EIA: high prices for gasoline will persist, even as demand weaken

Current record high prices for both crude oil and product are occurring despite weakness in U.S. demand, the Energy Information Administration (EIA) reported in its Short-Term Energy and Summer Fuels Outlook. The weakness in demand is expected to be a prominent feature of the summer driving season, defined as the period from April 1 to Sept. 30.

Regular grade gasoline retail prices, which averaged $2.93 per gallon last summer, are projected to average $3.54 per gallon during the current driving season, according to the Outlook. Diesel fuel prices, which averaged $2.85 per gallon last summer, are projected to average $3.73 this summer.  The monthly average gasoline price is projected to peak at just over $3.60 per gallon in June, while the monthly average diesel price is expected to peak at just over $3.90 per gallon in April.

The EIA said that its retail price projections reflect higher prices for the refiner’s average acquisition cost of crude oil, projected to average almost $97 per barrel, up from about $67 per barrel last summer. However, for motor gasoline the projections indicate a narrowing of the difference between the gasoline retail price and the average cost of crude oil, due largely to the weak gasoline demand, high inventories, and growth in ethanol production, according to the Outlook.  While the average cost of crude oil is projected to increase by about 70 cents per gallon this summer over last, the average gasoline retail price is expected to increase by only 60 cents.  In contrast, summer diesel fuel prices are projected to increase by 87 cents per gallon this summer over last, largely because of strong world distillate demand growth, especially in Europe and Asia.
  
The EIA stressed that even if the national average monthly gasoline price peaks around $3.60 per gallon this summer, it is possible that prices at some point will cross the $4 per gallon threshold. Among the reasons:

Variations around the monthly average .  Daily or weekly national average prices will inevitably be both above and below the monthly average price, whatever it turns out to be.  For example, in May 2007, the average monthly retail price for regular gasoline was nearly $3.15 per gallon, but the weekly price within that month increased from $3.05 per gallon at the beginning of the month to $3.22 per gallon by the end.

Variations across States .  There is also significant regional variation in gasoline retail prices because of different gasoline quality specifications, distribution costs, and taxes.  For example, prices along the West Coast—and more specifically, California—are often well above the U.S. average price.  On March 31, 2008, the U.S. average price was nearly $3.29 per gallon, while the average price in California was $3.61 per gallon, or 32 cents above the U.S. average.  In other periods, it has been the Midwest that has seen prices well above the U.S. average.

Variations within States . Finally, there is significant variation in prices between stations and areas within any State.  For example, during the first 3 months of 2008 the price of gasoline in San Francisco has been about 10 cents per gallon higher than the California average.

Because taxes and retail distribution costs are generally stable, movements in gasoline and diesel prices are driven primarily by the change in crude oil prices and wholesale margins. The projected average WTI crude oil price for May and June is about $103 per barrel. Assuming no change in margins, an additional dollar in the oil price adds about 2.4 cents to product prices.  Crude oil prices have been highly volatile in recent months. Oil prices significantly above the projected level would greatly increase the prospects for $4 per gallon gasoline in some parts of the country.  Local supply conditions will also play a key role in determining prices in various regions and locations this spring and summer. 

Here is more from the EIA Short-Term Energy and Summer Fuels Outlook, which was released on April 8:

During the summer season, motor gasoline consumption is projected to decline by 0.4 percent to 9.4 million bbl/d as a result of the current economic slowdown and high retail prices.  The economic stimulus payments, which are scheduled to start in May, are expected to boost real disposable income but are not expected to have a significant impact on motor gasoline consumption. 

Motor gasoline is supplied by four sources:  domestic production of ethanol and other oxygenates for gasoline blending, domestic refinery output, primary inventories, and net imports of motor fuel and blending components.

The methyl tertiary butyl ether (MTBE) phaseout in 2006, high oil prices, and new mandates requiring the use of renewable fuels, have all encouraged construction of new ethanol production capacity.  During 2007, 36 new ethanol plants or plant expansions started production, and in 2008 an additional 64 new facilities are expected to begin production.  Domestic ethanol production has increased from an average of 314,000 bbl/d during the summer of 2006, to 418,000 bbl/d during the summer of 2007, and is projected to average 550,000 bbl/d this summer.

This summer’s domestic gasoline production is expected to be down by about 20,000 bbl/d from last summer’s average.  Because of the expected 130,000 bbl/d increase in ethanol production, production of gasoline at U.S. refineries is expected to decline by as much as 150,000 bbl/d this summer.

At the onset of the peak driving season (April 1), total gasoline stocks, at 224 million barrels, are estimated to be ample.  That level is 23 million barrels above last year, 19 million barrels above the 5-year average, and the highest in 15 years.  Because of the high current inventory level, the average stock draw is projected to be about 88,000 bbl/d, compared with last summer’s 14,000 bbl/d stock draw (and the average of 15,000 bbl/d over the last 15 years).

Imports are a significant source of motor gasoline on the East Coast, accounting for 87 percent of the U.S. total.  The East Coast obtains almost 30 percent of its gasoline supply from imports compared with about 2 percent for the rest of the United States. Because of the expected growth in ethanol production, the current high gasoline inventory levels, and the decline in gasoline consumption, there should also be less demand for gasoline imports this year.  For the current summer season, net imports of motor gasoline and blending components are projected to average 1.1 million bbl/d, down almost 100,000 bbl/d from last summer’s average of 1.2 million bbl/d.  

Distillate fuel consumption, which includes both diesel fuel and heating oil, is projected to be at about the same level as last summer.  Distillate fuel is supplied by three sources: domestic refinery output, primary inventories, and net imports. Refinery production this summer is projected to be close to last summer’s average of 4.14 million bbl/d.   

Refinery production of distillate fuel both here and in Europe may be constrained by the potentially weak gasoline market.  Without a growing outlet for gasoline, refiners may have to cut back on crude oil runs, resulting in lower distillate fuel output.   

Distillate inventories are projected to start the summer season at 109 million barrels. Although 11 million barrels less than last year, inventories are only slightly less than the 5-year average.  Consistent with seasonal patterns, distillate stocks are projected to rise to 132 million barrels at the end of third quarter, only 2 million barrels less than the year-earlier level.  As a result, distillate stocks are projected to build at a daily average rate of 122,000 bbl/d over the summer compared to 76,000 bbl/d last summer.

Because of the demand for building inventories during the summer to meet next winter’s heating fuel demand, net imports are projected to average 115,000 bbl/d, up from 55,000 bbl/d last summer.  However, strong growth in world demand for distillate fuels and constrained supplies could limit the availability of imports and leave inventories lower than desired at the beginning of next winter.