For three months now, US gasoline stockpiles have been dropping steadily. Nationwide, gasoline prices jumped 10.2 cents a gallon last week to an average of $2.97 and $3.46 around San Francisco.
Last week, US gasoline stockpiles dropped for the 12th straight week by another 1.1 million barrels as US motorists continued to burn up gasoline at a rate 1.6 percent higher than last year. While refinery utilization at 88.3 percent is still well below what is needed to build up stocks for the summer driving season, refiners did manage to produce another 300,000 barrels of gasoline per day which reduced the pace at which gasoline stockpiles have been dropping; 1 million barrels last week vs. the 4 million barrels per week we saw earlier last month. US imports remained the same last week at 1.2 million barrels per day, also well below the 1.5-1.6 required to build up stockpiles for the summer.
As has been the case for many weeks, gasoline consumption continues to run above last year, a series of refining problems have kept gasoline output well below the utilization needed to build stockpiles, and the US seems to be unable to find enough refined gasoline on the world markets to make up the difference.
There are several underlying problems behind the growing shortfalls, none of which seem susceptible to immediate solution. The automobile is so deeply imbedded into our lifestyles that gasoline will have to go much higher – some say $6+ a gallon - before there will be any significant slackening in demand. Sales of gas-guzzlers probably will continue to drop, but major changes in lifestyles will not come until actual gasoline shortages and gas lines develop. Here in America, there are simply too many other ways to save money before we cut back on driving.
The fundamental problem in keeping the refineries working is that they are simply being pushed too hard. Twenty years ago US refineries were run at an average 78 percent of rated capacity and all was well. Now they need to be operated at close to 95 percent of capacity to keep up with increased summer demand. Moreover, there is a growing shortage of the experienced personnel needed to overhaul our refineries and they are becoming more complex as a result of the need to process more of the heavy sour crude oil that is an increasing share of what is available for import.
There is no lack of incentive for refineries to produce gasoline. Refinery profit margins have been rising along with pump prices. Refiners made an average of $15.75 per barrel in the first quarter, more than 30 percent higher than last year. In fact, the profitability of refining causes many observers to believe that the production shortfall will end soon. Although considerable new refinery capacity in the US is planned and under construction, it will have no bearing on the immediate situation.
Imported gasoline, which makes up the difference between the roughly 8.5 million barrels of gasoline we refine each day and the 9.5 million we burn, is also in short supply. European refiners have shifted more production to diesel fuel as European motorists buy the higher fuel efficiency that diesel-powered cars provide. Imports are running about 12 percent below year-ago levels.
As we enter May, the key question is whether there will be time for refiners to catch up to be ahead of summer demand or whether we will see much higher prices and shortages later this year. Spot shortages have already developed around Denver and in Iowa, but industry spokesman say these are minor distribution glitches.
Earlier this week, Energy Secretary Bodman said he feared surging gasoline prices will reach a record high, but he remains “reasonably confident" the market will respond to the high prices with new supply. The head of ConocoPhillips, however, recently said he is concerned about the refining industry's ability to meet growing demands for gasoline.
The Secretary of Energy, of course, has a special responsibility not to spook the public into panic buying. Nothing would exacerbate a gasoline shortage problem worse than having a substantial portion of America’s 200 million motorists rush out to gas stations and fill every available container in anticipation of shortages. Thus when the secretary says the supply picture ahead of the high-demand summer driving season has yet to require any special federal government response, the comments have to be taken within this context. "It's not something we are going to undertake any kind of emergency activity on," the secretary said. "I'm not considering doing anything."
All this leaves us in a basically unchanged situation. Although the rate of decline dropped last week, the decline continues at a pace that eventually will lead to much higher prices and shortages. A major point to keep in mind is that the geopolitical/weather situation is relatively calm at the minute. There are still at least half a dozen major threats to our oil imports out there, waiting to happen.
In the meantime, the struggle among demand, prices, refining, and imports will continue. Every Wednesday morning the Department of Energy will update the score card and the picture of how much longer we can all continue business as usual will become a little clearer.