Released on November 28, 2007
(Next Release on December 5, 2007)

Where Being Above Average is Undesirable
Many readers are familiar with Garrison Keillor’s phrase used on radio’s “A Prairie Home Companion” series, “Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average.” The phrase points to the many times we hope and strive to be above average. But in some situations, we prefer below average. This is the case when it comes to local gasoline prices. Consumers would rather be in an area that has below-average prices. Today’s discussion focuses on the above-average price behavior of a different Midwest area than the fictional Lake Wobegon, Minnesota. The area is North Dakota, whose gasoline and diesel prices were the subject of a Congressional hearing last week. Energy Information Administration’s (EIA) testimony at that hearing is summarized in this week’s issue.

North Dakota was, and to some extent still is, subject to conditions that were peculiar to that area, on top of unusual U.S. market conditions. This resulted in North Dakota experiencing gasoline and diesel fuel prices being higher than the U.S. average. The situation in that State, however, is indicative of some of the factors that can affect petroleum markets elsewhere in the Nation.

This past year has brought abnormally tight market situations to the United States, both in the upstream (crude oil production) areas as well as the downstream (refining). As the lowest line in Figure 1 shows, the crude oil price has climbed steadily throughout the year. The EIA November Short-Term Energy Outlook projects crude to average nearly $34 per barrel higher in November than in January 2007. Retail petroleum product prices not only reflected this crude oil price increase, but rose even faster than crude during the spring and early summer, reflecting tightness in the balance between gasoline supply and demand. From late January through the middle of May, average U.S. retail gasoline prices rose from $2.17 to $3.22 per gallon, an increase of $1.05. Crude oil, however, only rose about 30 cents per gallon during this same period.

The main reason for the surge in gasoline prices over crude oil seems to have been unusually extensive U.S. refinery outages, which also pushed the limits of gasoline import availability. In the face of rising demand for gasoline and distillate products (e.g., diesel fuel and heating oil), supply was not able to keep up, thus drawing product inventories down, while the price differential to crude oil widened.

For the first half of 2007, refining outages on the Gulf Coast and in the Midwest averaged 1.2 million barrels per day, which is 500 thousand barrels per day higher than average for the 5 years from 2001 through 2005. The Gulf Coast refineries had outages that were about 50 percent higher than their 5-year average outages, while Midwest refinery outages ran 30 percent over their 5-year average outages. Outages have continued to affect these areas. In September and October, preliminary information indicates Midwest refinery distillation unit outages averaged about 370 thousand barrels per day, which is more than twice the 5-year historical levels for that time of year.

The Midwest is served not only by local refineries, but also by refineries in the Gulf Coast that move products into the Midwest through pipelines. (About 25 percent of the gasoline used in the Midwest comes from the Gulf Coast.) For example, one major pipeline, the Explorer, moves product from the Gulf to areas east of the Mississippi. Another pipeline, the Magellan system, serves areas mainly west of the Mississippi, including North Dakota, and is fed primarily by refineries in Oklahoma, Kansas, Minnesota, and Wisconsin rather than by Gulf Coast refineries. However, the Magellan system connects to the Explorer Pipeline in Oklahoma, allowing some additional access to refineries on the Gulf Coast.

Midwest gasoline demand typically peaks in the months of June, July, and August, while Midwest distillate demand peaks in September and October--varying somewhat depending on the harvest season. The unusually large refinery outage situation in 2007 resulted in significant reductions in product flow to terminals at the pipeline extremes, which means trucks had to travel further to reach terminals with product. Additionally, inventories were drawn down as gasoline and then distillate demand peaked. Towards the end of August, EIA weekly data showed Midwest gasoline inventories had dropped to their lowest level in almost 7 years. The areas that generally experienced the most supply problems were those that are at the ends of the distribution system, such as North Dakota and Michigan. For example, from 2003 through 2006, gasoline prices in those States on average tended to fluctuate a penny or two around the national average. In 2006, both States averaged about 1 cent per gallon below the national average gasoline price. However, from June through early November 2007, they averaged about 16 and 15 cents per gallon over the national average, respectively. North Dakota receives supplies from the Magellan and the NuStar pipeline systems. In addition, it receives product from a number of northern refineries such as the Tesoro refinery located in Mandan, North Dakota, and the Cenex refinery in Laurel, Montana, via a proprietary pipeline.

A number of the refineries that provide supplies to North Dakota experienced outages, both planned and unplanned. The Coffeyville refinery in Kansas that flooded this past summer feeds directly into the Magellan system. Outages in other refineries affected the area as well. Any area needing supply will draw on areas that have supply, affecting all prices. Some of the largest Midwest refinery outages were at refineries that serve areas further east, such as the outage at BP’s Whiting, Indiana, refinery, which began this past summer and has continued. This has several impacts. First, there will be increased competition for product from refineries in the upper Midwest that can move product into areas served by Whiting. Second, there will be increased competition for supply from pipelines like the Explorer that move product up from the Gulf Coast. This pull on supply competes with volumes that might otherwise move further west.

