Pump price of gasoline breaks loose from crude

Disconnection temporary, economists say, with tight supply, higher cost ahead

August 20, 2004|By Paul Adams and Lorraine Mirabella | Paul Adams and Lorraine Mirabella,SUN STAFF

A few months ago, a barrel of crude oil was selling for $42, the cost of regular gasoline soared to more than $2 a gallon and consumers were told to pry open their wallets because expensive fuel was here to stay.

Today, oil is selling for nearly $49 a barrel, while the price at the pump is down to a more comfortable $1.88 a gallon.

The numbers seem to defy logic. But oil industry experts and economists say the disconnect between the price at the pump and the record price of crude is the result of quirks in the laws of supply and demand that are working their way through the distribution chain.

Despite worldwide jitters about a disruption in oil supplies, stocks of refined gasoline are higher than they have been in a year, which is one reason prices have stayed relatively low despite the speculative frenzy that is driving up crude oil futures.

But economists warn this might be a temporary reprieve from the growing threat of an energy crisis that some say is already creating a drag on economic growth worldwide.

While most say the current prices are irrationally high, global crude oil production is barely meeting demand, and the potential for supply disruptions remains real as a result of political instability in major oil-producing countries.

In other words, the high gas prices that consumers saw last spring are threatening to return, raising the possibility of rising inflation and slackening economic growth.

"Our sense is the market is legitimately concerned about higher energy prices broadly and, more importantly, very concerned how sustainably prices remain high," said Jack Caffrey, an equities strategist with JP Morgan Private Bank.

"More often than not lately, you see people talking about higher prices for longer."

Record high crude

Crude oil for September delivery reached $48.90 on the New York Mercantile Exchange yesterday, the highest since oil futures began trading in New York in 1983.

Although prices have reached record highs as measured in 2004 dollars, they fall short of prices in 1990 leading up to the Persian Gulf war, when prices soared to the equivalent of $57 per barrel in current dollars.

The price of crude oil, which accounts for nearly half of the retail price of gasoline, typically influences consumers' costs at the pumps. A $1-per-barrel increase or decrease in crude usually equates to 2.38 cents, up or down, per gallon of gas.

Put another way, a $4 bump in the price of crude would mean about an extra dime a gallon at the pumps.

Complicating factors

But that relationship can be thrown out of whack by seasonal demand, the amount of inventory in stock, the availability of imported gas and problems with refineries and pipelines, analysts said yesterday.

"In terms of the gasoline, it's a separate market, and the futures price for unleaded gasoline has been quite volatile of late," said Marshall Steeves, an energy analyst with Refco Group Ltd. in New York.

"Futures had been going up in concert with crude oil prices, but they detached from each other in July."

At the start of the high-demand summer driving season this year, gasoline inventories were low as repair work took some refineries out of production.

Concern was mounting about whether refiners could keep up with increased demand and new fuel blend requirements in some states, as well as whether adequate imports could be shipped.

Those fears drove up the price of gasoline.

"When gas inventories were low, the price of gas started to rise as speculators basically bought up futures contracts in expectation there wouldn't be enough gasoline supply in the summer," Steeves said.

"People get jittery in the spring and bid up prices. That contributed to the improvement in margins. The margins for refiners were pretty good, and we saw refinery utilization rates go way up."

By May, the price of regular, unleaded gas shot over $2 per gallon, peaking at $2.06 nationally.

"It had nothing to do with crude oil; crude was still in the cost of it, but crude wasn't that high at the time," said James L. Williams, of WTRG Economics, oil and natural gas market forecasters based in London, Ark.

Rising inventories

Over the summer, as import levels rose and refineries managed to dodge major problems, gasoline inventories grew.

"Those pre-summer worries about gas supplies dissipated in mid-July," causing gas prices, relative to crude, to drop sharply, said Michael Burdette, a senior analyst at the Energy Information Agency.

"At the same time, crude was rising but we had the margin of spot gas over crude coming down faster than crude was going up, so the refiners' profits were coming down faster than crude was going up."

"It's just fortunate for the consumer that the declining gas margins occurred at the same time, or we would have seen gas prices shoot up along with crude oil," Burdette said.

In less than two months, the price of crude oil has shot up $13 per barrel.

Economic warnings

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