Copyright 1999 The New York Times Company
The New
York Times
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May 5, 1999, Wednesday, Late Edition - Final
SECTION: Section C; Page 8; Column 1;
Business/Financial Desk
LENGTH: 1560 words
HEADLINE: Business Travel;
Drivers face a summer of
rising gasoline prices
as the nation's refineries run at
top capacity.
BYLINE: By Agis Salpukas
BODY:
WITH the summer driving season approaching,
the price of gasoline across the country has jumped sharply
from historically low levels as major oil producing countries cut supplies of
crude oil.
The supply of crude remains the most crucial factor affecting
gasoline, but many experts warn that a shortage of another kind
may push prices at the pump higher in the months ahead: tight supplies of
refined gasoline in the United States. Demand for
gasoline has been increasing steadily, spurred by the economic
boom of the 1990's, by the growing popularity of big sport utility vehicles that
have relatively poor gas efficiency -- and by the low price of fuel. In
February, at 87.8 cents a gallon for regular nationwide, gas was as low, on an
inflation-adjusted basis, as it had been since the 1920's.
Even with
price rises since then -- almost 29 percent, to an average of $1.13 a gallon
nationwide -- energy prices remain relatively modest in most parts of the
country.
Predicting oil and gas prices is an inexact science at best.
During the summer, the Energy Department says, the likelihood is that
gasoline will range from $1.08 to $1.18 a gallon, 9 to 10 cents
higher than the unusually low prices seen last summer. Since the average
motorist drives 15,000 miles a year and gets 21 miles a gallon, and would spend
$821 a year on gas at $1.15 a gallon, according to AAA, such prices would not
pose a huge financial burden.
But two factors may drive prices higher.
The first, the supply of crude oil, has received most attention. Two announced
cutbacks in production by a coalition composed of members of the Organization of
Petroleum Exporting Countries and non-OPEC members like Norway, Mexico, Russia
and Oman have driven prices up from a low of $10.35 a barrel in December to
$18.92 a barrel yesterday on the New York Mercantile Exchange. Crude oil prices
have risen in anticipation of actual production cuts. If the cutbacks do not
stick, the price of oil, and of gasoline at the pump, could
decline again.
But it is the declining capacity of refineries to process
crude oil and convert it into gas and other products that has recently come
under scrutiny on the West Coast, and is likely to become more of an issue
across the country, many analysts say.
From 18 million barrels of crude
oil a day in 1981, refining capacity across the country declined sharply during
the next 15 years as the industry underwent a period of low profit margins,
consolidation and investment in equipment to meet more stringent environmental
regulations. Capacity began to rise modestly four years ago.
Still, it now stands at only 16 million barrels a day and demand is growing
faster than supply.
For the last three years, refineries have been
running at top production levels. "Refiners have to work full blast just to keep
up with demand," said Fred Leuffer, an analyst for Bear, Stearns. "There is no
more room for error."
Shortfalls are being made up by imports of
gasoline, which are more expensive and have been less reliable
than domestically refined fuel.
Under these circumstances, when
production at refineries is disrupted, as occurred recently in California,
spikes in gasoline prices are likely to follow. In a case now
under investigation by the California State Attorney General's office, prices
jumped by more than 40 percent after two fires shut refineries there.
Meanwhile, over the next several years, new regulations
by the Environmental Protection Agency to greatly lessen the amount of
sulfur in gasoline would require considerable
investment by refineries just to make existing quantities of
gasoline environmentally acceptable. Under new rules proposed
by President Clinton on Saturday the agency would require the industry to
produce gasoline with no more than 30 parts per million of
sulfur, about a 91 percent reduction.
All these factors
are likely to put pressure on prices at the pump nationwide.
"People
will still get what they want to buy," said Larry Goldstein, with the Petroleum
Industry Research Foundation, a research group for the industry in Manhattan.
"There will just be times when they will have to pay more for
gasoline."
No one is predicting a return to the gas
lines of 1973 and 1979, which were the result of big cuts in the supply of oil
by OPEC. Barring unforeseen disasters, oil supplies are generally believed to be
too abundant and diversified to allow critical shortages that might require
rationing or long lines at gas stations.
"It's worth raising the
concern," said Jeff A. Dietert, an analyst who covers refining for Simmons &
Company International of Houston. "But I don't think that the world is about to
come to an end."
