Released on March 30, 2005
(Next Release on April 6, 2005)

Crystal Balls and Gasoline Prices
Forecasting, as anyone engaged in such efforts will say, is either an art or a very inexact science. While predicting the weather, or the winner of the NCAA basketball tournament, may be even more difficult than forecasting energy prices, the process is similar: you look at historical patterns, tendencies, and relationships, and make a "best guess" at some future outcome, based on the evidence you see today. And though some may forecast winter weather by looking at caterpillars, or pick the NCAA champion by the color of their jerseys, the predictions with the best track records are made using the same elements we at EIA use to forecast energy prices: lots of historical data, analyzed using the proper statistical techniques.

EIA annually forecasts energy trends out to 20 years (in the Annual Energy Outlook and International Energy Outlook) and also produces a more detailed monthly forecast for the next two years (in the Short-Term Energy Outlook). To inform its short-term modeling efforts and validate its weekly price data, EIA has also been examining the link between changes in wholesale and retail prices for a number of years, formulating and testing models of this relationship. The methodology and results of this modeling activity can be found in the articles Gasoline Price Pass-through and Diesel Fuel Price Pass-through on EIA's World Wide Web site, but the general idea is very simple: retail price changes in the immediate future can be predicted by looking at recent spot price changes.

So what does this relationship say about gasoline prices over the next few weeks? Since roughly mid-February, when both spot and retail gasoline prices were relatively stable for a few weeks, the weighted average U.S. spot price for regular gasoline has risen by about 28 cents, from $1.28 on February 18 to $1.56 per gallon as of March 28, while EIA's weekly retail price has risen 25 cents, from $1.905 to $2.153, over roughly the same period. Thus, by this approach, only about 3 cents of spot price increases currently remain to be passed through to the retail level. This, of course, only considers price changes already "in the pipeline" - so if spot prices were to rise further (or fall) before the remaining 3 cents or so passes through, retail prices would change by more or less, accordingly. And given normal supply and demand patterns, especially with the approach of the summer driving season, it is a near-certainty that there will be further changes in spot gasoline prices, with or without changes in the underlying crude oil prices.

Another way of looking at pass-through is that when all spot price changes have been transmitted to retail - in other words, the relationship between spot and retail prices is at equilibrium - the differential between the U.S. average spot and retail prices for regular gasoline is about 60 to 65 cents per gallon, of which about 44 cents is taxes. (The average differential in 2004 was 64 cents.) Based on this relationship, the current (March 28) average spot regular gasoline price of $1.56 per gallon should translate to about $2.16 to $2.21 per gallon at retail, compared to the current price of $2.15. (Note that all of the estimates above are for the U.S. average only; both price levels and changes can vary significantly among regions.)

While knowing these relationships may provide small comfort, if any, to motorists who are now paying more than ever before for gasoline (in terms of prices that have not beenadjusted for inflation), at least it may help to "de-mystify" the process by which retail gasoline prices change over time.

U.S. Average Retail Gasoline Price Increases Again
The U.S. average retail price for regular gasoline increased this week by 4.4 cents from the previous week to reach 215.3 cents per gallon as of March 28, 39.5 cents higher than this time last year. This is the highest price ever recorded (not adjusted for inflation) and the sixth week in a row that prices have risen. Prices increased throughout the country, with the West Coast and Rocky Mountains seeing the largest regional increases of 6.0 cents to reach 231.8 cents per gallon and 213.3 cents per gallon, respectively. The West Coast price was the highest regional price in the country. Prices in California gained 6.4 cents to 237.6 cents per gallon. Retail prices on the East Coast gained 5.0 cents to 212.0 cents per gallon, which is 39.1 cents higher than last year.

Retail diesel fuel prices gained 0.5 cent last week to 224.9 cents per gallon, topping the previous highest price ever recorded (not adjusted for inflation) for the second week in a row. Prices were up throughout the country, with New England prices jumping 1.9 cents to 237.4 cents per gallon. Prices on the West Coast rose 1.2 cents to average 248.3 cents per gallon, remaining the highest regional average in the country, and 66.6 cents per gallon higher than last year. Average diesel fuel prices in California increased by 3.0 cents to reach 251.2 cents per gallon, which is 62.3 cents higher than this time last year.

Propane Stockdraw Slows
Following a period of sharp inventory declines over the past several weeks, U.S. inventories of propane posted a moderate 0.3-million-barrel stockdraw last week that moved the nation's primary inventories of propane down to 27.0 million barrels as of March 25, 2005. While March inventories are poised to surpass the average 5-year stockdraw for this month, inventories remain well within the average range for this time of year. Despite the modest weekly stockdraw, regional inventories posted mixed results, with East Coast and Gulf Coast inventories moving down 0.3 million barrels and 0.4 million barrels, respectively, while Midwest inventories gained 0.5 million barrels during this same period. Moreover, the combined Rocky Mountain/West Coast regions remained unchanged at 0.6 million barrels in inventories last week. Propylene non-fuel use inventories soared higher to 4.5 million barrels last week, accounting for 16.7 percent of total propane/propylene inventories.

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