Oil's 'perfect storm' buffets Del. motorists

www.delawareonline.com By MAUREEN MILFORD Staff reporter 03/08/2003

Delaware motorists, small business owners and independent gas-station operators are being battered by what petroleum experts are calling the "perfect storm" in the gasoline industry.

Several key forces that contribute to retail gas prices - from the flow of crude oil to the demand for heating oil - have converged in recent months, pushing prices nationwide to their highest levels since May 2001 when a gallon of regular unleaded peaked at $1.718 nationwide.

Prices Friday were inching close to the recent record, with regular grade selling nationally for an average of $1.684 a gallon, according to the AAA Daily Fuel Gauge Report.

In Delaware, the average price was $1.64 a gallon, though individual stations have been charging as much as $1.80.

The highest recorded price for regular unleaded in the state was $1.728 a gallon in June 2001, although prices adjusted for inflation were much higher in the early 1980s.

"To pay $10 and get 5.99 gallons of gas - it ticks me off," said Shannon Zuzek, 32, of Newport, as she pumped gas at the Newport Exxon Friday. Regular unleaded was selling for $1.669 a gallon there. "We use to budget $50 a month for gas, now it's $70 or $80."

Mary Beth Pala, 36, of Hockessin, said it now costs her about $45 to fill up her Chevrolet Suburban.

The Hockessin Texaco station where she was pumping gas Friday was selling regular unleaded for $1.719. "It annoys me," Pala said.

Experts are warning consumers to batten down because the recent price spike is weeks ahead of the annual rise in prices during spring and summer.

Changes from winter blends of gas to formulations for summer have driven up wholesale prices from March to May during the past 18 years, said Peter Beutel, president of Cameron Hanover, an energy risk-management company in New Canaan, Conn. Increased summer driving also boosts prices.

Still, experts said motorists shouldn't expect average prices to imitate those in California, where regular was selling for $2.057 a gallon Friday. Pump prices for regular gas are expected to average about $1.70 a gallon nationwide from April to September, with prices peaking in April at about $1.76, according to a forecast released Thursday by the Energy Information Administration, the statistical arm of the U.S. Department of Energy.

And gas prices are a bargain compared with other years. In today's dollars, gas in March, 1981 was selling for $2.90 a gallon. "Historically, it's cheap as a percentage of discretionary income," said David Costello, an economist with the Energy Information Administration.

But economists said they can't speculate what prices will do if war erupts with Iraq and crude oil supplies are further disrupted.

Even if a war ends quickly, it's not a forgone conclusion that prices will plummet. The oil market is still "fundamentally tight," he said. "The decline in prices is going to be pretty gradual."

Cost factors converge

Gas prices always vary widely because of seasonal changes and local market conditions.

But in recent months, several supply disruptions have pushed the price of crude oil up 65 percent, from $22.37 a barrel in March 2002 to $36.86 Thursday - a level not seen since October 1990, according to the Energy Information Administration.

• A general strike in Venezuela dramatically decreased crude-oil production. In 2002, Venezuela exported 1.19 million barrels of crude oil a day to the United States, or 13 percent of the country's total daily crude-oil imports, Costello said. While the general strike has ended, the recovery has been slow, he said.

• OPEC cut production in 2001, resulting in excess oil being used up through 2002.

• A cold winter in the Northeast has resulted in greater demand for heating oil, meaning refineries produce more heating oil at the expense of gasoline. Gasoline inventories at the end of February were about 5.6 percent below last year's levels, Costello said.

• Prices in the natural-gas market have risen because of the cold weather and low storage levels, Costello said. Oil prices also have a tendency to rise with the natural-gas market.

• Worries of a war with Iraq have driven up prices, although industry experts say it's difficult to quantify.

All this comes before the switch to summer blends. Because of the Clean Air Act Amendments of 1990, reformulated gasoline is required in metropolitan areas with ozone problems - or about one-third of the total U.S. gasoline market. Delaware is required to use reformulated gasoline statewide.

In winter, gas is allowed to contain more volatile components. But in summer those components must be removed to meet environmental requirements. To comply, refineries have to shut down equipment and clean it, a process that takes about 15 days and affects supplies temporarily. Prices also tend to rise by about 6 percent during summer, according to the Energy Information Administration.

"Get used to it, regardless of what happens in Iraq," said David Hinton, petroleum-industry analyst with the administration.

Prices vary widely

How gasoline is marketed also results in wide price disparities from state to state. Even in the same community, the difference in the price of regular unleaded can be as much as 12 cents.

Some prices have to do with proximity to supplies. In the oil state of Oklahoma, for example, the average price for a gallon of regular unleaded was $1.559 Friday. In New Jersey, with its refineries, the average price for the same gas was $1.566.

"Delaware is closer to a lot of sources of supply, but it's not Houston," Hinton said.

Federal and state-excise taxes also can drive up prices at the pump.

And gas can be higher in wealthier areas because of the cost of real estate, experts said. Greenville Amoco, though, has been able to keep its prices down because it's been in business there for about 40 years. "We don't have a big mortgage," said owner Joseph Di Donato.

Some convenience-store chains offer the lowest prices because they sell unbranded gasoline, industry experts said. Wawa Inc., for example, sells Wawa brand. "We build cost efficiencies into our model, and as long as we can obtain favorable costs we try to pass that along," said Lori Bruce, spokeswoman for Wawa.

Still, the effects of price increases are being felt across the board.

"Gas prices are the most visible commodity you buy because the price is right up there in big numbers that you see every day,'' said Michael Shanahan, spokesman for the American Petroleum Institute, which represents 400 oil and natural gas companies. "It has a very real impact on consumers because the economy runs on oil."

Independent station owners said they are finding it hard to compete.

Shawn Rodgers, owner of Dewey Beach Exxon, said he's selling regular unleaded for $1.599 a gallon, but paying $1.579 for it. With the average 2 percent fee he pays the banks for credit-card purchases, he said he's losing money.

"If this place wasn't in my family there's no way I could make it," he said.

Ken Hudson, owner of Kens Exxon in Lewes, is charging $1.719 for regular unleaded and finding it tough. Business at his 42-year-old establishment is down about 60 percent, he said.

"I don't know how much longer I can stand it," he said. "I hope something gives. If not, I'll have to go out of the gas business."

Small businesses that use a lot of gasoline - such as limousine, delivery and other companies that use automobiles and trucks - also are grousing.

"Everybody gets hurt," said John Killeen, owner of Touch of Elegance Limousine Service in New Castle. "I just have to bite the bullet for a while, and hopefully gas will go down. But if it doesn't and we go into summer when prices normally go up 10 to 15 cents a gallon, I guess I'll have to do something."

Reach Maureen Milford at 324-2881 or mmilford@delawareonline.com.