Blast Gives Gas Price Ladder New Rung - Low Supplies, Uncertainty Reflected at the Pump

www.washingtonpost.com By Peter Behr Washington Post Staff Writer Saturday, February 22, 2003; Page E01

In the minutes after several million gallons of gasoline exploded over Staten Island yesterday, energy traders in Manhattan began hitting the "buy" button: Get gasoline now. It will cost even more later.

Traders, fuel dealers, importers, refiners and speculators swapped gasoline contracts back and forth yesterday, with a total of 2 billion gallons changing hands on the New York Mercantile Exchange. The wholesale price for delivery in March climbed nearly 5 percent, to $1.01 a gallon.

Yesterday's trading prices will begin showing up at East Coast gasoline pumps in a few weeks or even days, continuing a relentless upward march of prices rooted in both reality and emotion.

For gasoline, heating oil and natural gas, the story is the same: The nation has come to the verge of war in the Persian Gulf with crucial energy inventories at very low levels and traders reacting at hair-trigger speed to any supply disruption.

Around the Washington region, the cost of premium gasoline topped $2 a gallon at some service stations this week -- the highest it has gone in 20 months. Prices for regular gasoline reached a nationwide average of $1.66 a gallon, up 54 cents from a year ago, the Energy Information Administration reported.

At Mahesh Tanna's Exxon Mobil service station in Rosslyn, just outside the District, premium gasoline had been marked up to $2.08 a gallon yesterday and regular was going for $1.76.

Tanna has operated the station for a dozen years -- selling Gulf gasoline, then Chevron brands, now Exxon Mobil. As he sees it, the higher gasoline prices have tracked the rise in crude oil over the past half year, step for step.

"The price depends on the barrel price of the oil. The barrel price is up because of the war situation," Tanna said.

His higher pump prices, triggered by higher fuel costs from Exxon Mobil, haven't deterred many customers, he said. "People know the reason."

The simplest explanation for higher gasoline prices is the worldwide increase in crude oil prices, said John Felmy, policy director of the American Petroleum Institute, an industry lobbying organization. Over the past 10 weeks, oil prices have climbed about 30 cents a gallon. So have average gasoline prices.

Crude oil prices have risen because of concerns about the Iraq crisis and because of declining inventories of oil and fuel products around the world -- and particularly in the United States.

A siege of severe arctic weather has drained heating fuels in this country and Europe. A strike at Venezuelan oil fields that began in December deprived U.S. refiners of 10 percent of their supplies. Deliveries from Venezuela are just starting to recover.

These shocks have hit a cautious worldwide energy industry that has held back on expansion of refineries and drilling projects, particularly following the collapse of oil prices in 2001. With profits and stock prices depressed, most energy companies are reluctant to increase investments at a time of gyrating oil prices and rising exploration costs, analysts said.

It is getting harder and harder to find new oil reserves that can be lifted, refined into gasoline or heating oil and sold at a price that meets companies' profit targets, said Steven Pfeifer, global oil research coordinator at Merrill Lynch. Most companies aren't giving ground on their profit goals.

The result is that oil and fuel inventories -- both in the United States and other major industrial nations -- are at the bottom of normal ranges for the past five years, the EIA reports. "We don't see inventories getting back to normal levels until 2004," Pfeifer said.

"It is a very tightly stretched system," said Doug MacIntyre, a senior market analyst with the federal Energy Information Administration. "It doesn't take too many problems to cause a ripple effect."

When gasoline inventories are full, competition takes over. That is what happened a year ago, and the U.S. price for regular gasoline averaged just $1.13 a gallon from December 2001 to February 2002.

But when inventories are stretched very thin, as they are now, the day-to-day energy prices vibrate according to the strategies and hunches of traders, companies, investors and speculators.

Some industry critics, such as Sen. Carl M. Levin (D-Mich.), think that Congress should consider requiring oil companies to maintain minimum inventory levels, to prevent shortage conditions that lead to price spikes on gasoline and fuel oil. But that proposal is not gathering support.

Some market observers say that energy companies could show more restraint.

"Right now, it's a very speculative market," said Mantill Williams, spokesman for the national AAA organization. Current gasoline prices are the highest for any February on record. "Motorists are paying for that speculation. We've been asking companies to show some restraint in pricing their products and take the consumer into account," he said.

But EIA's MacIntyre replies that for now and the foreseeable future, consumers are stuck with a market where demand is running ahead of supply. "Gasoline stations are going to charge what the market will bear. If another gasoline station in the neighborhood raises prices, they can too," MacIntyre said.

Within two miles of Tanna's Rosslyn station, other stations' prices for regular gasoline fluctuated from $1.59 a gallon to $1.70 depending on location. But all were much higher than a year ago.

The balance won't go the other way until the Iraq crisis is resolved and inventories of oil and fuels are rebuilt, MacIntyre said. When that will happen is just another of the unanswered questions hanging over energy markets and consumers.