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The Price of Gasoline Trends and Open Research Questions.ppt

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					The Price of Gasoline:
Trends and Open
Research Questions
Chris Decker, PhD
University of Nebraska Omaha
MBAA – March 31, 2006

                               1
Gasoline prices and consumer expenditures
                                     Average annual growth       Share of income   ch. in

                                 1990-2005 1990-2000 2000-2005   1990      2005    share

Personal Income (nominal)          5.07      5.62       3.99
Selected Consumer expenditure
    Categories (nominal):
 Motor vehicles and parts          5.07      6.15       2.94     4.36      4.36    0.00
 Furniture and household
   equipment                       5.32      6.19       3.59     3.52      3.64    0.12
 Food (grocery and restaurant)     4.42      3.81       5.67     13.05    11.89    -1.16
 Clothing and shoes                3.57      3.85       3.02     4.18      3.37    -0.81
 Gasoline and oil                  6.53      4.68       10.34    2.08      2.80    0.72
 Electricity and gas               4.74      3.56       7.14     2.07      1.97    -0.10
 Other household operation         5.46      6.94       2.56     2.59      2.73    0.15
 Transportation                    5.31      7.03       1.97     3.03      3.13    0.11
 Medical care                      6.88      6.33       8.01     11.40    14.73    3.33
 Recreation                        7.16      7.86       5.78     2.88      3.07    0.19
                                                                                      2
Components of the retail price of gasoline

                  Average price 2001-05, $1.69
                         dist&mkt,
                         3.35%
                                                 taxes, 22.39%
 refinery cost,
 29.19%




                                       crude oil,
                                       44.64%
                                                                 3
    The price of crude oil is determined in a
    world market of which the US is a major
    consumer
             Production (thousand bpd)                          Consumption (thousand bpd)
                 2005      %GR 1990- %GR                             2005    %GR 1990-     %GR
                             1999      2000-2005                                1999     2000-2005
World           84,079.12        1.33         1.97   World         83,728.36        1.44        2.13
United States    8,249.01       -0.81        -2.31   United States 20,638.89        1.55        1.24
OPEC            33,954.71        2.32         0.27   China          6,865.11        7.39        8.70
Non-OPEC        50,124.42        0.65         3.20

                 Market Balance
                Prod       Cons     Difference
1994-1999     435,607.84 433,827.03    1,780.81
2000-2005     479,210.67 479,418.89     -208.22




                                                                                               4
With such a tight market, and a low elasticity
of supply, good energy (crude oil, natural
gas, etc.) demand projections are critical
          Energy consumption forecast vs. actual
        average annual growth rates - IEA (1999-2005)

        6.00
        5.00       actual      forecast (2001)
        4.00
        3.00
        2.00
        1.00
        0.00
               World   North      US       West    Asia   China
                        Am                Europe


                                                                  5
      Crude oil demand projections vs. actual off
      as well…
                    2004 predicted vs forecast crude oil demand
                         (forecast constructed by IEA: 2001)
       1.00
       0.80          actual      forecast
       0.60
MBD




       0.40
       0.20
       0.00
      -0.20
              US




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                                                                                                   6
Also, with such a tight market, any crude oil
supply disruptions will impact the market
   Geo-political events
      2004 – Basra Oil Terminal bombed (90% of Iraq’s crude oil exports ship through
       here).
      February 2006 – attempted bombing of Saudi Arabia oil facilities sent crude oil
       price up $2.00 to $63.00.
   Labor stoppages
      2004 Norway (a major oil exporter) experienced labor strikes, shutting down
       375,000 bpd of production in June and another 300,000 bpd in October.
      2004-2005 – Strikes in Venezuela disrupted oil flows to US (particularly Texas).
   Natural disasters
        2004 Hurricanes Charlie, Frances and Ivan.
        2005 Hurricanes Katrina, Rita.
        Stopped shipping of crude extracted in the gulf coast and destroyed refinery and
         inland shipping capacity.
   Strains on shipping capacity
      (according to Federal Trade Commission) Tanker fleets have not kept up with
       increased demand for oil worldwide.
      Significant amount of (environmental) regulation linked to tanker construction.

                                                                                          7
Given such conditions, futures traders are
able to bid up prices for future deliveries of
crude
                Entering the hurricane season again.
                Increased international political instability.
                Spot prices tend to closely track futures prices.

