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Released on May 24, 2006
(Next Release on June 1, 2006)
Why Gasoline Prices Have Increased in 2006
With the U.S. average retail price for regular gasoline having risen above $2.90 per gallon during the spring of 2006, the U.S. Energy Information Administration (EIA) has received many inquiries regarding the price increases seen this year. With the price averaging about $2.15 per gallon as recently as December 5, 2005, the average of $2.88 per gallon on May 22 reflects a sharp increase in prices over the last five months. With the Memorial Day weekend and the start of the unofficial summer driving season just days away, questions about high gasoline prices are not likely to fade away soon. EIA’s analysis of current gasoline markets indicates the following reasons for such a sharp rise in prices so far this year.
- Crude Oil Prices – The price of West Texas Intermediate crude oil, which was near $60 per barrel in early December, has been above $70 for most of the time between mid-April and mid-May 2006. This increase alone would explain about 25 cents per gallon of the recent price rise for gasoline.
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- Reduced Gasoline Production – Gasoline production in recent months has been significantly lower compared to year-ago levels, in part due to deferred maintenance from last fall. Refineries typically shut down some or all of their units periodically in order to perform routine maintenance that will allow the refinery to run efficiently, economically, and safely. This work is usually done during the fall, prior to the peak heating season, and early spring, prior to the peak summer driving season. However, some refineries deferred planned routine maintenance from last fall to this spring in order to keep operating following last year’s hurricanes, so that companies could meet their contractual obligations and capitalize on higher prices. Additionally, some refineries damaged by the hurricanes last year are still not fully operational. Thus, we have much more maintenance than usual this spring. With damaged refineries and heavy maintenance this spring, less gasoline was produced relative to year-ago levels. Refineries built up inventories in anticipation of this maintenance, but even with high volumes of imports, gasoline inventories were drawn down rapidly and stocks remain at relatively low levels. Lower gasoline production has been a major factor in the increase in gasoline prices seen during the spring of 2006.
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- Rising Gasoline Demand – Despite high prices, gasoline demand has remained relatively strong, increasing along with warmer weather. Gasoline demand typically increases throughout the spring and into the summer season, and this year seems to be no exception. Although demand may not be increasing as much as it would if prices were lower, the increase in demand still has put additional upward pressure on retail prices.
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- Switching from MTBE to Ethanol in Reformulated Gasoline (RFG) – Another factor influencing gasoline prices has been the transition from using methyl tertiary butyl ether (MTBE) in reformulated gasoline (RFG) to using ethanol in RFG in some parts of the country, most notably much of the East Coast and major cities in Texas. Changeover of tanks at terminals, the need for a more expensive gasoline blendstock to combine with ethanol, and logistical problems delivering ethanol to some areas, have all contributed to higher prices.
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The current EIA forecast expects the U.S. average retail price of regular gasoline to remain above $2.60 per gallon throughout the entire summer, even absent any damage due to hurricanes or additional crude oil supply disruptions overseas, with prices averaging $2.71 per gallon over the April through September period. However, there is considerable uncertainty even beyond the unpredictable effects of hurricanes and crude oil supply disruptions. If gasoline demand remains strong and production remains below year-ago levels, it would not be too surprising to see higher prices again this summer. And, of course, crude oil prices will continue to play a critical role in determining future price developments. Regardless of how the summer unfolds, it is nearly certain that gasoline prices will remain relatively high this summer.
U.S. Average Retail Gasoline Prices Fall More Than 6 Cents
The U.S. average retail price for regular gasoline decreased by 6.4 cents last week to 288.3 cents per gallon as of May 22, which is 75.8 cents higher than last year. This is only the second time in eight weeks that prices have fallen. Prices were down throughout the country, with the largest regional price decrease of 10.9 cents occurring in the Midwest, deflating prices to 275.7 cents per gallon. West Coast prices remained the highest in the nation, falling 5.3 cents to 319.7 cents per gallon, while California prices were down 7.5 cents to 325.5 cents per gallon. The East Coast saw a price decrease of 4.1 cents to reach 289.3 cents per gallon.
Retail diesel fuel prices dropped 3.2 cents to reach 288.8 cents per gallon as of May 22, which is 73.2 cents higher than last year. The Rocky Mountains saw the largest regional price decrease of 5.0 cents to 302.4 cents per gallon. West Coast prices remained the highest in the country, falling 1.7 cents to 317.5 cents per gallon, while California prices softened 0.8 cent to 323.4 cents per gallon. East Coast prices fell 3.0 cents to 287.7 cents per gallon.
Propane Inventories Continue Slow Build
U.S. propane inventories grew by just 0.3 million barrels last week, extending a pattern of seasonally low builds that has occurred over the past several weeks. At about the mid-month point, the May stockbuild has totaled about 3.2 million barrels so far, only about one-third of the 9.4-million-barrel average for May over the most recent 5-year period. Consequently, with inventories at an estimated 37.7 million barrels as of May 19, 2006, the seasonally low builds have moved U.S. inventories near the bottom of the average range for this time of year. Regional gains were mostly limited to the Midwest with inventories up 0.3 million barrels for the week, while the combined Rocky Mountain/West Coast regions moved up by 0.1 million barrels during this same period. Elsewhere, inventories remained unchanged in the East Coast and Gulf Coast regions last week. Inventories of non-fuel use propane moved slightly higher by 0.1 million barrels last week to account for a higher 7.7 percent of total propane/propylene inventories, compared with the prior week’s 7.5 percent share.
Text from the previous editions of “This Week In Petroleum” is
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