March in March

Lull before regulatory storm, says Lundberg

CAMARILLO, Calif. -- Self-serve regular gasoline prices lost 6.21 cents on average in the past two weeks. The U.S. average is $2.2407. It is a total of about nine-cents-per-gallon decline since January 20, according to the most recent Lundberg Survey of approximately 7,000 U.S. gas stations.

These five weeks of downward drift are probably a lull before a regulatory storm that will force gasoline prices up at wholesale and retail.

It will force them through several converging [image-nocss] government-driven changes to how finished gasolines are produced and supplied. The U.S. Environmental Protection Agency's lower sulfur in gasoline and ultra-low sulfur in diesel (due Jan. 1, 2006, and June 1, 2006, at the refinery level, respectively) add cost to refining, but it is last year's federal energy bill requiring more ethanol that clinches gasoline's need for a higher price level. Replacing a cheaper additive with a more expensive one will exacerbate, along with lower gasoline sulfur, the ratcheting up of costs that occurs every year with seasonal vapor pressure caps. Already, ethanol is leading the surge in costs as supply tightness has sent buyers scrambling and shot ethanol prices to lofty highs.

Even if crude oil prices retreat below their level before the failed attack in Saudi Arabia last week, gasoline prices will march, probably in March, to the drums of the EPA and the new ethanol mandate.

Adding now to the building price pressure is substantial refining margin shrinkage. Retailers' margins have in the main been normalized down, and the same can be expected of refiners' margins up. Retail margins so far this year are below 2005's, but above 2004's. Meanwhile, refining margin on gasoline so far this year are well below those of the past several years.