                                           WTI Crude Oil Price


                70
                60
                50
 $ per barrel




                40
                30
                20
                10
                 0
                1986:1           1991:1           1996:1             2001:1   2006:1
                                                                                       8
Gasoline demand in the United States
       % growth in gasoline demand (thousand gpd)
             1991-1995 1996-2000 2001-2005

                                      1.09                                4.25                        5.05
                                               gasoline sales (all grades)
                                                     thousand gpd


  410000
  390000
  370000
  350000
  330000
  310000
  290000
  270000
           Jan-90
                    Jan-91
                             Jan-92
                                      Jan-93
                                               Jan-94
                                                        Jan-95
                                                                 Jan-96
                                                                           Jan-97
                                                                                    Jan-98
                                                                                             Jan-99
                                                                                                      Jan-00
                                                                                                               Jan-01
                                                                                                                        Jan-02
                                                                                                                                 Jan-03
                                                                                                                                          Jan-04
                                                                                                                                                   Jan-05
                                                                                                                                                            9
Refinery capacity utilization in the United
States
                                       Refinery Operation

  18000
  17000
  16000
  15000
  14000
  13000
  12000
  11000
          1/


                       1/


                                    1/


                                                 1/



                                                              1/


                                                                           1/


                                                                                        1/


                                                                                                     1/
             1/


                          1/


                                       1/


                                                    1/



                                                                 1/


                                                                              1/


                                                                                           1/


                                                                                                        1/
                19


                             19


                                          19


                                                       19



                                                                    19


                                                                                 20


                                                                                              20


                                                                                                           20
                  85


                               88


                                            91


                                                         94



                                                                      97


                                                                                   00


                                                                                                03


                                                                                                             06
                                        utilization           capacity
                                                                                                             10
Utilization rate
   Averaged 93 % since 1995.
   Averaged 91 % since 2000.
   Capacity may not be the main issue with rising prices.

                                       Capacity Utilization Rate

    100
    95
    90
    85
    80
    75
          11              1/               2/           3/           4/           6/
             /24             2/               10           21           29           7/
                 /1             19              /1           /1           /2            20
                    98            89              99           99           00            05
                      4                             3            7            1


                                                                                               11
    Increases in crude oil prices and refinery
    markups are the major contributors to gas
    price increases

                                          The Composition of Gas prices
     refiner's acquisition   refinery markup    distribution and        taxes   price
      price of crude oil                           marketing
1995          0.41                 0.35               0.01               0.37   1.15
2000          0.67                 0.43               0.00               0.39   1.49
2005          1.12                 0.69               0.02               0.38   2.21
                                                   % growth
95-00        63.87               21.99              -71.14               4.53   30.18
00-05        66.60               60.01              363.72              -1.48   47.94




                                                                                        12
Why the increased refinery markup?
   Increased gasoline demand
        Benefited crude oil markets as well as refinery markups.
   Substantial merger and acquisition in the petroleum refining industry
        GAO reports 2,600 mergers have occurred in the industry since 1990.
        Most vertical in nature but some large horizontal ones:
             1996 – Shell and Motiva, Ultramar and Diamond Shamrock
             1997 – Tosco and Unocal, UltramarDiamondShamrock and Total (Valero)
             1998 – BP and Amaco, Marathon and Ashland Petroleum
             1999 - Exxon and Mobil
             2000 – BPAmaco and Arco
             2001 – Chevron and Texaco, Phillips and Tosco, UDS and Valero
             2002 - Conoco and Phillips
        GAO estimates this may account for a 2-7 cent increase per gallon on
         average (wholesale price).
   Caution: mergers may increase prices but can also lead to scale
    economies
        FTC ruled in a few cases that the merger would be allowed if the new
         company divested substantial amts of its combined capital assets.
                                                                                    13
Available fuel inventories declining
   Inventories can be costly to hold.
   Industry has made efforts over time to reduce inventories.
   But inventories smooth unanticipated supply and demand shocks.

                     inventories to sales (finished gasoline) (%)


       70
       65
       60
       55
       50
       45
       40
       35
       30
        Jan-90   Jan-93       Jan-96        Jan-99        Jan-02    Jan-05
                                                                             14
Inventories down across a number of fuel
types

   Gasoline:                down 17.4% from 2001 levels
   Reformulated Gasoline:   down 58.8% from 2001 levels
   Diesel fuel:             down 7.2% from 2001 levels
   Home heating fuel:       down 10.3% from 2001 levels




                                                           15
Energy & Environmental Policy and
Regulation
   Since last year’s energy bill (July 2005) did not
    grant liability protection against MTBE lawsuits,
    US refiners will halt the use of MTBE.
   Increased demand on other oxygen fuel
    additives, notably ethanol.
   Note: MTBE has already been phased down or
    banned in many states – inventories have been
    down substantially (down 75 % from 1993 levels).


