The Petroleum Industry Research Foundation Inc., New York, has warned that government petroleum product rules have caused a compartmentalization that leaves local markets vulnerable to disruptions.
Pirinc analyst Ron Gold presented a report at the Jan. 9 meeting of the National Research Council Transportation Research Board.
He said, "The problems and risks of `boutique' fuels remain. Indeed, there are new challenges to the downstream that could aggravate risks, in particular, the new regulations for ultra-low sulfur diesel and the coming phase-out of methyl tertiary butyl ether. Unless carefully�and flexibly�managed, the result could be new domestic supply shortfalls and new limits on the industry's ability to shop world markets to overcome them."
As examples, Gold cited the California and Chicago gasoline markets.
California's Air Resources Board (CARB) has its own standards for gasoline. The Chicago area uses reformulated blendstock for oxygenate blending (RBOB) with ethanol in a ratio of 90:10.
"California has long been known for its unique gasoline specifications and tight refinery balances which together leave the market extremely sensitive to any disruption in local supply. Accordingly, spot price differentials for Los Angeles CARB unleaded versus the Gulf Coast have been extremely volatile, ranging from near 0 to over 30�/gal over the past 2 years.
"Last June, Chicago (and Milwaukee) looked like California as a spike in spot price of RBOB pushed the average monthly differential versus Gulf Coast reformulated from about 0 to 25�/gal. Refiners had great difficulty in meeting Phase II specifications for ethanol-based reformulated gasoline�used almost exclusively in Chicago and Milwaukee.
"The resulting supply shortfalls, although small (about 2-3%), resulted in sharp increases in prices to consumers, as would be expected when the product involved is a virtual necessity.
"After the television cameras went away, and calls for investigations of `gouging' died down, the specifications were quietly relaxed, helping to bring supply shortfalls to an end," Gold said.
He said distillate is not immune either from regional market segmentation, but causes are different. He said in 1999 the monthly average differentials between the spot price of No. 2 oil in New York Harbor and the price on the Gulf Coast was less than 2�/gal. But in January last year, the differential averaged 13�/gal during a cold snap.
Gold said this year regional distillate inventories remain very low, even allowing for the 2 million bbl in the newly created Northeast Heating Oil Reserve.
"With pipelines full, the marginal sources of supply are imports and waterborne shipments from the Gulf Coast. But international tanker rates are high; a result of the surge in Organization of Petroleum Exporting Countries production while domestic Jones Act tanker capacity is also limited. Thus some significant differential is likely to persist until it is clear heating season needs are met and shipments to the Northeast recede."