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This Week In Petroleum EIA Home > Petroleum > This Week In Petroleum |
Released on March 16, 2005
(Next Release on March 23, 2005)
FAQ on Gasoline and Oil Prices
With gasoline and crude oil prices near historical highs (not adjusted for inflation), EIA has received a number of questions about high prices recently. Below is a sample of those we have received.
Q. What is the forecast for gasoline prices this year, and what is the reason for the projected price increase?
A. EIA’s March 2005 Short-Term Energy Outlook projects that motor gasoline prices will average as much as $2.15 per gallon on a monthly basis this spring, with a weekly peak price even higher at some point. Most of the increase in gasoline prices recently can be attributed to the increase in crude oil prices. Pump prices could go even higher if crude oil prices remain at or above current levels (about $54 per barrel for West Texas Intermediate or WTI) for a considerable period.
Another factor behind high gasoline prices is strong growth in demand. Despite relatively high absolute levels for gasoline inventories, the days of cover (beginning inventories divided by demand per day) for gasoline has generally been declining (on a year-over-year basis) for over 2 years, suggesting increasing short-term tightness for gasoline markets. Sustained domestic growth in gasoline demand, both seasonal and year-over-year, is expected to keep the days of cover relatively tight, keeping upward pressure on gasoline prices.
For the year as a whole, EIA forecasts an average price of $2.03 per gallon for regular gasoline, an increase of 18 cents per gallon compared to the annual average price for 2004. Average annual WTI prices are expected to increase by $7.50 per barrel in 2005 compared to the average annual price for 2004. This represents an increase of about 18 cents per gallon for crude oil. Thus, almost all of the annual increase in the price of gasoline for 2005 can be attributed to higher crude oil prices.
Q. Beyond the increase in the cost of the raw material (crude oil) needed to produce gasoline, what other factors contribute to the increase in the final cost to the consumer of gasoline?
A. The difference, or spread, between retail gasoline and crude oil prices can be usefully broken down into three major components: the spread between crude oil and spot market gasoline prices, representing the costs and profits of the refining sector; the differential between spot and retail gasoline prices, less taxes, representing costs and profits of the distribution and marketing sector; and the taxes themselves.
Other than the price of crude oil itself, it is the spread between spot gasoline prices and crude oil prices that is by far the most changeable component of gasoline prices. 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. 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. However, 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, and is also sensitive to gasoline inventory levels. 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 relatively little change in the short term in excise tax rates, which are usually denominated in cents per gallon, but a number of States and local jurisdictions charge additional sales or other taxes denominated as a percentage of the sales price.
Q. In the past year energy prices have consistently been at or near all time highs, even though inventory figures show near average, or in some cases above average, stocks of fuel. Are speculators driving these higher prices?
A. Given that U.S. crude oil inventories are in the upper half of their average range and gasoline inventories are above the upper end, some people have raised the issue as to whether there are “non-fundamental” factors, including speculator trading, driving prices higher than they would be otherwise. EIA believes that supply/demand fundamentals explain most of the recent rise in oil prices, even given current inventories.
First and foremost amongst these fundamental factors is the growth in global oil demand seen over the last year or so. Oil demand growth has been especially strong in China, but also here in the United States and elsewhere. Global oil demand has grown much faster than non-OPEC supply, which has enabled OPEC to produce more without seeing prices decline. This growth in demand has also caused inventories not to be as high as they would appear on the surface. Looking at how many days of demand inventories would cover shows a much smaller increase this year versus last year than would appear to be the case by simply looking at the absolute levels of inventories, due to the expected growth in oil demand.
Another important factor influencing prices is the lack of spare production capacity, both upstream (crude oil production), and downstream (refinery capacity). The lack of both spare capacity and inventory cushions to cover potential surges in demand or disruptions in supply, in a strong demand environment, is the primary force behind currently high prices. Spare crude oil production capacity is expected to remain at relatively low levels for at least the next year or two. In addition, refinery spare capacity has also tightened globally, especially given the recent shift towards a lighter product slate, particularly for diesel fuel.
These factors seem to explain most of the movement to high oil prices, even given what appears to be relatively comfortable inventories. As such, EIA does not believe that hedge funds and speculator trading in energy are the main reasons why oil prices are higher now than they were a year or two ago.
U.S. Average Retail Gasoline Price Gains Another 6 Cents
The U.S. average retail price for regular gasoline increased this week by 5.7 cents from the previous week to reach 205.6 cents per gallon as of March 14, 33.2 cents higher than this time last year, and the second highest price ever recorded (not adjusted for inflation). Prices were up across all regions, with the Gulf Coast seeing the largest gain of 6.8 cents to reach 196.8 cents per gallon. The West Coast posted the highest regional price of 222.8 cents per gallon, up 5.4 cents from the previous week and 21.3 cents higher than last year. Prices in California gained 5.8 cents to 228.7 cents per gallon. Retail prices on the East Coast gained 6.4 cents to 201.6 cents per gallon, which is 31.3 cents higher than last year.
Retail diesel fuel prices gained 2.6 cents last week to 219.4 cents per gallon. Prices were up throughout most of the country, with the East Coast seeing the largest regional increase of 3.4 cents to 219.7 cents per gallon. Prices on the West Coast fell 0.8 cent to average 244.2 cents per gallon, remaining the highest regional average in the country, and 64.1 cents per gallon higher than last year. Average diesel fuel prices in California increased by 1.0 cent to reach 241.8 cents per gallon, which is 54.4 cents higher than this time last year.
Residential Heating Fuel Prices Increase
Residential heating oil prices increased for the period ending March 14, 2005. The average residential heating oil price increased by 3.0 cents last week to reach 211.9 cents per gallon, an increase of 52.8 cents from this time last year. Wholesale heating oil prices increased 5.4 cents to reach 161.5 cents per gallon, an increase of 64.8 cents compared to the same period last year.
The average residential propane price increased 0.7 cent to reach 172.1 cents per gallon. This was an increase of 23.8 cents over the 148.3 cents per gallon average for this same time last year. Wholesale propane prices increased 4.3 cents per gallon, from 88.0 cents to 92.3 cents per gallon, a gain of 29.0 cents compared to the same period last year.
These prices come from the last survey done for the 2004/05 winter heating season. Weekly retail and wholesale prices for heating oil and propane will restart for the 2005/06 winter season beginning in October 2005.
Propane Inventories Sharply Lower
U.S. inventories of propane posted their second largest weekly decline of the heating season last week with a 3.4-million-barrel drop that left the nation’s primary supply of propane at an estimated 29.1 million barrels as of March 11, 2004. (The largest weekly decline of the 2004-05 heating season was 4.0 million barrels reported for the week ending January 21, 2005.) The unseasonably cold weather in many parts of the nation over the last several weeks triggered sharp declines in Midwest and Gulf Coast inventories at a time when inventories in these regions typically begin to flatten out near the end of the heating season. Midwest inventories fell 1.3 million barrels last week while Gulf Coast inventories reported a much larger 2.1-million-barrel decline during this same time. East Coast inventories managed a slight build last week that measured 0.1 million barrels while the combined Rocky Mountain/West Coast regions posted a 0.2-million-barrel decline during this same period. Despite last week’s sharp decline, U.S. inventories of propane remain in the middle of the average range for this time of year, while regional inventories remain well within their respective average ranges. Propylene non-fuel use inventories plunged lower by 0.4 million barrels last week to 4.0 million barrels, accounting for a slightly larger 13.7 percent of total propane/propylene inventories, compared with the prior week’s 13.5 percent share.
Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.
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5.7
-1.9