More likely are occasional price spikes, most analysts
say. In California, the refinery fires cut production by about 15 percent.
Prices for regular unleaded gasoline in the state jumped from
an average of $1.11 a gallon in February to nearly $1.60 in March before
starting to recede in recent weeks to the current level of $1.47 a gallon.
Shipments from the Gulf Coast and from as far as Korea eventually helped to ease
the state's shortage.
Last Friday, some California municipalities and
consumer groups urged drivers not to buy gasoline in protest.
John Gioia, a member of the Contra Costa County Board of Supervisors,
which supported the boycott, said that while the effort had little economic
impact it was a "symbolic statement of concern over the action of the oil
companies."
California's geography and its stringent environmental
regulations have made the state's gas more expensive than in
the rest of the nation. Even if gasoline could be shipped from
the East Coast to the West economically, it would not meet California's
regulatory standards.
But across the country, demand for
gasoline grew at a pace of about 3 percent last year, with
another 2 percent expected this year. Refineries nationwide are expected to be
hard pressed to meet demand.
"They're going to have to run harder and
harder because demand is outstripping supply growth, " said Mr. Leuffer of the
Bear, Stearns.
In the long run, Mr. Leuffer said, refiners and retailers
will be able to impose higher prices for gasoline.
While the current tightness in refining capacity may impose burdens on
motorists, it represents a welcome change for the industry. Overcapacity led to
years of shrinking profits, and inefficient refineries were abandoned. From 300
refineries in the early 1980's, there are only about 160 refineries.
Last year's collapse of the price of crude oil, which cut profits of oil
companies and independent refiners alike, led to belt tightening and low capital
spending. For most companies, the profit decline continued into the first
quarter of this year and capital spending remained low. Most companies say they
are waiting to see if the crude oil price remains at current levels.
Refining capacity is due to grow at a little more than 1 percent this
year and probably not much more in the next few years, industry analysts say.
This compares with an increase of 2.6 percent last year and an average of 2.2
percent in the last five years.
"With capacity going up 1.8 percent and
demand growing at more than 2 percent you are going to get higher prices over
time," said Michael Mayer, an analyst with Schroder & Company.
Still, there is a check on the industry. Often when prices in the United
States climb, refiners in Europe and Latin America, who still have extra
capacity, begin to ship extra supplies. In the first quarter of this year, for
example, imports of gasoline were up sharply, rising 7 percent
over last year and accounting for 5.3 percent of total supply. For all of last
year, imports amounted to just 3.6 percent of supply.
But the
gasoline shipped here is more expensive. Transportation costs
add about 3 to 4 cents a gallon. Overseas refiners tend to hold off, waiting to
see whether United States shortages, and price increases here, stick. That
uncertainty often causes spot prices for gasoline in the United
States to run up even more in futures markets. If sustained, those increases
eventually get passed on to the motorist.
"The movement across the
Atlantic is fairly expensive to justify shipping a lot of
gasoline," said Eric Leon, the London-based general manager for
the chemical and petroleum industry for I.B.M., and a close observer of European
refining.
In August 1997, the price of gasoline in the
United States jumped about 10 cents a gallon when strong demand combined with
problems at several American refineries. The price surge, which was ultimately
alleviated by European imports, came even though crude oil prices were dropping.
Such short surges in prices, however, are not expected to cause oil
companies and independent refiners to ease their purse strings.
"Brief
peaks in prices will not get a lot of investment going," said John Cook, the
director of the petroleum division of the Energy Information Administration, the
statistical arm of the Energy Department.
The challenge is to meet new
environmental standards while maintaining adequate gasoline
supplies, he said. He expects that imports of gasoline are
likely to play a larger role in the future.
"There is concern about
making the transition," Mr. Cook added. "How do you get from here to there
without disrupting the marketplace?"
http://www.nytimes.com
GRAPHIC: Graph: "Running Out of Gas"
The United
States capacity to refine gasoline has fallen and its
refineries are running at nearly full capacity, creating the possibility that
any future increases in demand could send prices, already rising because of
cutbacks in production by OPEC, even higher. Graph tracks refinery capacity
(1980-1999), refinery utilization (1980-1998), and the average price for regular
unleaded (since 1998). (Source: Simmons & Company
International)
LOAD-DATE: May 5, 1999 
