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Gasoline
Inventories Continue to Fall,
Prices Will Be Volatile
March
3, 2000
According to the February 28th Energy Information Administration (EIA)
Petroleum Market Report, inventories of motor gasoline continue to fall
while prices are steadily increasing. Inventories of finished motor
gasoline for February 25, 2000, were 196.5 million barrels or 14% below
inventories at the same time last year. Likewise, stocks of crude oil are
12.1% below last year.
The price of a barrel of crude oil appears to be the driving force
behind the lower inventories and higher gasoline prices. Yesterday's
closing price for a barrel of West Texas Intermediate crude oil on the New
York Mercantile Exchange (NYMEX) was $31.78 - or $19 per barrel higher
than the February 1999 price. On March 2, 2000, the NYMEX price for a
gallon of gasoline settled at $.97 per gallon (the average price for
gasoline in February 1999 was $.35 per gallon). While prices for gasoline
are extremely high when compared to those of a year ago, concerns appear
to be focused more upon the tight supplies of crude, the lack of refinery
output, and the low inventories of finished motor gasoline.
The following EIA table shows the difference between crude oil
production and demand as of February 2000. The variance between production
and demand can primarily be attributed to OPEC's decision to reduced
production. While several OPEC members have agreed to increase production,
it will be at least 1 month, more likely 6 weeks, before these increases
impact supplies.
The levels of production increases that have been agreed to appear to
close the gap between daily demands and supply. However, they do not
appear to be significant enough to restore the stock levels to historical
averages. Thus, the continuing low inventories will cause prices to remain
volatile and leave the gasoline distribution chain susceptible to minor
glitches such as pipeline closures or refinery maintenance disruptions.
If there are any hopeful signs, they are coming from the low refinery
output. Low output leaves room for dramatic increases in refinery
utilization should refiners choose to ramp up. A longer-term analysis of
refinery utilization shows that it has been over 10 years since refinery
outputs were this low. Once again, high crude oil prices are the driving
force behind the lower than normal refinery utilization. Market
backwardation (future prices of oil being lower than the current price) is
a major disincentive to refiners to increase output. The refiners do not
want to get stuck with high cost inventories 3 months down the road when
the NYMEX contract price for gasoline is expected to be $.20 per gallon
cheaper than it is today.
So How Low are Gasoline
Inventories?
The following EIA table illustrates the current inventory levels for
finished motor gasoline. The area in green represents the 5-year average
inventory levels.
What Should States Be Doing Now,
and What Can We Tell
Consumers About Gasoline Prices and Supplies?
States should be monitoring both prices and supplies of gasoline in
their state on a regular basis. It's a good time to be talking to your
gasoline wholesalers about the types of assistance that you might be able
to provide to them in the event of gasoline supply disruptions. If you
have refiners in your state, you should be talking to them about delaying
scheduled refinery closures, provided that the postponement of the closure
will not compromise safety.
States should also look at their bulk purchasing practices. Now is not
the best time to purchase huge inventories of gasoline for a number of
obvious reasons. If you don't need the product, don't overburden gasoline
inventories by taking delivery of huge volumes of product.
A number of the Territories and Hawaii are also facing abnormal
surcharges for electricity due to the fact that electric generation is
primarily from petroleum products. Work with your utilities on demand
reduction strategies and switching to alternative fuels when possible.
States that are not normally dependent upon petroleum products for
generation may need to take a look at the fuel source for summer peaking
generation. You should work with your utilities to find less costly fuels
that will meet the requirements of these facilities.
Your Governor and Attorney General may want to know what they can do to
mitigate the effects of high petroleum prices for low-income consumers and
small businesses. One of the best things to do in an urban area is to
reduce or waive mass transit fares and commuter satellite parking fees for
a period of time. In the Washington, DC area, many commuters are faced
with a mass transit round trip fare and parking bill of up to $9 per day -
making it less costly for many workers to drive to work. Taxi operators
and delivery firms are also faced with higher costs. Many municipalities
have granted relief to these firms by allowing temporary increases in
tariffs. You may also want to encourage your state government and business
to allow 4-day work weeks whenever feasible.
Providing assistance to consumers and business in rural areas presents
a much more perplexing solution. Recognizing that per capita gasoline
consumption in these areas varies widely and that mass transit is not an
option, states need to be innovative when developing mitigation
initiatives. Several ideas come to mind:
- Work with rural community action agencies to promote the use of
elderly and handicapped transit and to promote wise use of gasoline
for the low-income;
- Brush off the efficiency recommendations concerning car pooling,
tune-ups, etc.;
- Encourage the use of telecommuting and other programs that reduce
the vehicle miles traveled;
- Make state services available locally whenever possible so that
citizens won't have to travel to the State Capitol to conduct routine
business.
As gasoline prices continue to rise or remain high, consumers and
business will become more aware of the expense that state and federal
taxes add to the price of a gallon of gasoline. Currently, state and
federal taxes add $.41 per gallon to the retail cost of gasoline. Be
prepared to deal with the issue of waiving state taxes on gasoline
(averaging $.226 per gallon).
NASEO will continue to monitor the current situation with gasoline and
crude oil. Keep in mind that diesel prices and supplies continue to be a
problem as well. If you have any questions or, more importantly, if you
have any examples of mitigation strategies that we can share with other
states, please contact NASEO.
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