Gasoline Price Surge Revisited: Crude Oil and Refinery Issues

Publication Date: May 2004

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

Type:

Abstract:

Since late 2002, gasoline prices have been extremely volatile, with the national average spiking above $1.70 three times. Most recently, the nationwide pump price of regular fuel set a new record as momentum carried it to nearly $2.00 per gallon. Prices in some states — at nearly $2.30, California stands out — are much above the average. In addition to the set of market forces applicable to pump prices in the United States, the Organization of Petroleum Exporting Countries (OPEC) announced a supply cut effective in April. At a minimum, this underpins very high crude oil prices, which are a component of the current pump price situation.

Beyond higher crude oil prices, gasoline prices are strongly influenced by the supply and demand situation at the pump. Since 1999, the only growth in U.S. oil consumption has been increased gasoline demand, which has risen by 500,000 barrels per day to a current annual average of 8.9 million barrels per day. While this might seem to be a relatively small amount, it has translated directly into increased demand for foreign gasoline, since U.S. refineries have not added capacity as gasoline demand has grown. Demand for imported gasoline now exceeds one million barrels per day.

In addition to the high demand for imported gasoline, the quality of gasoline sought from foreign refiners has become a factor. As the specifications for environmentally acceptable fuel have become more stringent, the complexity of manufacturing “U.S. spec” gasoline has increased. Not all refiners can economically make fuel that meets domestic requirements. U.S. gasoline marketers seeking imports must shop world markets for a scarce commodity; accordingly, prices are high. These high-priced incremental supplies play an important role in determining prices at the pump, because all gasoline tends to be priced by the market at the cost of the last units supplied.

Other factors contributing to the pump price situation include the state of gasoline and crude oil inventories at U.S. refineries. Both are at low levels. Gasoline inventories available for consumption amount to less than two days of supply. Crude oil stocks — from which gasoline consumed is replaced — are still at low levels, although rebounding somewhat from last winter’s record lows. Petroleum inventories are low because global oil supplies are tight, in part due to strong demand, especially in Asia. OPEC production policy is a consideration as well.

As gasoline prices rise, the matter is becoming more visible and politicized, resulting in calls for some sort of public policy remedy. Among the options discussed is release of crude from the Strategic Petroleum Reserve, a complicated measure with a list of pros and cons, and the relaxation of Environmental Protection Agency rules regarding gasoline composition.

This report will be updated to reflect significant changes in the factors impacting gasoline markets and prices.