Gasoline Prices Likely to Rise

Inventories Lower Than Last Summer's as Driving Season Nears

http://washingtonpost.com/ac2/wp-dyn/A13664-2001Mar29?language=printer

By Peter Behr,Washington Post Staff Writer

Friday, March 30, 2001; Page E01

With the summer driving season just two months away, the nation's gasoline inventories are even lower than last year's strained supplies, and motorists again face a risk of a big jump in fuel prices, government and industry analysts warn. "We are beginning the driving season with very little stock cushion," said John Cook, director of the federal Energy Information Administration's petroleum division.

The EIA says that barring mishaps, pump prices should average around $1.50 a gallon over the summer, about 10 cents above the current average. But Cook added, "All bets are off if we experience the same sorts of refinery or pipeline problems we had last summer."

The EIA warning is echoed in a report to be released today by the Federal Trade Commission, based on a nine-month investigation of sharp price spikes in the Midwest last summer. Prices for gasoline with mandatory new antipollution additives reached $2.13 a gallon in the Chicago area and $2.02 in Milwaukee last summer, prompting congressional demands for the FTC investigation.

The FTC report cites a series of problems that contributed to last summer's gasoline shortage in Chicago and Milwaukee. Those problems included a disruption of deliveries through two pipelines serving the Midwest, several refinery breakdowns and unexpected problems producing the reformulated gasoline required for Chicago and Milwaukee by the Environmental Protection Agency.

The commission warned that last summer's price spikes could be repeated this summer because gasoline supplies and production capacity remain strained. The FTC said it found no evidence of illegal collusion by gasoline suppliers. The commission said that once prices spiked, several firms quickly increased production and shipped additional gasoline to the Midwest.

But it said some firms worsened the shortages of the reformulated cleaner gasoline by cutting production or deliveries in the expectation of higher profits. "A significant part of the supply reduction was caused by the investment decisions of three firms," the FTC report says, without naming the firms.

"An executive of [one] company made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin," the FTC report says. "Firms that withheld or delayed shipping additional supply in the face of a price spike did not violate the antitrust laws. In each instance, the firms chose strategies they thought would maximize their profits," the report says.

Oil refineries throughout the country have been operating at close to their maximum capacities, although gasoline supplies and delivery problems vary widely because of regional differences in pipeline and refinery capacity.

Overall, the nation's gasoline stocks, now totaling 194 million barrels, are 4 percent below a year ago and 9 percent below 1999 levels. "All the scenarios that existed last summer unfortunately exist now," said Mantill Williams, spokesman for the national AAA. "We haven't solved those problems."

In the Washington region, prices hit $1.62 a gallon for regular unleaded fuel last summer, up from $1.14 in the summer of 1999 and 98 cents in March 1999, according to AAA Mid-Atlantic. The current pump price for regular gasoline averages $1.48 a gallon, although prices tend to be higher in the District and near-in suburbs.

Similarly, current gasoline inventories are significantly lower in the South Atlantic, Midwest and Mountain states than in the mid-Atlantic and West Coast regions.

Cook said that refineries are expected to run at full capacity as summer begins in order to make up for low inventories, and that means there's virtually nowhere to go for new supplies in an emergency except Europe. "Resupply is a long way off," he said.

The reasons why refinery operations are so strained are part of a national debate over energy policies launched by the Bush administration. The administration and industry groups say that conflicting environmental requirements for gasoline additives in major cities require the production of many specialized types of gasoline, severely limiting the flexibility of refiners in one area to help meet shortages elsewhere.

But investments in refineries also dropped because low energy product prices wiped out refining profits. "In the late '90s, nobody wanted to spend a dime on refineries," said Gene Edwards, senior vice president of Valero Energy Corp. in San Antonio, a major U.S. gasoline producer. "Refiners have to invest more and more in regulatory requirements and environment measures, and that leaves less for strategic expansion."

Specialized chemicals that must be added to gasoline to reduce pollution are also in short supply in many parts of the country – in part an unexpected consequence of the extraordinary increase in natural gas prices that began last fall.

Normally, part of the nation's natural gas production would be drawn off to produce methane, a main ingredient in the gasoline additive MTBE, which is used to reduce motor vehicle exhaust emissions. But when natural gas prices shot up last summer, there was little incentive to divert part of the production into making MTBE, said John Felmy, policy analyst director for the American Petroleum Institute.

Another wild card in the gasoline picture is the production decisions by the Organization of Petroleum Exporting Countries.Oil production and investments in gasoline refinery operations slowed when oil prices dropped in the late 1990s. Then rapid growth in the United States and other countries caused worldwide supplies of crude oil – the raw material for gasoline – to tighten.

Crude oil prices contribute about 40 percent of the pump price of gasoline, while taxes, refining, distribution and retailing charges make up the rest. Thus, OPEC's ability to cut back crude production and keep oil prices in the current $25-a-barrel range will impact this summer's gasoline prices.

© 2001 The Washington Post Company

-- Swissrose (cellier3@mindspring.com), March 29, 2001

Answers

Gasoline prices are going to rise - well that's a no brainer. Do leaves fall off the trees during the fall? Gas prices rise for the summer. After all that's when the SUVs tour the United States along with the 40' motor homes and 40' fifth wheels.

-- Guy Daley (guydaley@altavista.com), March 30, 2001.

Gasoline prices in the Twin Cities rose 24 cents yesterday. Summer's coming early. Have they jumped where you are?

-- John littmann (LITTMANNJOHNTL@AOL.COM), March 30, 2001.

No increase in AZ yet. 1 gallon is around $1.43-1.45. Swissrose.

-- Swissrose (cellier3@mindspring.com), April 02, 2001.