Until the Western United States has more refining and pipeline capacity and the government changes legislation to make gasoline blends more uniform, annual price spikes at the pump will continue to plague Valley motorists, an oil industry economist said Friday.
Many of the same conditions that shot prices up last March haven’t changed this year and the annual switch from winter to summer gas is constricting an already short supply, said American Petroleum Institute chief economist John Felmy
"Every year we’re forced to go through the same switchover, which is an enormous challenge given the limitations we have on pipeline capacity, on refinery capacity and on tankage," Felmy said during a conference call with members of the Arizona media.
"Until something changes and until the federal legislators move forward and enact an energy policy that gets us off this treadmill, it’s not good news."
Felmy said ga soline demand is strong and prices of crude are between $35 to $36 a barrel, the same as last year. The average U.S. cost for crude oil was 85 cents per gallon last February, two cents less than this year.
Thursday, the national average price for gasoline rose to $1.71, versus $1.68 a year ago. "It’s deja vu all over again," Felmy said.
A cold winter, disruptions in supply from Venezuela and Iraq and an announced cut in production from Organization of Petroleum Exporting Countries are working to cut supply while at the same time a stronger economy increased demand for gasoline between 2 percent and 3 percent, Felmy said.
"If you look at all the states in the United States except the West Coast, from December on, we see crude oil prices have gone up from roughly 70 cents a gallon to around 87 cents a gallon," he said. "At the same time, for all the states on average outside of California, we’re seeing about that increase in gasoline price."
Gasoline in the East Valley averaged $1.99 a gallon Friday, up a penny from Thursday and 38 cents from a month ago, AAA Arizona reported. In Scottsdale, the average price for gasoline was $1.97 a gallon, down nearly 4 cents from Thursday.
AAA spokesman David Cowley said OPEC’s decision created a volatile futures market, driving prices up.
"Nothing is going on particularly, except that we’ve all heard OPEC plans to cut production April 1," he said. "There’s really not much else happening. The first two or three weeks of this rate increase that we have seen, oil didn’t move an inch. It was right at $34.50, which is kind of high, but it didn’t go up. It was all speculation on the futures market."
Prices in western states are more than other states because of the special blend of gasoline that California is required to use, Felmy said. California exports gas to Nevada, Arizona and Oregon.
"The tidal wave that has affected gasoline prices started there and flows out to these other trading partners in the region," Felmy said. "We have always seen a situation where supply and demand are tightly balanced, but with the introduction of a ban on MTBE in gasoline and a required switchover to ethanol, what we see is a fundamental change in terms of some of the supply impacts."
In order to add ethanol and meet clean air requirements, refineries have to reformulate gasoline because ethanol is more volatile than MTBE, Felmy said. The cost to do so is more expensive, he said.
Switches done the last couple of years in March and September are difficult for the industry, Felmy said.
"We don’t have excess storage that we can start producing summer gasoline and put it in a separate tank and then draw down winter gasoline," he said.
Refinery shut-downs only compound the problem, he said.
As a consequence of market factors and switchovers, California and Nevada prices are at record levels. Gas in Los Angeles was selling for an average of $2.20 a gallon Friday. Arizona, Oregon and Washington were closing in on record high prices.
While the gross profit margins for the nation’s 150 refiners have increased this year, Felmy said he didn’t know if they are making more money. Early this year, margins were running around 25 cents a gallon for branded gasoline and they increased to roughly 63 cents a gallon, he said
Breaking it down, the cost for the crude oil is 87 cents a gallon. State and federal taxes add 43 cents a gallon, creating a branded gasoline base cost of $1.30 a gallon. According to the California Energy Commission, 63 cents a gallon goes to refining and 11 cents to distribution and marketing, costs associated with transporting from terminals to gas stations.
Unbranded gasoline costs four cents less to refine and four cents less for distribution and marketing, the energy commission calculated.
This week AAA said retail margins averaged 10 cents last week in major markets such as Phoenix and were less than a penny in Flagstaff.
Felmy dismissed any idea that oil companies are making excessive profits, saying the industry had a profit rate of 6.3 percent in the fourth quarter of 2003, meaning it made between 5 cents and 6 cents per $1 on gas.
He said the overall profit rate for all industries was 6.7 percent.
"The petroleum industry is a low profit industry," he said. "Our profits are big because our companies are big and that’s what catches attention."