CAMARILLO, Calif. -- The U.S. average retail regular grade price increased 15.08 cents per gallon in the past two weeks, to $3.6245. It has been 31 cents in a month, and 55 cents so far this year, according to the most recentLundberg Survey of approximately 7,000 U.S. gas stations.
In the prior two week change, crude oil starred, this time, mostly from its retail margin recovery, and secondarily a smidgeon to refiner margin recovery.
Retailers will probably give part of that expanded delta between wholesale and retail price [image-nocss] changes back, short term. (In many markets, unbranded rack has been dropping; retailers are under plenty of pressure on the street, to compete for sales, and will cut when they can.) Refiners, however, will probably have a wider margin between crude oil prices and finished product netback, especially for gasoline, soon. (They will have to, or keep some mothballed capacity out of the action.)
Next month, U.S. gasoline demand enters its high three-month plateau. Although demand will not be as robust this year due to price (early 2008 demand is down significantly in some key large consuming states per Lundberg taxable sales databases), its seasonality is alive and well. One of the Lundberg Survey refiner margin calculation methods puts refiner margin on gasoline at under 23 cents per gallon currently, less than one-fifth of its year-ago level and less than half its total calendar-year 2007 level.
Hypothetically, if refiner margin on gasoline made a recovery soon, 25 cents per gallon for example, capacity utilization should crank up and foreign gasoline suppliers would be attracted to augment sales to this market. In this scenario, retail prices might peak within a month, perhaps even decline thereafter. But if demand resistance to price or retaliatory threats by politicians inhibit that margin recovery, gasoline supply tightness just when consumers need the most will make today's retail price look tame.
A better margin for refiners soon would prevent greater retail price hikes than otherwise would occur. Currently, gasoline supply remains slightly above normal. If margin fails to improve, tighter supply will ensue as seasonal demand kicks in, a recipe for pump price shock.
Crude oil's direction from here may obfuscate the refining role in price, but not for long. If crude oil prices drop, retail price hikes will be lesser but refiner margin improvement will be protested. If crude doesn't drop, retail hikes will be greater, and refiners blamed with more venom. More than crude oil producers or gasoline retailers, refiners will be in the spotlight to defend their requirement of profit margin beyond all their costs, which this year include greater volumes of ethanol purchases by government order, adding impetus to cost increases during the lower vapor pressure season—also known as the Summer driving season.
Already some refining capacity expansions have been put on ice due to current and projected future cost increases from the next round of environmental protection regulations and the moving target of the ethanol sales mandate. U.S. dependence on gasoline imports to meet demand is deepening.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.