Released on March 22, 2006
(Next Release on March 29, 2006)

An Early Peak?
The U.S. average retail price for regular gasoline jumped by 13.8 cents per gallon between March 13 and March 20, the third-largest weekly increase ever recorded on EIA’s weekly retail price survey, which began in 1990. Since February 20, U.S. consumers have seen prices rise, on average, by a total of 26.4 cents per gallon. As the graph below shows, gasoline prices usually rise during this time of year. But are gasoline prices nearing their peak early in the year as they did in 2003, or is this just the beginning of a long run of increasing prices such as seen just last year?

Before trying to answer this question, it may be helpful to understand the major factors behind the recent increase in retail gasoline prices. The first factor is the seasonal rise in demand. As the weather turns warmer (though many parts of the country just received a recent blow of very cold weather) with the approach of spring, gasoline prices typically rise as well. As with most commodities, the more people use it, the more valuable it becomes. But a unique factor potentially contributing to this year’s pressures is the uncertainty over supplies this summer due to a change in the type of gasoline that many consumers will use. As EIA stated in a report released last month, a number of petroleum companies announced their intent to remove methyl tertiary-butyl ether (MTBE) from their gasoline this year. Companies’ decisions to eliminate MTBE have been driven by State bans due to water contamination concerns, continuing liability exposure from adding MTBE to gasoline, and perceived potential for increased liability exposure due to the elimination of the oxygen content requirement for reformulated gasoline (RFG) included in the Energy Policy Act of 2005. Most companies eliminating MTBE in the short run will blend ethanol into gasoline to help replace the octane and clean-burning properties of MTBE. The rapid switch from MTBE to ethanol could have several impacts on the market that serve to increase the potential for supply dislocations and subsequent price volatility on a local basis. This uncertainty about future supplies and concern about the logistics of blending ethanol RFG (ethanol must be transported and stored separately from the base gasoline mixture to which it is added until the last step in the distribution chain) appears to be causing wholesalers to buy more gasoline now than they may have done otherwise. In other words, if a wholesaler thinks prices will be higher in the future, it makes sense for him to buy more now and store it for use later, when prices will presumably be higher.

But just as an increase in gasoline demand at the end-user level can lead to an increase in retail prices, increased purchases by wholesalers can lead to an increase in the wholesale price. Using the spot price of gasoline in various markets around the country as a proxy for wholesale prices, the graph below shows that wholesale prices have jumped by nearly 50 cents per gallon since the middle of February. While retail prices have not increased by this much, they also did not go down as much as wholesale prices did prior to the latest rise. Now that wholesale prices appear to be flattening, we would expect retail prices to remain close to current levels, given the typical difference between spot prices and retail prices. This would imply that retail prices could be near their short-term peak. Of course, this could change if spot prices were to increase again. And just as occurred in 2003 and 2005, there is always the possibility that prices could reach other short-term peaks later in spring or summer. But, at least for the next couple of weeks, a sharp increase in retail prices, like the one seen last week, does not appear to be on the immediate horizon.

U.S. Average Retail Gasoline Jumps 13.8 Cents
The U.S. average retail price for regular gasoline gained 13.8 cents, the third-largest weekly increase ever, to reach 250.4 cents per gallon as of March 20, which is 39.5 cents higher than last year. Prices were up throughout the country, with the Gulf Coast seeing the largest increase of 18.4 cents to reach 247.6 cents per gallon, or 45.4 cents per gallon higher than a year ago. The highest regional price in the country was on the West Coast, where the average price was 257.1 cents per gallon. California prices rose 10.3 cents to 263.5 cents per gallon, 32.3 cents higher than this time last year. East Coast prices rose 16.4 cents to 249.7 cents per gallon, which is 42.7 cents higher than a year ago.

Retail diesel fuel prices increased by 3.8 cents to reach 258.1 cents per gallon as of March 20, which is 33.7 cents higher than last year. Prices were up throughout most of the country, with the Gulf Coast seeing the largest regional increase of 5.5 cents to 255.2 cents per gallon. West Coast prices, still the highest in the nation, lost 0.9 cents to 271.6 cents per gallon.

Late-Season Chill Lowers Propane Inventories
Chilly temperatures across many areas of the nation last week continued to put downward pressure on propane inventories, which dropped by 1.9 million barrels from the previous week to an estimated 30.9 million barrels as of March 17, 2006. At about mid month, U.S. inventories of propane were down 5.4 million barrels, a level well above the most recent 5-year average draw of nearly 2.3 million barrels reported for March. Moreover, if the sharp downward trend continues over the next two weeks, the March 2006 stockdraw may approach the all-time March record of 7.4 million barrels reported during 1999.

Regional inventories were mixed, with most of the weekly stockdraw occurring in the Gulf Coast region with a weekly decline of 1.8 million barrels, followed by the East Coast at 0.2 million barrels. During this same time, Midwest inventories rose by only 0.1 million barrels, while the combined Rocky Mountain/West Coast regions remained unchanged. Propylene non-fuel use inventories plunged by 0.8 million barrels during the week to 2.6 million barrels, lowering its share of total propane/propylene to 8.4 percent from the prior weeks share of 10.4 percent.

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