Washington (Platts)--18Jan2008

International trade in petroleum products, which has expanded
significantly over the past two decades, has provided access to more sources
of supply for the US, but can also have an adverse effect on domestic prices,
the Government Accountability Office said in a report released Friday.

"The benefit of flexibility in sources of supply helped US marketers and
retail sellers obtain gasoline and other petroleum products in the aftermath
of Hurricanes Katrina and Rita, when imports of gasoline to the US increased
to fill the void left by damaged or shut-down domestic refineries and
pipelines," the report said. "However, the fact that petroleum product markets
are international means that supply disruptions or unexpected increases in
demand anywhere in the world can influence US prices."

The report also said that plans and mandates in the US and other
countries to greatly expand the use of biofuels blended with petroleum
products "may have the unintended effect of reducing opportunities for trade
because blending different levels of biofuels with petroleum blending stocks
will require changes to these blending stocks and thereby reduce fungibility."

If European counties adopt widely different blending levels, refineries
serving these countries will have to alter petroleum blending stocks "and this
could make blending stocks themselves less tradable across countries."

The report also sited the "systemic lack of pipeline capacity in the
supply infrastructure system in key states including Arizona, California,
Colorado and Nevada." The existing supply infrastructure "is insufficient to
carry the commensurate volumes of petroleum products and crude oil needed to
meet growing demand there."

Congress directed the departments of Energy and Transportation to study
the extent of infrastructure inadequacy, but to date no such analysis has been
undertaken, GAO said.

Congress failed to allocate fund specifically to do the study, and the
agencies have not reallocated other funds to do the work. Congress directed
that the study be submitted by June 2008. "However, given that the study has
not begun, it seems highly unlikely that the agencies will be able to meet
their deadline," GAO said.

GAO recommended that when the agencies do embark on such a study, they
"evaluate the feasibility and desirability of designating a lead federal
agency, with authority to convey the power of eminent domain, to coordinate
across agencies and streamline the permitting and siting process" for
interstate oil and refined products projects, using the role performed by the
Federal Energy Regulatory Commission in interstate natural gas pipeline
permitting as a model.

--Gerald Karey, gerry_karey@platts.com