U.S. gasoline price spike spawns outcry

Rocketing gasoline prices in the U.S. once again have spurred calls for government action to deal with the problem.

The biggest U.S. independent gasoline marketers association last week said its members' survival may be threatened by rising wholesale gasoline prices and suggested it might call for intervention by Washington, D.C.

American Automobile Association (AAA) last week reported its monthly survey found U.S. gasoline prices are at their highest level since the start of the Persian Gulf war in January 1991. Gasoline price spikes 5 years ago ahead of and during that war also sparked outcries for government intervention.

Much of the price spike stems from a rally in crude oil prices that has lasted for several months. For the most part, that rally was caused by refiners' just in time strategy of holding minimal crude and products stocks while awaiting the possibly imminent return of Iraqi oil to markets.

U.S. crude oil stocks are 11% lower than a year ago, and gasoline stocks are at 20 year lows for this season.

Iraqi and U.N. officials at presstime last week still were negotiating the third round of talks aimed at securing a deal to allow Iraq to export a limited volume of oil to raise funds for humanitarian aid in that country.

Ironically, it is the reluctance of Iraqi President Saddam Hussein to accept terms of that deal that is causing the problem by keeping supplies from the market that in turn surely will depress oil pries. With demand strong from a protracted winter and crude and products stocks low worldwide, the just in time strategy is forcing refiners to scramble for supplies, bolstering crude and products prices to 5 year highs.

Price jump

The average price for self-serve regular gasoline at the pump in the U.S. in mid-April has soared to $1.24/gal, says AAA.

That's up 6/gal from last month and 11.2/gal from a year ago. It compares with an average $1.249/gal in January 1991, when allies led by the U.S. launched a campaign to oust Iraq from Kuwait.

The California based Lundberg Survey found regular self-serve gasoline Apr. 12 hit $1.251/gal, an increase of 7/gal since Mar. 22.

Typically, that big a surge in prices in 2 months would be attributed to a rise in driver demand, but the summer driving season won't be in full swing for weeks.

AAA said gasoline prices probably will peak early this summer then dip after sustained higher prices begin to attract imports of gasoline, which in turn will spur U.S. refiners to increase gasoline production.

Sigma's complaints

Recent spiraling prices of gasoline, distillate, and crude oil could have serious, long term consequences-the potential demise of the most cost efficient segment of the gasoline marketing industry, says Tim Columbus, Washington attorney for the Society of Independent Gasoline Marketers of America (Sigma).

"Prices are going up at all levels, wholesale and retail, but not all at the same rates," said Columbus. "Right now, I'm hearing reports from independent marketers that their wholesale cost for gasoline and diesel fuel is higher than the pretax retail price they can charge. Price inversions like this are not a natural phenomenon of a free market system at work."

Columbus notes that apparently a number of factors have combined to create shortages of fuel and skyrocketing prices, including a recent string of refinery outages in the U.S.

"A piece of special interest legislation adopted 2 years ago, which requires foreign refiners to meet a higher standard for gasoline than many domestic refiners, has substantially reduced imports-a source of supply that is usually available when shortages crop up," Sigma said.

Sigma contends independent marketers have led the way on virtually every new trend that has led to lower gasoline prices over the years.

All that may be about to end, though, Columbus said: "No amount of efficiency can overcome a price inversion. If your buying price is higher than your selling price, you can't make it up in volume."

Sigma questions

Sigma Pres. Leo Liebowitz noted Sigma members at their spring convention near Jacksonville, Fla., this week will debate these questions:

Why has the price of crude oil risen from $17/bbl to $25/bbl in just 3 months?
Should the government take a fresh look at the Clean Air Act requirements and its effect on available petroleum supply and prices?
Should the government investigate the potential for commodity prices to be manipulated?
Can Congress be persuaded to allow foreign refiners to compete with domestic refiners on an equal footing?
Will the Federal Trade Commission investigate the market concentration and power of some commodity traders and refiners?
Will members demand that Sigma and its leaders seek legislation to ensure a truly free market?

Culprits?

Sigma mainly blames government actions and futures traders for its plight.

"Speculators and traders in the futures markets...are the ones who stand to benefit most in the short term by the runup in prices," Liebowitz said. "It makes no sense to allow brokers and traders to destroy the highly competitive and efficient motor fuel market for short term, nonproductive paper profits."

"And the government hasn't helped," he added. "For more than 2 years, Congress has blocked EPA from adopting a foreign refiner baseline rule similar to that applicable to domestic refiners."

The lack of that rule is a key factor that makes imported gasoline largely unavailable to meet the shortfall in U.S. gasoline output, Sigma claims.

"The government pressure on independent refining companies' capital and the concentration of market share in certain areas all add to our problem," Liebowitz said. "And while Sigma supports reformulated gasoline, these requirements have made it difficult to transfer surplus gasoline from one part of the country to another."

How serious the threat is to independent marketers "depends on how long this lasts," Columbus said. "The last time around, Sigma lost about a fourth of its members due to financial distress. Many of those companies went out of business. This time around there are a lot of other major calls on their capital-requirements to up- grade underground storage tanks, to install Stage II vapor recovery in some areas, and a host of other environmental laws. They can dip into their reserves to sell gasoline at a loss only so long."