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Oil & Gas Journal

Nick Snow
Washington Editor

WASHINGTON, DC, Mar. 31 -- Oil costs, and not refinery turnarounds, are primarily responsible for higher gasoline prices, American Petroleum Institute officials said.

"We have significant gasoline inventories on hand. We also have relatively soft demand. So it's no great surprise that turnarounds are taking place," API Pres. Red Cavaney told reporters during a Mar. 31 teleconference.

Diesel fuel prices may be climbing more rapidly because governments in Europe have created greater demand and imports from there are harder to find, Cavaney said. "The increase from Jan. 1 through [Mar. 28] was 95¢. Unlike gasoline, which is about 20¢/gal less, it seems to be in lock-step with crude," he said.

"You have a tighter market for diesel than for gasoline," added John C. Felmy, API chief economist, who also participated in the teleconference.

Their remarks came 3 days before the Senate Energy and Natural Resources Committee's scheduled hearing to examine whether nonoil institutional investors are influencing crude prices. They also followed a Mar. 26 Consumer Federation of America report which alleged that refiners are performing maintenance now to reduce inventories and increase profits during the summer driving season.

Turnarounds normally take place as refiners deplete inventories of winter fuel blends and before they begin to produce fuels with summer formulations, Felmy explained.

"The reason we've seen increased gasoline prices has been higher crude costs. Refiners' returns aren't good right now. On [Mar. 28], the price of crude was $2.51/gal. Add in about 47¢ for taxes, then consider the costs of refining and distribution, and the profits don't look great," Felmy said.

Unlike 2007, when there were several unplanned US refinery outages, maintenance is following normal seasonal patterns early in 2008, Felmy said. "I think higher prices are starting to have an impact on demand, but the change is at the margin. We learned in the early 1980s that permanent changes occur when consumers change the kind of cars they drive and the number of trips they take. There's no question that fuel's share of total household expenditures has gone up from 4.6% in November 2006 to around 5% now, with gasoline representing about 20-25% of the increase," he said.

He and Cavaney also questioned whether institutional investors are driving oil prices higher. "Alan Greenspan, when he was chairman of the Federal Reserve, said it about as well as anybody. When people buy oil for noncommercial accounts, they provide liquidity for the markets," Cavaney said.

Contact Nick Snow at nicks@pennwell.com.