Released on September 8, 2005
(Next Release on September 14, 2005)

What to Expect for the U.S. Gasoline Market
According to EIA’s weekly survey of retail gasoline prices, the U.S. average for regular gasoline rose 46 cents from the previous week to $3.07 per gallon on Labor Day, September 5, just a nickel shy of the inflation-adjusted record of $3.12 averaged over March 1981, and by far the highest price ever if not adjusted for inflation. But besides the largest ever weekly hike in prices, another issue that concerned many motorists over the past weekend was the number of gasoline stations that were out of gasoline. Some motorists found themselves doing something they hadn’t done since the late 1970s or early 1980s: waiting in long lines to fill up their cars. How did this happen, and where do we go from here?

Retail gasoline prices have been trending higher throughout 2005. From January 3 through August 29, the average price of regular gasoline across the United States rose from $1.78 to $2.61. Even prior to Hurricane Katrina, EIA was forecasting that the average retail price would remain above $2 per gallon through all of 2006. (This would make March 7, 2005, when the average price was $1.999 per gallon, the last time the average price was below $2 per gallon for a long time.) Against this backdrop, Hurricane Katrina dealt a devastating blow to the U.S. gasoline market. Over 25 percent of U.S. crude oil production was initially affected and between 10 and 15 percent of refinery capacity was shut down for the first few days, reducing gasoline production by about 10 percent. In addition, two major pipelines that carry gasoline from the Gulf Coast to the East Coast (Plantation, which ends in Virginia, and Colonial, which ends in New Jersey) were also shut down for the first few days and have only very recently had their capacity fully restored. Also, the Capline, a major crude oil pipeline that feeds crude oil from the Gulf Coast to some Midwest refineries, saw its flow severely curtailed for several days, causing some Midwest refineries to reduce the amount of their production due to a lack of supply of crude oil. All of this added up to a dramatic drop in the supply of gasoline at a time when demand typically peaks, as well as having the distribution system dramatically affected. The result was very high prices for many stations which had gasoline, particularly along the eastern portion of the country, and some stations that had no gasoline available temporarily. This was a definite shock to many motorists, and gasoline prices quickly became one of the major issues for the country. But what might happen over the next few weeks?

Retail gasoline prices are likely to remain very high for some time to come, with as much as 5 percent of refinery capacity possibly being out of commission for a few months. In addition, while crude oil production from the Gulf of Mexico continues to improve, it may be some time before production is back to pre-hurricane levels. But there are some indications that retail gasoline prices may have peaked, or if not, are very close to the peak. While gasoline imports were down during the week ending September 2, this is expected to change over the next couple of weeks. It generally takes about 2 weeks for gasoline imports to arrive from Europe and other sources and get incorporated into the U.S. gasoline supply chain. And with the price jump seen over the last week, there are reports that gasoline shipments are on their way and should begin arriving possibly as early as late this week. Also, an announcement by the International Energy Agency (IEA) that over 30 million barrels of relief was coming from IEA countries outside the United States, some in the form of gasoline volumes drawn from their government-owned and controlled stockpiles, should also aid in adding supply and putting immediate downward pressure on prices. The sale of up to 30 million barrels of crude oil from the U.S. Strategic Petroleum Reserve, in addition to the 12.6 million barrels of crude loaned to refiners earlier to meet more immediate concerns, should also alleviate any concerns refiners might have in terms of crude oil supply over the next several weeks. News that the Plantation and Colonial pipelines are back at full capacity, along with news that some refineries are returning to full capacity this week, should also help supply issues and lower prices. However, it may be awhile before retail prices return to pre-hurricane levels as there appears to be four refineries (ChevronTexaco located in Pascagoula, MS; ConocoPhillips located in Belle Chasse, LA; ExxonMobil located in Chalmette, LA; and Murphy located in Meraux, LA) that are likely to be down for an extended period. These refineries help supply the Plantation and Colonial pipelines and it is unclear how easily and efficiently increased gasoline imports will be able to be inserted into the distribution system. But EIA expects prices to be lower by the end of September than they are now, and they should continue to fall throughout most of the next couple of months, absent any disruptions to supply from other hurricane activity or other factors.

For more details on EIA’s latest forecast for the U.S. oil market, please see the Short-Term Energy Outlook , released yesterday (September 7).

For the latest information on how oil infrastructure is being impacted in the aftermath of Hurricane Katrina, see EIA’s Daily Report and more detailed reports from the Office of Electricity Delivery & Energy Reliability.

U.S. Average Retail Gasoline Tops $3 in Record Run-Up
The U.S. average retail price for regular gasoline increased by 45.9 cents to 306.9 cents per gallon, which is the highest price and highest one-week price increase on record. This is 121.9 cents higher than this time last year. Prices were up throughout the country, with the East Coast seeing an increase of 60.6 cents to 319.7 cents per gallon making it the highest average price amongst the major regions. The surge along the East Coast was exacerbated by pipeline outages caused by Hurricane Katrina, in addition to the loss of gasoline and crude oil production. Prices on the storm-ravaged Gulf Coast gained 38.5 cents to 291.4 cents per gallon. Along the East Coast, prices in the Central Atlantic jumped 68.1 cents to average 329.2 cents per gallon. The West Coast averaged 302.5 cents per gallon after gaining 28.4 cents. The average price in California gained 28.6 cents to 305.6 cents per gallon. This is the first time since June 26, 2000 in which the average price in California was less than the U.S. average.

Retail diesel fuel prices experienced a new all-time nominal high for the fourth week in a row and an all-time one-week price increase, gaining 30.8 cents to reach 289.8 cents per gallon. This is the fifth week in a row that retail gasoline prices have been higher than on-highway diesel after a year of inversion. Prices were up across the country, with the East Coast seeing the largest regional increase of 33.6 cents to 290.0 cents per gallon. The West Coast had the highest regional price, up 22.9 cents to 314.9 cents per gallon, and California prices added 20.5 cents to reach 325.0 cents per gallon. The Midwest saw a gain of 31.1 cents to 284.3 cents per gallon.

Propane Inventories Weather Storm
The impact from Hurricane Katrina on propane inventories apparently was not as severe as expected, although the storm did contribute to one of the smallest monthly August builds on record. The August stockbuild measured only 1.5 million barrels, far below the 5-year average build in August of about 5.4 million barrels. Following last week’s drop, U.S. inventories moved lower to an estimated 64.8 million barrels as of September 2, 2005.

The expected drop in U.S. inventories of propane last week totaled 0.6 million barrels, pushed lower by the 0.8-million-barrel drop in Gulf Coast inventories and the 0.4-million-barrel decline in East Coast inventories. With a large segment of Gulf Coast petroleum infrastructure shut down for days last week, many pipelines were not able to maintain normal operations in the supply of inventories, contributing to the sharp drop in inventories in the Southeast region of the East Coast. In contrast, Midwest inventories managed a 0.6-million-barrel build during this same time, while inventories in the combined Rocky Mountain/West Coast regions moved higher by 0.1 million barrels. Propylene non-fuel use inventories fell by 0.2 million barrels last week to 4.5 million barrels, a level that accounted for 6.9 percent of total propane/propylene inventories.

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.