The US gasoline industry will be racked by greater price volatility in the next 2-3 years as it adjusts to environmental regulations that restrict its ability to cope with rapid market changes, analysts said.
"Volatility [in gasoline markets] is now the norm, not the aberration," said Larry Goldstein, president of PIRA Energy Group and president and a member of the board of the Petroleum Industry Research Foundation Inc., New York.
Goldstein doesn't expect any major changes in market volatility after 3 years. He's just reluctant to make any forecast longer than that.
"What comes next may be another 24-36 months of volatility," he said. "At the end of the day, gasoline is actually a commodity, and commodities are susceptible to sudden surges in the market."
In the past, he said, the market was better able to deal with sudden changes in supply or demand, in part because there was spare storage and refining capacity that allowed greater flexibility.
But market changes in recent years have made industry management reluctant to tie up capital in inventory. With refineries operating at peak capacity almost year-round, there's no spare capacity to bring on in an emergency. In fact, disruption of any refinery's operation can trigger a serious market dislocation, as when a fire knocked out Citgo Petroleum Corp.'s 158,650 b/d Lemont, Ill., refinery (OGJ, Aug. 27, 2001, Newsletter, p. 8).
Proliferation of specially blended "boutique" gasolines mandated for specific markets also reduced the industry's flexibility to manufacture and distribute products as needed to supply area shortages, Goldstein said. As a result, he said, "Price now has to carry the extra work of clearing the market." But it takes a relatively large change in price to force even a small change in demand.
Replacing MTBE
The move to replace methyl tertiary butyl ether with ethanol as an oxygenate blending component in gasoline beginning in 2003 will complicate and restrict the market even further (see related story, p. 36).
"Ethanol is an efficient holder of oxygen, so we'll need only about half the volume [that would be required for] MTBE," said Goldstein. That will cut US gasoline production by 150,000-200,000 b/d-"equivalent to the loss of a 300,000 b/d sophisticated US refinery making 50% gasoline," he said.
The US Environmental Protection Agency temporarily eased its reformulated gasoline requirements through Sept. 15 to get more supplies into the Chicago-Milwaukee market to offset lost production at the Citgo refinery (OGJ, Sept. 3, 2001, p. 28). But Goldstein doesn't look for any permanent rollback of federal or state regulations.
"The environmentalists love it. They support high prices on petroleum," he said. "And refiners' [profit] margins have improved, so they also benefit." The ones most affected by increased volatility in gasoline markets are individual consumers, so there's no political opposition "on an organized basis," Goldstein said.
US gasoline imports rise
Meanwhile, US imports of gasoline and blending stocks increased to an average 725,000 b/d in July, the last full month for which figures are available, said Ron Planting, an analyst with the American Petroleum Institute.
That was up 70,000 b/d from July 2000. However, year-to-year increases in imports of gasoline and blending stocks jumped to 200,000 b/d last November and 300,000 b/d in December and surpassed 700,000 b/d during 4 of the first 6 months of this year, Planting said.
"One factor is that last winter was the coldest in 5 years, which kept US refineries producing home heating oil to meet that demand instead of doing turnarounds for gasoline production. That left a bigger opening for imports," he said.
To supply the extraordinary large demand for distillate last winter, refinery yields increased by about 2 percentage points in December-March, while gasoline production was reduced by more than 1 percentage point during the same period (OGJ, Aug. 20, 2001, p. 22). US stocks of finished gasoline fell to 146 million bbl at the end of March, 11 million bbl below the same period in 2000, which was exceptionally low, too.
If European winter weather hadn't been relatively mild to free up supplies for export, some sources said, the US might have run short of both heating oil and gasoline. At its peak earlier this year, distillate imports equaled 20% of US production. Imports of finished gasoline have averaged about 5% of US production this year.
Gasoline import suppliers
In the first half of this year, the US imported 79.6 million bbl of finished gasoline and 54.8 million bbl of blending stocks from around the world.
The biggest suppliers were Canada (21.9 million bbl of gasoline, 4.2 million bbl of blending stocks), Venezuela (10.8 million bbl of gasoline, 3.3 million bbl of blending stocks), and the US Virgin Islands (17.2 million bbl of gasoline, 213,000 bbl of blending stocks).
Brazil, which just a few years ago was turning sugar cane into fuel ethanol to supply its own fuel needs, exported 4.5 million bbl of gasoline and 657,000 bbl of blending stock to the US this year. The US market also sucked up supplies from small producers such as Ireland, Denmark, Sweden, and Peru. Even Japan, which imports virtually all of its own fuel, contributed to the US gasoline import market.
Other suppliers included Russia, China, Algeria, Nigeria, Saudi Arabia, Argentina, and India.
