BUSINESS WEEK ONLINE
June 15, 2000
America Feels the Pain at the Pumps
But some areas feel it worse, thanks to differing regional gasoline formulations
At some point this weekend, if it hasn't happened already, some poor sap in the Chicago area is going to pull his sport-utility vehicle into a gas station. He'll fill his 42-gallon tank with premium gasoline and hand the clerk a $100 bill. And he won't get any change.
The $100 tank is a reality thanks to a huge spike in gasoline prices in parts of the Upper Midwest. In Chicago, regular unleaded gasoline has topped $2.30 a gallon. Thanks largely to those markets, the national average hit a record $1.66 a gallon in mid-June. But even though most of the country is paying more than it was just a few weeks ago, some states are enjoying a slight reprieve.
The average price of gasoline in the seven Western-most states slid 4% in the last month and a half, to a below-the-national-average $1.63 a gallon. States like California and Hawaii that have traditionally led the nation in gas prices now see others capturing that dubious distinction. California's recent average price of $1.66 per gallon puts it just 10th in the nation.
What's happening, say oil-industry analysts and refiners, is that structural changes in the way gasoline is refined and distributed in the U.S. are being highlighted by the huge run-up in crude-oil prices (see BW Online, 6/13/00, "OPEC's Inaction Shows the Cartel Is No Central Bank"). In the future, individual markets will see prices spike more steeply than in the past. Regional pricing differences may widen.
LOCAL VARIETIES. One major structural change is that the refining industry, like much of manufacturing, now operates in a just-in-time fashion. Gasoline production continues to hit new records in the U.S., but crude-oil inventories have not grown accordingly. This is exacerbated by the high prices of crude. With prices lower in the futures market, refiners are naturally reluctant to stockpile high-priced inventory today.
That's why crude-oil inventories are down 11% in the last year, to 300 million barrels, and gasoline inventories have shrunk 9%, to 203 million barrels. The number of days' worth of fuel refiners keep on hand has shrunk to 22 days, from 26 last year, according to Deutsche Banc Alex. Brown oil analyst Adam E. Sieminski.
Another major shift is the introduction of cleaner-burning gasoline. The latest standards for reformulated gasoline took effect in roughly one-third of the country on June 1. Refiners say regional differences in formulas raise costs and lead to shortages, as is currently the case in the Midwest. Citgo Petroleum Corp., one of the nation's largest refiners, notes that it must produce nine different formulas for gasoline this summer just in the Eastern states in which it operates.
On top of federal regulations, Georgia mandates that lower-vapor pressure gasoline be sold in Atlanta. Minnesota requires corn-based ethanol be used in its fuel. The city of El Paso has different gasoline requirements than does East Texas.
STRAINED SYSTEM. A recent study of California's gasoline market conducted by the U.S. General Accounting Office illustrates the problem. The Golden State might as well be an island. In March, 1996, California introduced its own less-polluting form of reformulated gasoline, which boasts the most stringent requirements in the nation. Stricter environmental regulations and more efficiencies at large refineries forced 23 of the state's 43 refineries to close since 1982. Meanwhile, California's gasoline demand continued to climb.
Now, whenever there's a problem at one of the state's refineries, demand cannot easily be met from other sources. No gasoline pipelines enter the state. Out-of-state refineries must reconfigure their plants to produce California-style gas and ship it by water to the market. In fact, the uproar from a refinery-induced price spike in California earlier this year nearly squashed BP Amoco's merger with the Atlantic Richfield Co.
A similar regional-supply-induced price spike is exactly what's happening in the Midwest. Two gasoline pipelines and a refinery in the region were put out of commission temporarily in recent months. "The system is being strained," says Urvan Sterfels, president of the American Petrochemical & Refiners Assn. "Anytime you have a pipeline break or a refinery down, you're going to see prices spike."
GAS ACTIVIST. That's little comfort to the people in the regions that are getting pinched. Darlene Lundin is a 51-year-old resident of Deer Park, Ill. She figures that she and her husband, both traveling insurance salespeople, are now spending an extra $40 a month filing up their cars. Prices have gotten so high in the Chicago area recently that Lundin slipped an extra $20 into her mother's wallet just to make sure the retiree could afford to keep driving her friends to the supermarket.
"I'm hoping our Illinois legislators realize we'll vote them out at the polls," Lundin says. "People are not going to be held hostage by these prices. I'll become an activist if I have to." She may have to.
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