During times such as those seen this past summer, Federal and State governments look at options to relieve the situation. At the end of August, the Federal government granted North Dakota’s request for a waiver to use some gasoline supplies from Canada that were thought to be slightly “off-spec” from U.S. summer gasoline requirements. Still, gasoline supplies remained tight. Meanwhile, diesel prices were also rising with growing harvest demand. A diesel supply waiver was discussed, but subsequently not implemented since incremental distillate supplies were not available to respond to a waiver. With truck drivers needing to travel long distances to find product, North Dakota and other affected States issued executive orders extending service hours for truck drivers delivering fuel supplies (also approved by the Federal Motor Carrier Safety Administration) to relieve the situation.

While diesel demand is declining seasonally in the Midwest, it still is relatively strong, particularly in North Dakota. Early-November Midwest refinery outages were high and, while this situation is now starting to improve, North Dakota is still struggling. Refineries are returning to more normal operation, which will ease the tight balance in North Dakota, but we cannot predict exactly when the problems will cease. Prices in North Dakota have dropped somewhat, relative to the national average, indicating an improvement in the balance, but with crude prices pushing up all prices, gasoline and diesel prices remain high in the State.

Looking ahead into 2008, both crude prices and refinery constraints should ease somewhat. Today’s very high crude prices are expected to fall back to average close to $80 per barrel in 2008. At the same time, refinery availability should improve. Both BP’s Whiting and Texas City refineries may return to more normal operations, adding as much as 325 thousand barrels per day of capacity next summer over this past summer. In addition, the U.S. could see another 100 thousand barrels per day of refinery capacity from more normal reliability and some small expansions. Increased use of ethanol in gasoline should also add to U.S. gasoline supply in 2008. EIA is projecting that overall regular gasoline prices may average $2.97 per gallon in 2008, which is 18 cents per gallon higher than the 2007 average mainly due to higher crude prices, but lower than the $3.10 seen on November 26. Similarly, 2008 diesel prices are projected to average $3.09 per gallon, which is 23 cents per gallon higher than in 2007, but lower than the $3.44 reported by EIA on November 26.

Residential Heating Oil Prices Surge Upward
Residential heating oil prices maintained their record-breaking ways for the eighth week in a row during the period ending November 26, 2007. The average residential heating oil price leaped up another 7.2 cents last week to reach 328.7 cents per gallon, a gain of 91.3 cents from this time last year. Wholesale heating oil prices gained 11.5 cents, advancing to 276.7 cents per gallon, which was an increase of 104.6 cents compared to the same period last year.

The average residential propane price gained 1.4 cents on the way to setting its eighth consecutive weekly record, reaching 244.9 cents per gallon. This was an increase of 50.4 cents compared to the 194.5 cents per gallon average for this same time last year. Wholesale propane prices resumed their increases with a rise of 2.7 cents per gallon, from 159.4 to 162.1 cents per gallon. This was an increase of 59.5 cents from the November 20, 2006 price of 102.6 cents per gallon.

Retail Gasoline Price Slightly Lower, Diesel Price Sets Record
The U.S. average retail price for regular gasoline was down 0.2 cent to 309.7 cents per gallon as of November 26, 2007, 85.1 cents above a year ago. Regional prices were mixed, with the East Coast gaining 0.7 cent to 309.2 cents per gallon. The highest regional price in the country was on the West Coast, up 0.2 cent to reach 330.5 cents per gallon. The average price for regular grade in California was 339.8 cents per gallon, up 0.3 cent from last week and 90.5 cents per gallon over last year. A decrease was recorded in the Rocky Mountain region, where a drop of half a cent sent the price to 306.3 cents per gallon. The Midwest price fell 1.1 cents to 305.9 cents per gallon while the Gulf Coast was lower by 0.3 cent to 296.6 cents per gallon, still the only region under the $3 mark.

Topping the previous record high by almost 2 cents, the retail diesel fuel price jumped 3.4 cents to 344.4 cents per gallon. Prices were up across the country and set regional record highs in the East Coast, Midwest, and Gulf Coast. The East Coast increased the most, 4.6 cents to 345.3 cents per gallon. The Midwest rose to 342.3 cents per gallon, 3.4 cents more than last week. The Gulf Coast swelled 3.6 cents per gallon to 336.0 cents per gallon. The Rocky Mountain region price advanced 2.0 cents to 352.7 cents per gallon, just a half cent shy of the peak. While continuing as the highest regional price, the West Coast recorded the smallest increase by moving 0.1 cent higher to 358.7 cents per gallon. California prices declined 0.4 cent to fall to 362.0 cents per gallon.

Propane Inventories Post Modest Gain
Propane stockholders reported a modest 0.3-million barrel gain last week, extending the recent trend of alternating gain and loss in weekly inventories seen over the month. With last week’s gain, propane inventories moved up to an estimated 61.5 million barrels as of November 23, 2007, a level that continued to track just below the lower limit of the average range for this time of year. In contrast, the November stockdraw measured a modest 0.4 million barrels, a level significantly below the most recent 5-year average of more than 2.3 million barrels. Regional gains were reported in the East Coast and Gulf Coast areas last week, up 0.4 million barrels and 0.3 million barrels, respectively. During this same time, Midwest inventories declined by 0.2 million barrels while the combined Rocky Mountain/West Coast region fell by 0.1 million barrels. Propylene non-fuel use inventories declined by 0.2 million barrels to account for a smaller 2.5 percent share of total propane/propylene inventories from the prior week’s 2.9 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.