                                                   16
Ethanol
   Good news
       ethanol inventories have been increasing, from 4.3 mbd in 2000 to
        6.0 mbd in 2005 (39 % increase).
       existing production has kept pace with state demands as these states
        have phased out MTBE.
   Bad news
       substantial increases in demand will likely strain existing ethanol
        productive capacity.
       Proposed production of FLEX FUELS (E85) by Ford and GM could
        substantially strain ethanol capacity.
       Transportation of ethanol must be done by tanker truck, barge and/or
        rail (not pipeline) which tends to 1) be more expensive and 2) takes
        more time to get to refinery destination. Also, ethanol must be stored
        separately and blended just prior to final product distribution.
       More corn used to make ethanol means less corn for live-stock feed,
        suggesting beef prices could increase as well.
   Net effect
       not immediately obvious however, there is good reason for concern.
                                                                        17
Why the general and sustained increase in
gasoline prices?
   Current crude oil “spike” unlike previous price
    spikes:
     1973 – OPEC oil embargo – supply side.
     1980 – Iran/Iraq war – supply side.
     1990 – Gulf war – supply side.
     2000 – sustained increase in world demand.
   Greater than anticipated world demand for crude
    oil and refined energy products.
     The  “miss” on Asian (Chinese) demand likely resulted
      in fewer refinery capacity additions and lower
      exploration and development rates.
     Strains on existing world productive capacity.
                                                          18
Why the general and sustained increase in
gasoline prices?
   Refinery markups increasing
       More consolidation, less competition.
   US Energy policy and regulations.
       MTBE phase out at the national level. Increased reliance on
        ethanol.
   Relatively tight refinery capacity combined with dwindling
    fuel inventories.
       More susceptible to planned inventory maintenance (usually in the
        fall and spring).
       Greater price increases when refineries switch productive mix to
        special (cleaner burning) fuel blends (usually in the spring).
       More susceptible to unplanned production/distribution disruptions.
            Texas, March 25, 2005 – major supply disruption.
            2005 Hurricanes – Gulf coast accounts for 30-40 % of gasoline
             production in the US.
                                                                             19
A number of puzzles remain…
   Why the poor demand projections, particularly
    for Asia and China?
       China’s economy has been growing for years now.
       Historically strong statistical link between GDP growth and
        energy demand.
       Improvement in demand forecasts critical for more accurate
        crude oil price forecasts.
       Guides exploration, production, refining, and alternative fuels
        planning and investment.




                                                                          20
Puzzles…
                     Change in gasoline price (cents per gallon)
                      Average decline        Average increase
    1990-2005               -4.8                    7.8
    2000-2005               -7.4                   10.5

   Prices tend to increase much more quickly than
    they fall, leading to average increases in prices.
    Why?
       Inventories build and decline, as do crude oil prices. Why then
        don’t gas prices fall as quickly and to the same extent as they
        increase.
       Oligopoly behavior
       Search behavior

                                                                          21
Puzzles…
                          Gasoline price ($ per gallon)
              period                 mean             standard deviation
             1990-1994                  1.13                     0.08
             1995-1999                  1.17                     0.09
             2000-2005                  1.69                     0.37
   Why has the volatility of gasoline prices
    increased so much recently?
       Major puzzle – oligopolies are usually characterized by relatively
        stable prices!
       Geo-political uncertainty, fear of unanticipated supply disruptions
       Tightening inventories.
            To meet unanticipated increases in demand or to counter
             unexpected supply disruptions, firms may draw down inventories
             rather than increase price. However, if inventories are low and
             falling, price changes may be more frequent.
                                                                               22
Preliminary Regression…

Preliminary results suggest inventory levels play a major role in
stabilizing prices:




                                                                    23

				
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