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Lower gas prices may be short-lived
May 2, 2000
BY JOSH P. HAMILTON BLOOMBERG NEWS
NEW YORK -- Energy Secretary Bill Richardson may have jumped the gun when he declared victory over record gasoline prices.
Richardson, who spent much of March lobbying OPEC members to boost output, said at the end of the month that the producer group's decision to open the spigots meant refiners would have enough oil on hand to make gasoline, and that motorists should expect a gradual decline in prices this summer after suffering through record highs early this year.
Yet the energy chief paid scant attention to the impact on drivers of a new grade of fuel mandated by clean-air laws for the nation's most densely populated regions. As the grade is more difficult to make than conventional fuel, and not every refinery is producing it, unexpected production halts may cause shortages. And such disruptions are not unusual during the summer months.
"We can't afford any emergency outages this year, but it's highly unlikely that we'll get through the summer without any," said George Gaspar, managing director of petroleum research at Robert W. Baird & Co. in Milwaukee. "If that happens, gasoline prices in some regions could challenge the earlier records."
So-called reformulated gasoline blends have been in use for years in places where air pollution is high. The newest version of the fuel is supposed to keep tailpipe emissions lower than last summer's grade in order to meet new Federal air-quality standards for metropolitan centers including New York, Chicago and Los Angeles.
Such areas, where one-third of U.S. gasoline is sold, must start using the fuel no later than June 1.
Motorists along the Northeast Corridor from Washington to Boston may find the fuel in especially short supply.
Foreign refineries, which normally provide the region with about 15 percent of its gasoline and the components used to make reformulated gasoline, probably won't make the new fuel, known as RFG II, this year unless prices rise high enough to make it economical to produce and export. So far that hasn't happened, analysts say.
"There are only a few refineries overseas that do have the capability to make RFG II," said Michael Busby, manager of crude oil and refined products trading at Northville Industries Corp. in Melville, N.Y., one of the nation's largest gasoline importers.
Adding to concerns, Busby said, a federal appeals court in Los Angeles in late March upheld a Unocal Corp. patent on reformulated gasoline. The court ordered Exxon Corp., Mobil Corp., Chevron Corp., and others to pay $91 million, or 5.75 cents a gallon, to Unocal for infringing the patent in California during a five-month period of 1996.
"We'll be going back to district court in L.A., asking for a nationwide accounting by those defendant companies" for any sales that infringed Unocal's patent wherever they occurred, Unocal spokesman Barry Lane said.
The patent covers characteristics largely found in the premium grade of summer reformulated gasoline, although the patent is not based on those specific regulations, Lane said.
"Now, even if the economics are conducive, we're not going to bring components in and blend up reformulated gasoline," Northville's Busby said. A refiner or importer could be in violation of the Unocal patent simply by meeting the federal specification, and that is causing others to stay out of the market, too, he said.
Even Secretary Richardson's own domain, the Energy Department, sees potential for trouble this summer.
In April, the department's forecasting arm, the Energy Information Administration, said "the U.S. gasoline market faces unusually high risks of price run-ups this spring and summer, particularly if significant refinery problems are encountered."
New specifications aside, part of the problem is that refiners during the summer months can't make enough gasoline to meet demand from Americans, who this summer will drive their cars a record 12,000 miles per household from April through September, according to DOE estimates.
Refiners normally make up for the seasonal deficit by stockpiling gasoline in the winter months for the summer peak. Yet with prices for crude oil, gasoline's raw material, at nine-year highs, refineries in the month of January cut back operations to the lowest level in almost a decade.
U.S. gasoline inventories are 7.4 percent below year-ago levels, according to the industry-funded American Petroleum Institute, and refiners will need to run at 97 percent of their capacity through September to meet demand and keep pump prices falling, the EIA projected.
That's not an unprecedented rate. Over the past five years, refiners ran at an average rate of about 96 percent from April through early September, API figures show. They averaged 98 percent of capacity during that period in 1998.
Still, "it's unreasonable" to expect consistently high refining rates, said Jim Greenwood, vice president of government relations at Valero Energy Corp. in San Antonio, the nation's second-largest independent refining company with six U.S. refineries. Running that hard, "you will see equipment go down. You saw that with Chevron and Tosco," in California last year, he said.
An explosion and other mishaps at California refineries owned by those companies sent statewide prices soaring more than 23 cents a gallon in one week last year, with prices topping out at $1.70 a gallon in San Francisco, compared with a national average of $1.08 at the time.
California's stringent environmental regulations made most supplies available elsewhere unusable without further processing. Now, big cities across the country join California in using a more specialized gasoline for which there is no ready substitute.
To be sure, not everyone agrees prices will soar again this year. Producing gasoline at 97 percent of capacity is "quite do-able," said Bud Davis, a spokesman for Sunoco Inc., the third-largest independent U.S. oil refiner.
There is always a chance of outages, Davis said. And while he concedes "it'll be more difficult to replace lost production with imports" under the new specifications, any price surges should be short-lived. "It will be tight, but we as an industry will meet that demand."
Yet when refineries run flat out, there's an increased risk of unplanned shutdowns, and a dearth of overseas supplies could cause more problems than government forecasters expect.
"What's concerning me is more the imports," said Marianne Kah, chief oil economist at Conoco Inc. in Houston, the nation's fourth-largest oil company and operator of four refineries in the U.S. "Imports of reformulated gasoline are down, which tells me that other countries are having trouble meeting our new specs."
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Then again, they may not be short lived.
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