfall. Figure 3. Make-up of U.S. Gasoline Imports: Jan. 2002 - July 2004 Source: EIA, Weekly Petroleum Status Report, August 2, 2004, Table 9. The increasing use of blending components in building up the gasoline pool is seen in the riseof components as a proportion of nationwide gasoline inventories. Figure 4 shows that total gasolinestocks started 2003 at essentially the same level (212 million barrels) that they were at the end ofAugust 2004 (206 million barrels). But blending components held in inventory rose from 54 millionbarrels, or 26% of inventory, to 72 million barrels, or 35% of total inventory. This is a substantialincrease, and shows refiners' demand for stocks of components to meet the need for locally-mixedethanol blends as well as diverse boutique fuels. Fifteen states have chosen to address clean air issues by calling for localized gasolineformulations for all or part of their states (4) . Many of these requirements are in effect during summer monthswhen concerns about ozone are greatest. The diversity of fuel formulations has raised concerns among stakeholders regarding refiners'ability to provide the diversity of products required in sufficient quantities as well as the producttransport sector's ability to distribute the diverse product slate.