Released on February 24, 2005
(Next Release on March 2, 2005)

Thoughts of Summer in February
As we prepare this report, it is snowing outside our offices. But even as many Americans (including those of us in the Washington, DC metropolitan area) are still in the depths of winter, for some, now is the time to begin planning their summer vacation. For businesses as well, especially in the transportation and tourism sectors, it’s time to plan for summer travel demand. And if EIA’s mailbox is any indication, many people are already wondering how high gasoline prices might go this summer.

While it’s impossible to predict petroleum prices with any certainty, and too early to foresee many of the market fundamentals that will drive prices this summer, it appears from current price levels that this summer will again feature gasoline prices (not adjusted for inflation) that are high by historical standards. EIA’s weekly retail gasoline price survey for February 21 showed the U.S. average price of regular gasoline at $1.905 per gallon, nearly 22 cents per gallon higher than a year ago, and easily the highest price (again, not adjusted for inflation) ever seen during the second half of February. However, the primary factors driving this year’s high gasoline prices are different from those seen last year, and this difference may provide some clues to the path this summer’s gasoline prices will take.

For the sake of simplicity, retail gasoline prices can be broken down into four basic components: crude oil, refining costs and profits, distribution and marketing costs and profits, and taxes (see Gasoline and Diesel Fuel Update). These components can be calculated relatively easily, using crude oil and gasoline spot prices, along with retail gasoline prices and average tax rates. Comparing the components behind this week’s EIA average retail regular gasoline price, and the same data from a year ago, it becomes apparent that higher crude oil prices account for all the difference, and more; in fact, crude oil costs (as represented by the West Texas Intermediate spot price) are actually up more than 30 cents, while overall costs and profits for refining, distribution and marketing are more than 8 cents lower than a year ago, adding up to the 22-cent year-to-year difference in retail prices. (It should be noted that all of these calculations should be seen as averages and/or estimates, and not specific to gasoline prices in any particular area.)

Chart Methodology

This comparison is also reflected in EIA’s price forecast for this summer, updated monthly, in the Short-Term Energy Outlook. In the most recent forecast, released on February 8, EIA expects monthly average retail gasoline prices to reach their peak this spring at somewhere close to the peak price seen last spring. Underlying this gasoline forecast is a crude oil price forecast that expects West Texas Intermediate crude oil prices to be higher than last year, by an amount exceeding any increase in gasoline prices. Thus, while monthly average retail gasoline prices are currently expected to peak this spring at or near the peak price last year, crude oil prices are expected to average significantly higher this spring than a year ago.

The reason EIA expects gasoline prices to rise less than those for crude oil lies in the significantly higher level of U.S. gasoline inventories expected this spring compared to last, and the underlying supply/demand balance behind them. Although crude oil prices were relatively high last spring, by historical standards, the more significant factor behind the peak gasoline prices was low gasoline inventories, and the widespread concern that gasoline supplies might not have been adequate to last through the summer driving season. However, as the situation developed, both U.S. refinery production and imports kept pace with demand throughout the summer season, keeping gasoline inventories more than adequate, and as a result, gasoline prices declined over the course of the summer. This year, U.S. gasoline inventories heading into the spring are much higher (18.3 million barrels, or 8.9 percent, higher than a year ago as of February 18), and are expected to enter the driving season at 215.8 million barrels at the end of May, 11.4 million barrels higher than in 2004. That said, over three months remain until the peak driving season arrives. Even relatively small changes in demand or supply can abruptly shift the gasoline balance, given underlying relatively tight overall U.S. and global market conditions.

It is also important to remember, though, that no matter how high gasoline prices may go this summer, they are unlikely to approach record levels when inflation is taken into account. Even if this year’s peak gasoline price reaches a “record” nominal level (over $2.064 per gallon set on May 24, 2004), it will pale in comparison to the average price in March 1981 of $1.417, which in today’s dollars equates to $3.08 per gallon. Though consumers may have a hard time seeing today’s gasoline prices as a bargain, it’s a fact that over the past 24 years, gasoline prices have risen at a much slower rate than consumer prices overall.

U.S. Average Retail Gasoline Edges Upwards
The U.S. average retail price for regular gasoline increased this week by 0.7 cent from the previous week to reach 190.5 cents per gallon as of February 21, 21.7 cents higher than this time last year. Prices were mixed, with the West Coast seeing a gain of 5.6 cents to 209.6 cents per gallon, the highest regional price in the country. Prices in California gained 5.9 cents to 215.0 cents per gallon. Retail prices on the East Coast fell 1.1 cents to 188.7 cents per gallon, which is 23.1 cents higher than last year. The Midwest saw prices increase 0.5 cent to 187.2 cents per gallon.

Retail diesel fuel prices gained 3.4 cents last week to 202.0 cents per gallon. Prices were up throughout the country, with the West Coast seeing the largest regional increase of 13.1 cents to 232.1 cents per gallon. California prices increased by 6.3 cents to 225.9 cents per gallon, which is 39.5 cents higher than this time last year. Prices in the Midwest gained 1.8 cents to 195.3 cents per gallon. East Coast prices rose 1.4 cents to reach 202.7 cents per gallon.

Residential Heating Fuel Prices Change Little for Another Week
Residential heating oil prices increased slightly for the period ending February 21, 2005. The average residential heating oil price increased by 0.3 cent from last week to reach 198.4 cents per gallon, an increase of 37.5 cents from this time last year. Wholesale heating oil prices increased 4.2 cents to reach 141.5 cents per gallon, an increase of 45.5 cents compared to the same period last year.

The average residential propane price decreased 0.3 cent, from 172.1 cents to 171.8 cents per gallon. This was an increase of 18.3 cents over the 153.5 cents per gallon average for this same time last year. Wholesale propane prices increased 1.2 cents per gallon, from 81.6 cents to 82.8 cents per gallon, a gain of 9.4 cents compared to the same period last year.

Propane Stockdraw Moderates
U.S. inventories of propane continued lower last week but at a slightly slower rate compared with the past several weeks, falling 2.5 million barrels to an estimated 33.9 million barrels as of February 18, 2004. With last week’s relatively moderate stockdraw, inventories at the primary level maintained the same path near the upper limit of the average range for this time of year. East Coast and Midwest inventories posted strong imports last week that most likely blunted the weekly stockdraw in those regions to only 0.5 million barrels and 0.9 million barrels, respectively, while the lack of imports into the Gulf Coast region probably had the reverse effect of contributing to the strong 1.1-million-barrel draw during this same period. The combined Rocky Mountain/West Coast region fell by 0.1 million barrels to total only 1.0 million barrels last week. All the major propane-consuming regions, including the East Coast, Midwest, and Gulf Coast, showed inventories at or near the upper limit of the average range for this time of year. Propylene non-fuel use inventories remained unchanged last week at 3.9 million barrels, although its share of total propane/propylene inventories continued to climb to 11.5 percent.

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