CAMARILLO, Calif. -- The U.S. average regular grade gasoline price is $2.9330a tiny two-hundredths of one penny above its May 19 level. Further, the average price has fluctuated comparatively little over eight weeks, according to the most recent Lundberg Survey of approximately 7,000 U.S. gas stations.
Prices ceased their steep upward climb mostly because supply is up and demand is not, and because of the near-complete passthrough of new government-driven costs. The result is a close supply-demand [image-nocss] balance and eight weeks of relative price stability.
Supply: return of most of the U.S. refining capacity from 2005 hurricane damage and 2006 pre-summer work projects; and good import volumes.
Cost pass-through: It appears that refiners have passed through the bulk of new 2006 costsblending with ethanol instead of methyl tertiary butyl ether (MTBE), lowering gasoline sulfur, costing out the unprecedented costs of the new ultra-low-sulfur diesel fuel; and achieving spring vapor pressure caps under those conditions.
Demand: not growing of late, due to price. The higher prices have been effective incentives for refiners to return to high-capacity use, foreign suppliers to send much-needed imports and consumer demand to sit flat.
Assuming no oil price surge or hit to downstream U.S. infrastructure, gasoline prices may have downward pressure in coming weeks. Oil prices, which could well fall as world demand sinks seasonally, are also propped up by petro-politics, as the oil market does not seem to put much credence in Iran's effort to appear as a diplomatic negotiator.
Margins do not hold much potential for big retail gasoline price cuts, either. Margins at both the refining and the retailing level slimmed somewhat of late, remain flush compared to some prior years, but must be wide enough to reflect 2006 conditions. Too few observers outside the industry are aware that the ethanol sales mandate and ULSD are adding costs and headaches beyond the refinery gate, raising the cost of doing business not only for refiners but for transporters, distributors, marketers and retailers.
While it appears that much of the new costs have been passed through to the consumer, some will be ongoing, and higher to some refiners and retailers than to others. Spot ethanol prices currently average around $3.52 per gallon and as of 2006 are a bigger high-cost variable affecting gasoline prices. Political and public watchdog finger-pointing and accusations concerning retail pricemore of which can be expected in the futurewill almost certainly fail to take such government-mandated higher costs into account.
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