Gasoline Price Determinants

Gasoline prices tend to be volatile due to a number of factors ranging from feedstock availability, fundamental supply/demand shifts, plant outages, government taxes and fuel specifications.

The basic costs to produce and deliver gasoline to consumers take into account the following:

From the refinery, gasoline can be shipped via pipeline, barge or truck. There are various markups added along the way, from the wholesale level where the trucks pick up the product, to the retail level where it is pumped into the car. These markups can vary widely, and how much each of the above factors contribute to total costs differs from region to region due to the formulations required to produce different grades of gasoline.

Feedstock availability

Over the last two decades, rapid gasoline price increases have occurred in response to crude oil shortages. In a simplistic correlation of how crude affects gasoline, if refiners cannot make money producing gasoline, among other products, from crude, they will not buy crude. This will result in the price of crude going down until an 'affordable' level for producing gasoline. Conversely, if the refiners can make profits making gasoline, they will bid heavily for crude, driving up the price of crude until it no longer makes any sense to make gasoline. These two act as a balance.

Crude oil prices are determined by worldwide supply and demand, which is heavily influenced by the Organization of Petroleum Exporting Countries (OPEC).

OPEC has the potential to influence oil prices worldwide because its members produce nearly 40% of the world's crude oil and hold close to 70% of the world's estimated crude oil reserves.

When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer "driving season" and then fall in the winter. This traditional "driving season" in the US and Europe often results in increased demand for gasoline and hence higher prices. It has always been during this time of the year when arbitrage opportunities are created as players seek to take advantage of price differentials between the regions.

Supply/Demand

Supply/demand imbalances can also drive gasoline prices both up and down. For example, if demand rises quickly or supply declines unexpectedly due to refinery production problems or lagging imports, gasoline inventories may deplete rapidly. When stocks are low, some wholesalers become concerned that supplies may not be adequate over the short-term and bid higher for available product, pushing prices up.

The price of basic energy, like gasoline, is generally more volatile than other commodity prices as consumers are limited in their ability to substitute fuels when prices fluctuate. Unless the shift towards the use of alternative fuels becomes more pronounced, global reliance on gasoline, as a key source of vehicle fuel, will remain.

Government taxes

As with all other commodity products, government taxes account for a considerable component of the retail price of gasoline.

In the US for example, taxes in 2000 (not including county and local taxes) accounted for approximately 28% of the cost of a gallon of gasoline, according to the Energy Information Administration (EIA). Within this national average, federal excise taxes were about 18.4 cts/gal and state excise taxes averaged 19.96 cts/gal. There are also additional state sales taxes, some of which are applied to the federal and state excise taxes.

Specifications

Gasoline specification changes can also influence product prices. Changes in specifications may alter the way the product is traded. As different refineries produce gasoline with different specifications, consumers may need to seek new sources of gasoline if their current supplier cannot meet tighter product specifications.

Restrictions on the content of the oxygenate MTBE in gasoline will also affect certain imports which may fail to meet the grade due to excessive MTBE content. The US, for example, is in the midst of proceedings to ban the use of MTBE in gasoline.

Gasoline specifications govern odor, color, research octane number density, sulfur content and MTBE content. Different grades of gasoline are produced to serve regional market demand and to meet varying environmental requirements.

 

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