DIRECTOR, PETROLEUM DIVISION
ENERGY INFORMATION ADMINISTRATION
SUBCOMMITTEE ON ENERGY AND RESOURCES
COMMITTEE ON GOVERNMENT REFORM
Mr. Chairman, I appreciate this opportunity to testify today on the Energy Information Administration’s (EIA) insights into factors affecting recent gasoline prices.
EIA is the statutorily chartered statistical and analytical agency within the U.S. Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other Government agencies, the U.S. Congress, and the public. We produce data and analysis reports that are meant to assist policy makers in determining energy policy. Because we have an element of statutory independence with respect to the analyses that we publish, our views are strictly those of EIA. We do not speak for the Department or for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or the Administration. EIA’s baseline projections on energy trends are widely used by Government agencies, the private sector, and academia for their own energy analyses.
Gasoline prices have risen sharply since the beginning of this
year throughout the
While gasoline prices, and oil prices in general, are currently
high throughout the
The remainder of my statement indicates that gasoline prices
reflect changes in petroleum markets seen since 2000. Current gasoline prices in
Retail gasoline prices are a function of many influences. Thus, in order to assess the causes of price changes, it is necessary to break down retail prices into their various components: crude oil prices, refining costs and profits, distribution/marketing costs and profits, and taxes.
To elaborate on the previous paragraph, crude oil price variations often account for most of the change in the price of gasoline, which again was the case between April 2004 and April 2005 (a 32-cent-per-gallon increase). The second major component contributing to price variation is the spread between spot gasoline prices and crude oil prices, which rose 7 cents per gallon. Gasoline is sold into spot markets by both refiners and importers, and spot prices reflect the overall supply/demand balance for gasoline in the United States and regionally. As such, any change in gasoline supply availability or demand levels will influence this spread, and thus the short-run profitability of refining or importing gasoline. These changes, in turn, spur refiners and importers to increase or decrease supply, and thus are, to some extent, self-adjusting. The spot price spread tends to be very seasonal, rising in the spring and summer due to higher demand. In the longer term, changes in the costs of refining and blending gasoline, including the impact of government regulations on the refining industry, will also be reflected in this spread.
The retail-to-spot price differential, at least in the short term, is primarily a function of the lag involved in passing price changes through from wholesale to retail markets, both upward and downward. Because of this lag, as prices are rising, the retail-to-spot spread is compressed, while as prices are falling, it temporarily expands, in either case only until retail price changes catch up to changes in the underlying wholesale markets. In the longer term, this differential can also reflect changes in the underlying cost structure and/or competitive landscape of the petroleum marketing and distribution sectors.
Finally, insofar as taxes are concerned, there is usually relatively little change in the short term in excise tax rates, which are typically denominated in cents per gallon, but a number of States (including California) and local jurisdictions charge additional sales or other taxes denominated as a percentage of the sales price.
In 2004, crude oil prices almost doubled from 2003, rising from
about $30 per barrel for spot West Texas Intermediate (WTI) at the end of 2003
to a peak of $56.37 on
Prices since the end of 2003 represent the second major shift
in the marketplace since the 1990s, when prices averaged close to $20 per
barrel (Figure 3). The first shift occurred in the late
1990s. In late 1998, crude oil prices
plunged to almost $10 per barrel as a result of the Asian financial crisis
slowing demand growth just when extra supply from
Prices in 2004 appear to have shifted to a second higher level,
well above $40 per barrel. Several
factors underlie the tightening world supply/demand balance driving this second
increase. The key factor probably was
world petroleum demand growth, which rose in 2004 much more than anticipated by
On the supply side, growth in non-OPEC production fell well
short of meeting increasing world needs in 2004 and is expected to continue to
fall short for the next several years.
