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What’s pressuring gas prices?

Posted By Barry Ritholtz On March 24, 2004 @ 5:25 am In Finance | Comments Disabled

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Terrific center page pullout in Newsday (which I do not regularly read) looking at what’s causing gasoline prices to rise. Prices now average $1.77 a gallon. (Some predictions are for $3+ by this summer).

What’s causing the spike in crude prices are a combination of factors, beginning with rising demand and tight supply around the world.

Here’s Newsday’s look at “potential choke points in the pipeline”

1. WELLS
Oil flows from wells in the United States or abroad, through pipelines or via tankers to refineries. Transport takes about a week from Venezuela, two weeks from North Sea or Africa, 45 days from Middle East. The price can change while oil is in transit.

PRESSURE POINTS
Restricted supply. OPEC had planned to cut production by 1 million barrels a day April 1 to keep prices high but officials from two member countries, Quatar and Venezuala were quoted as saying that the cut might be postponed. OPEC also is attempting to crack down on “cheating” by member states but experts expect cheating to continue amid temptation of high prices.

Rising international demand. The United States remains the world’s biggest energy consumer, accounting for a quarter of world consumption. But China’s usage has nearly doubled since 1990, thanks to its growing economy.

Unstable imports. The United States has become increasingly dependent on imported crude oil and finished products from unstable areas of the world. Imports accounted for just over half of total needs in 2002, and are projected to reach 70 percent in 2025.

Iraq’s cutbacks. Although Iraq production has rebounded to its pre-invasion level, it still is well below its peak during the 1990s.

2. REFINERIES
The refining process takes a few hours, then anywhere from several days to more than a month for shipment to storage terminals on the East Coast, depending upon whether the refinery is in the Northeast, Gulf Coast or abroad.

PRESSURE POINTSCapacity shortage. At 16 million barrels per day, U.S. capacity is about two million barrels per day lower than 20 years ago. Many small refineries closed during the 1980s because they couldn’t meet new federal and state environmental regulations. That shortage, in turn, has required importing of more finished products such as gasoline, which, because of transit time, makes it more difficult to respond to spot regional shortages. Some offshore refineries cannot produce gasoline that meets the latest U.S. environmental requirements.

3. DISTRIBUTION
From U.S. or offshore refineries, gasoline is shipped to terminals by pipeline for longer distances, taking three to five days; by tanker if coming from offshore; and unloaded at tank farms in New York Harbor or on Long Island.

PRESSURE POINTS
Environmental rules. Increasingly stringent federal and state laws enacted since 1990 require 16 types of gasoline of each octane level. They vary seasonally and regionally, and thus cannot be used to alleviate local shortages. New this year are national requirements for lower sulfur and bans in California, New York and Connecticut of MTBE, a clean air additive now believed polluting groundwater. Ethanol is being substituted for MTBE, but a different type of gasoline using more crude oil is required to accept the ethanol. Summer gasoline is more difficult and expensive to produce with ethanol instead of MTBE.

4. THE PUMP
Despite rising prices, an improving economy and warming weather are increasing consumer demand.

PRESSURE POINTS
Consumer demand. Despite conservation efforts since the first oil shock of the 1970s, U.S. demand for petroleum has risen steadily, by 35 percent since 1975. The main reason is fuel economy of cars and trucks. Average fuel economy of vehicles has been dropping almost every year since topping out at 25.6 miles per gallon in 1991 because of the popularity of sport utility vehicles and other light trucks. Average was 25 mpg last year, a slight increase from 2002 as smaller, more efficient SUVs grew in popularity.

Tax breaks for guzzlers. Under tax relief law signed by President George W. Bush last year, business owners and the self-employed can deduct the purchase of many full-size SUVs, pickups and vans costing up to $100,000. The limit had been $25,000.

Good stuff from Newsday . . .

Source:
The Fold: Rising Gasoline Prices [1]
By Tom Incantaluop
Newsday, March 23, 2004

http://www.newsday.com/mynews/ny-i3719932mar23,0,1347112.story


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[1] The Fold: Rising Gasoline Prices: http://www.newsday.com/mynews/ny i3719932mar23,0,1347112.story

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