Consumers apparently reacted to higher prices as US gasoline demand during the second quarter dropped 0.4% to an average 9.2 million b/d, the American Petroleum Institute said July 19. The decline contrasted with comparable periods in previous years when gasoline demand rose 1.5-2% year-to-year, said Ronald J. Planting, information and analysis manager in API’s statistics department.
But the reaction may have lasted only 2 months, since total gasoline deliveries in June increased 2.1% year-to-year to an average of 9.58 million b/d. Average gasoline demand during the first half rose by only 4,000 b/d to 9.06 million b/d, API’s statistics show.
“In fact, most products showed flat-to-declining deliveries in the first half. The reasons included airlines working to operate more efficiently and use less jet fuel, and electric utilities and others switching away from heavy fuel oil because of price-competitive natural gas,” Planting said during API’s midyear supply-demand briefing.
On-highway diesel fuel was the lone exception, he said. It increased 1.1% to an average 3.06 million b/d because “the growing economy produced more goods needing to be transported to consumers,” Planting said.
John C. Felmy, API’s chief economist, conceded that higher prices have affected demand to some degree, “but only at the margin as it is very difficult for consumers to change their usage because of limited flexibility in commuting and driving requirements.”
That doesn’t necessarily mean that consumers are getting used to higher gasoline prices, he added. “Realistically, they are making choices as higher prices have an impact on their budgets. At the same time, they’re also taking vacations,” Felmy said.
The reaction to higher prices by consumers now falls way short of the early 1980s, when they demanded smaller, more fuel-efficient automobiles, he observed.
Economic impacts
One reason might be that retail prices overall have not started to rise dramatically. Those prices, as measured by the US Department of Labor’s Consumer Price Index, rose 0.2% during June, their slowest monthly rate since February, DOL’s Bureau of Labor Statistics said July 19. Petroleum-based energy prices actually decreased 0.9% last month but were still 23.3% higher than in June 2005 on a seasonally unadjusted basis.
The latest CPI showed signs that higher energy costs have started to creep into other parts of the US economy, however. The total price for items outside the traditionally more volatile food and energy sectors rose 0.3% for a fourth consecutive month. Prices within the food sector also climbed 0.3% during June, possibly as a result of the agricultural sector’s higher fuel and fertilizer costs.
“The real challenge for businesses selling goods is international competition from China, India, and other countries. That makes it hard for US manufacturers to pass along cost increases,” said Felmy.
Oil product price trends so far in 2006 have deviated significantly from previous years. API does not forecast prices. But the US Energy Information Administration has steadily revised its forecast for this summer’s average retail unleaded regular gasoline price from $2.62/gal in its April Short-Term Energy Outlook to $2.88/gal currently.
“No more than 14¢ of this 26-cent increase in the forecast gasoline price can be attributed to higher crude oil prices,” it said in a supplement to its latest monthly outlook on July 11.
Much of the remaining 12¢ can be traced to a wider-than-usual summertime spread between crude oil and wholesale gasoline prices, according to EIA. Normally, it peaks during May before falling back slowly through the rest of the year.
Last year, it followed that pattern until August, when it rose by about 20¢/gal in the first 2 weeks. Hurricane Katrina pushed the spread about 80¢ higher at the end of the month, but the refining industry was able to recover fairly quickly because the summer driving season was nearly through and the spread was near normal by November.
In 2006 however, price spreads have behaved differently, EIA said. The spread between wholesale gasoline and crude oil was about 15¢ higher than a year earlier by April while the retail-wholesale gasoline price spread was 8¢ above its year-earlier level. EIA said that it now expects these higher price spreads to continue through August, when a normal seasonal decline could bring some relief to the market.
Less refining
It said that price spreads have been higher in this year’s first half because gasoline demand has continued to grow year-to-year (EIA projects increases of 0.7% for 2006 and 1% for 2007) while crude oil processing rates at US refineries have fallen by 490,000 b/d, or more than 3%. API reported similar first-half refining declines in its statistics on July 19.
This occurred because several refineries still are recovering from the effects of Hurricanes Katrina and Rita, others have pursued maintenance that was deferred from last fall, and still more shut part of their capacity down to install new equipment to meet new Tier 2 gasoline and ultralow-sulfur diesel fuel regulations, EIA said.
One result, said Planting, was that oil product imports for the first half averaged 3.52 million b/d, 12.2% more than a year earlier and a 6-month level second only to 2005’s final half which included four months following Hurricanes Katrina and Rita.
The API statistician also noted that while refinery capacity utilization averaged 88.9% in 2006’s first 6 months, it reached 94.7% during June. “That’s pretty high,” he observed.
The transition from methyl tertiary butyl ether to ethanol also has contributed to higher gasoline prices in 2006, according to EIA. Greater demand for ethanol has raised prices for the additive, which the federal energy analysis and forecasting agency does not expect to moderate until September.
“There are questions about what will happen with ethanol. Its price has come down quite a bit, but it’s not certain what will happen over a longer period,” Felmy said.
While expenses associated with the transition to low-sulfur gasoline and ultralow-sulfur diesel are temporary, the higher costs of producing the improved fuels will remain, he indicated.
Crude oil costs, meanwhile, remain the single biggest component in product prices, Felmy told OGJ following the briefing. “In the short run, you can see speculative impacts. Over the longer term, there are fundamentals such as 2 million b/d of worldwide production that is offline,” he said.
US crude oil and condensate production averaged 5.14 million b/d during the first half, 5.6% less than the nearly 5.45 million b/d average in the same period a year earlier. Production in the Lower 48 states fell by a bigger percentage (5.5%) than Alaska’s 1.1%, according to API.
Planting said that roughly half of the decline outside Alaska could be traced to disruptions in the Gulf of Mexico following Hurricanes Katrina and Rita. The other half was due to depletion of reserves, he said.
