Low Midwest Fuel Supply Leaves Little Room for Error (Update1)

Lemont, Illinois, May 12 (<a href=quote.bloomberg.com>Bloomberg) -- The U.S. Midwest has the lowest supplies of gasoline of any region of the country, leaving motorists there vulnerable to higher prices at the pump as the warm-weather driving season begins.

Consumers in the Midwest saw bigger price increases than the rest of the nation in two of the past three years during the months when refiners run close to capacity to meet peak gasoline demand. Midwest prices were higher than in other locales because of low inventories and clean-air rules that limited flexibility to use fuel in one place to meet shortages elsewhere.

I don't think all the problems are necessarily behind us,'' said Mark Smith, general manager of the Citgo Petroleum Corp. refinery in Lemont, Illinois, 35 miles southwest of Chicago. We're still concerned about the volatility'' seen in the region's gasoline prices in prior years, he said.

The Midwest tends to be more vulnerable to fuel price swings than other parts of the U.S. because of the region's distance from the Gulf of Mexico and other deep-sea ports. Crude oil is primarily moved into the region by pipelines from Canada or the Gulf Coast.

Enbridge Energy Partners LP, which delivers most of the crude processed by Chicago-area refiners, shut part of its oil pipeline system for two days in mid-April, following a leak in rural Minnesota.

A longer shutdown might be enough to curtail refiner output and affect gasoline prices, analysts said. U.S. refineries typically run the hardest in the spring. They processed 15.7 million barrels of oil a day last week, the most since September 2001, according to the U.S. Department of Energy.

Chicago Refineries

When you run on the low side with inventories you have less ability to absorb unexpected supply disruptions,'' said Joanne Shore, a senior analyst with the Energy Department. Even with all of the refineries running, there still is a tight market situation.''

Citgo's 1,100-acre Lemont complex, which processes as much as 167,000 barrels of crude oil per day, is one of three in the Chicago area that account for almost a quarter of the Midwest's refining capacity and a fifth of its gasoline production.

The other two, Exxon Mobil Corp.'s refinery in Joliet, Illinois, and BP Plc's in Whiting, Indiana, both have had outages already this year. Part of the Whiting complex was closed for five weeks following a Feb. 18 fire.

While refiners have scaled up production, fuel inventories in the Midwest remain low as the period of heaviest gasoline demand approaches. The start of the summer driving season in the U.S. is typically marked as Memorial Day at the end of May.

Inventories

Supplies in Illinois and 14 other states in the region totaled 48.3 million barrels in the week ended May 2, down 8.2 percent from 52.6 million a year earlier, according to the Energy Department. Regional supplies are close to levels seen at the end of April 2000 and 2001, when summer prices jumped.

Motor gasoline supplies in the rest of the U.S. are at 159.5 million barrels, 1.2 percent below last year.

Gasoline demand is rising. Nationwide, consumption may reach a record 9.18 million barrels a day for April through September, up 1.6 percent from the same period a year ago, according to the Energy Department.

The jump in Midwest gasoline prices in June 2000 was caused by difficulties producing enough fuel under new clean-air regulations that had just gone into effect and by a pipeline outage, on top of the low inventories.

The average retail price for regular-grade gasoline across the Midwest reached a record $1.874 a gallon, up 26 percent from the average in May, according to the Energy Department. In Chicago, the average pump price reached a record $2.11 a gallon.

Midwest Prices

Chicago wholesale prices more than doubled from mid-April to mid-June 2000, reaching about $1.46 a gallon. That outpaced gains of about 50 percent for New York and Gulf Coast spot prices.

In May 2001, Midwest retail prices jumped as high as $1.813 a gallon, up 15 percent from the April average, government data showed. Over the past week, the average Midwest price averaged $1.413 a gallon, up 4.7 cents from a year ago, the Energy Department said today.

``If you drive from St. Louis to Chicago, which is about 300 miles, you drive through four different gasoline zones,'' said Patrick McGinn, a spokesman for Exxon Mobil Corp. That means shortages in one area can't always be made up from supplies elsewhere, he said.

Summer Grades

Federal regulations require a switch to ``summer-grade'' gasoline for some regions and cities, where gasoline must have a lower evaporation rate to reduce emissions. Chicago and Milwaukee fuels are blended with ethanol, a corn-based additive, to meet these requirements.

Such requirements have ``essentially created an island'' in the Midwest where the fuel that is consumed is tailored to the market and mostly made in the region, Shore said.

Refineries last year kept up with demand and avoided most disruptions. Midwest retail prices averaged $1.378 a gallon in May and June, little-changed from $1.382 in April.

Several years working with environmental rules may have given refineries a better understanding of how to balance production of various clean-air fuel blends.

``Each year we get a little bit smarter on how to maximize our production,'' said Glen Rabinak, business service manager for Citgo Lemont. Citgo is the U.S. refining unit of Venezuela's state oil company, Petroleos de Venezuela SA. Last Updated: May 12, 2003 17:23 EDT