Petroleum Industry Research Foundation Inc. (PIRINC) said Thursday that the US Midwest gasoline market remains very tight and vulnerable to more price increases until inventories are rebuilt.
In a report, PIRINC noted that, in mid-June, the US average gasoline price was up by about 50�/gal from a year ago ($1.66 vs. $1.15/gal) with about 20� of the increase coming since the beginning of May.
"The overall averages conceal some very wide geographic disparities. On the East Coast, the year-on-year increase in gasoline prices averaged about 47�/gal, while in the Midwest, the increase averaged 71�, and in reformulated areas, 85�/gal.
"These gasoline price increases far exceeded the increase in crude prices, which went up by 33�/gal vs. mid-June, 1999. As has happened on previous occasions, there have been numerous calls for investigations of industry price gouging, including a request by Clinton administration for an expedited review of price developments by the Federal Trade Commission."
Market movements
In its report, PIRINC noted that critics complained Chicago and Milwaukee price increases far exceeded the apparent cost of producing the new Phase 2 reformulated gasoline (RFG) required this year under Environmental Protection Agency mandate. The report explained the economics behind the increase.
"While costs are important, price in the short term is determined by the interaction between supply and demand. Price serves a critical function in a competitive market, namely adjusting demand to accommodate changes in supply conditions. When price is not allowed to play this role, the result is long lines at the pumps, rationing, or outright shortage.
"Consumers require a relatively stable amount of gasoline for their normal routines, with limited possibilities for using less when the price goes up and not much reason to use more when the price goes down, especially in the near-term. Thus, in economic terms, demand for gasoline, a necessity for most consumers, has a very low near-term price elasticity. As a result, the price adjustments tend to be disproportionately large. Over time however, history shows that they are also self-correcting," PIRINC said.
It said there were several identifiable factors behind the price increases: the rise in world crude prices, low world stocks, introduction of summer Phase 2 RFG, and uncertainty about a Unocal Corp. gasoline patent case.
PIRINC said disruptions to pipelines serving the Midwest and problems of blending ethanol as opposed to methyl tertiary butyl ether in making Phase 2 gasoline contributed to even sharper price increases in the Midwest than elsewhere.
"Apart from the increases in crude prices, and the exceptionally low level of stocks, both globally and within the U.S., none of the other factors by themselves would have had more than a minimal impact. But together, they produced a noticeable shortfall in supply of an extremely price inelastic product and a sharp increase in gasoline prices.
"As production and logistics problems are overcome, prices will moderate; indeed, this is already happening. However, until inventories are rebuilt, the system remains vulnerable," PIRINC said.