The largest source of non-OPEC production growth is expected to be
Russia and the Caspian Sea region, which are anticipated to contribute more
than 80 percent of the non-OPEC increase in supply in 2005 (0.5 million of the
As 2004 unfolded, market participants initially focused on inventories, which measure the balance between supply and demand, looking for signs of changing market conditions and resulting price pressures. World petroleum inventories were low for the first half of 2004, indicating a tight market, but they were not lower than levels seen in 2000 or 2003. Furthermore, 2004 inventories recovered towards year-end before falling sharply again. Yet, prices rose higher in 2004 than in either of those prior years. What was different?
Before answering that question, a couple of qualifications may
be worth noting. First, inventories in
areas outside of the Organization for Economic Cooperation and Development
(OECD) are not well known. Since
On the supply side, perhaps the most important change in 2004
from recent years was the drop in the world’s ability to surge crude oil
production, either to fill in for unanticipated loss of supply (e.g.,
In EIA’s view, it is the lack of both supply cushions – inventories and spare capacity – in the face of strong demand growth that explains most, if not all, of the price pressure currently evident in oil markets.
In summary, the tight petroleum markets in 2004 and 2005 and associated crude oil price increases differ from those experienced over the past 20 years in that the factors driving recent changes are not short-term in nature. Neither strong demand growth rates nor relatively small crude production capacity increases are likely to shift enough to relieve current price pressures in the near term.
As indicated previously, crude oil price increases explain much
of the rise in gasoline prices seen in 2004 and 2005. Crude oil and petroleum product markets
generally move together (Figure 6). With average crude oil prices rising by $13.24
per barrel (32 cents per gallon) since last April, gasoline prices followed for
the most part. Spot gasoline price
spreads over crude oil were high in 2004, reflecting the tight product and
crude oil market situation. However,
from January through April, the
· While the California refinery system supplies most of region’s needs, the refinery system runs near its capacity limits, which means there is little excess capability in the region to respond to unexpected shortfalls;
· The region uses a unique gasoline that is difficult and expensive to make, and as a result, the number of other suppliers who can provide product to the State are limited.
As a result of these factors, refinery outages on the West
Coast at times can cause prices to surge.
As we look ahead at the remainder of this year and next, EIA expects crude oil prices to remain above $50 per barrel. World demand, while likely growing less than in 2004, is expected to continue relatively strong growth. Projections for 2005 and 2006 call for worldwide growth averaging 2.2 million barrels per day, or 2.6 percent, per year, down from the 3.4 percent growth in 2004. With little excess crude oil production capacity, this growth will be met mainly by expanded capacity in Russia, the Caspian Sea region, and Saudi Arabia, but the balance between supply and demand is expected to remain tight, leaving little room for error.
The tight crude oil market also increases the likelihood of continued crude oil price volatility. For example, crude oil prices could ease somewhat over the next few months as world demand relaxes seasonally and refinery maintenance in other parts of the world eases the pull on crude oil supplies. However, as the world’s high demand season gets underway in the run-up to winter, crude prices may rise again, possibly to the mid-$50’s per barrel, as seen earlier this year. High refinery utilizations and non-fungible product specifications reduce supply response flexibility and thus add to the potential for volatility.
At this point, little is certain. Gasoline markets could turn in either
direction. If crude oil prices do not
increase further, the
In summary, for the next several years, consumers can expect
gasoline prices in the range of those seen recently. EIA’s Summer Outlook, issued April 7th,
projects U.S. gasoline prices in 2005 to average $2.28 per gallon for the April
to September summer season, 38 cents above last summer. Similar high motor gasoline prices are
expected through 2006. Monthly average
prices are projected to peak at about $2.35 per gallon in May or June. As in 2004, the primary factor behind these
price increases is high crude oil costs.
WTI crude oil, for example, is projected to average 37 cents per gallon
higher than last summer. High world oil demand will continue to support crude
oil prices and increase competition for gasoline imports. In the
This concludes my testimony, Mr. Chairman. I would be glad to answer any questions you and the other Members may have.