The US gasoline market will heat up for refiners this year—and not just in terms of gasoline prices and margins. US refiners face the prospect of spiking gasoline prices and slumping crude oil prices being a two-edged sword. On the one hand, it is good news for long-suffering US refiners in terms of improved margins; on the other hand, it's bad news in the form of the political heat refiners will draw when consumers see crude oil prices declining but gasoline prices not fully following down in lockstep. That's already happening in California (surprise).
California's preemptive strike
Gov. Gray Davis on Apr. 2 called on the California Energy Commission to continue to investigate the price of gasoline even after the CEC filed its first report, undertaken at his behest last month, finding no evidence of wrongdoing by refiner-marekters regarding recent spikes in state diesel and gasoline prices. (A companion investigation by CEC and the California Public Utilities Commission focused on natural gas price spikes and similarily came up empty-handed.)
Nevertheless, Davis's expectations of future price manipulation, however ill-founded, underpinned a bit of self-fulfilling prophecy.
"According to the (CEC) report, falling crude oil prices and more-abundant supplies mean that regular gasoline prices in California should fall below the $2(/gal) mark within the week, down from an average statewide record high of $2.15/gal," the Apr. 2 statement from Davis said. In other words, this view holds that because crude oil prices are falling, gasoline prices in California should follow them down penny-for-penny, regardless of the unique dynamics of California's fuels market and the various factors impacting gasoline prices nationwide. Davis called for the agency to continue with such reports every 30 days until next Jan. 1, saying, "When Californians fill up at the pump, they shouldn't be the victims of highway robberyUWe will continue to monitor the gasoline and natural gas market to ensure that no energy companies pull Enron-like tricks to artificially drive up the price of energy. California learned a lesson from the energy crisis: Never let down your guard when energy companies are around. We'll continue to monitor the gasoline, natural gas, and diesel fuel markets to ensure no illegal activity occurs."
Because the status of fuels markets in the US today ensures upward price pressure on gasoline beyond the influence of crude oil prices, such comments amount to a self-fulfilling prophecy by innuendo.
Adding to that upward pressure is California's ban on methyl tertiary butyl ether taking effect at the end of this year. The ban was to have taken effect last December, but Davis ordered a 1 year extension, acknowledging the prospect of supply shortages and consequent price spikes owing to refiners' rocky transition to the only viable alternative oxygenate, ethanol. So Davis on the one hand effectively acknowledges the noncrude-price influences on gasoline price behavior while also creating the impression with the public that if gasoline prices don't track crude prices on the way down, then refiners must be engaging in price-gouging.
Tight market
Meanwhile, the stage is set for strong upward pressure on gasoline prices from factors outside of crude price movements. US refiners will have to substantially boost utilization rates just to build gasoline stocks to last spring's levels, according to Boston-based Energy Security Analysis Inc.
ESAI noted that gasoline crack spreads recently soared to levels unseen in 2 years, and that low stocks along with the lack of Venezuelan gasoline exports and high demand are all behind the rally. ESAI estimated US refiners will need to average throughput rates almost 400,000 b/d higher than last year just to reach 2002 gasoline inventory levels. A subsequent report noted help would be forthcoming from the onset of warmer weather and high premiums for gasoline relative to heating oil, which would stimulate gasoline yields.
Problem is, at this writing, another arctic express has rolled across much of the US, spiking demand for heating oil. Supply of Nigerian crude—prized for its high gasoline yield—has been halved. Some key refineries are already in turnaround. And air travel is down because of security and economic woes. The last time the latter occurred, it boosted demand—and prices—for gasoline. Meanwhile, the Organization of Petroleum Exporting Countries is worried about a crude oil glut and plummeting crude prices. What are the odds refiner-marketers will hear more from Gray Davis—and other politicians—before the driving season is over?
(Online Apr. 7, 2003; author's e-mail: [email protected])
