Global demand produces gas pains

COLUMBUS – Strong global demand, rather than a shortage of supply stateside, is the driving force behind the high cost of gasoline, said an Ohio State University Extension economist.
The popular notion that constrained refining capacity is causing high fuel prices is misplaced, said economist Matthew Roberts.
Just not true. “We can easily look at the futures market and get a good idea of the money being made by refiners,” Roberts said.
“What we have seen over the last five years hasn’t been a significant shift in refining margins. If we truly had a shortage of refining capacity and it was having an effect on our energy prices, then refineries would be making lots of money. We’d see the difference between the cost of the input and the cost of the output increasing.
“Instead, with a few exceptions, we’ve seen that refining margin holding steady or declining. Refining margins are at their lowest point in five years, so there actually appears to be a refining capacity surplus in the market.”
Demand is culprit. Roberts contends that global demand for energy, fueled by strong economic growth, is the principle force pushing the energy market.
“Part of the energy demand is coming from China, which is using the energy not for driving cars, but for microgeneration of electricity,” Roberts said.
“Here in the states, Americans’ consumption habits of fuel have not changed dramatically in response to higher fuel prices. And so this country’s gasoline demands are increasing.
“Additionally, global economic growth is on track to be over 4 percent, which is very strong economic growth. Strong economic growth means strong oil demand.”
Add to demand the supply fears generated from instability in the Middle East and Iran’s nuclear aspirations, and global oil flow becomes tighter.
Why should you care? So what does it all mean for American consumers? Right now, not much, but things could change this summer.
“Until we get to $3 a gallon on gasoline, American consumers don’t really seem to care about the price,” Roberts said.
“But this summer certain regions of the country may see $3 a gallon for gas, or higher. The issue will have less to do with whether or not there’s enough gasoline, but whether or not there is enough fuel of the right specification at the right place at the right time. There are a lot of worries this scenario might happen.”
Sulfur content. One scenario that might cause higher prices is government regulations that require dramatic reductions in sulfur content in gasoline and diesel starting this summer.
“Right now, ultra-low sulfur fuels represent less than 1 percent of all the fuel being produced. This number needs to rise to 70 percent or 80 percent by this summer,” Roberts said.
“Refineries will have to be taken offline to make the adjustments so they can meet those targets. When you are not producing fuel and living off the inventories we have, that’s going to cause prices to rise.”
Move to ethanol. Also, refineries across the United States are phasing out fuel additive MTBE (methyl tertiary butyl either) and replacing it with ethanol. Analysts speculate this phase-out, which California is expected to complete this year, will stretch the country’s gas supply.
Farmers and other small business owners who store fuel on-site should take note, Roberts said.
Fill up now. “The take away point of this whole situation is that for those who have fuel storage, I would be filling it to the max right now,” Roberts said.
“It would probably be wise to fill fuel storage for use through June, and if you have any additional capacity, to fill up all tanks at this point.”
U.S. consumers already are seeing a taste of what might come in a few short months.
Price going up. According to the Department of Energy, average retail gas prices have risen nearly 8 cents from the previous two weeks, and Roberts said prices are likely to continue to climb well into April.
“We are entering the refinery maintenance season, where the units are taken offline to be repaired, modified, or upgraded. Some refineries went offline March 2,” Roberts said.
“More refineries will continue to go offline, and as that happens, we’ll see the price of gas continue to increase.”