Gas Prices Summer ’04: Conservation Helps
18 August 2004
Business Week online. A combination of increased gasoline supplies and decreased driving has kept gasoline prices low even while the price for crude continue to ratchet upward. Don’t expect that to last.
Gasoline prices soared last spring, when demand took off along with the U.S. economy. Industry pundits were predicting a strong summer travel season, and refining-industry profits hit all-time highs in the second quarter.
The market responded with refiners cranking up their gasoline production, and more gasoline imports arrived at U.S. ports. Yet consumers, spooked by higher prices and fears of a supply shortage, began to cut back on their driving. As a result, gasoline-demand growth, which had been averaging 4% in the second quarter, began to taper off to half that level.
This is a small example of the power of aggregated savings through acts of conservation, and why any discussion of sustainability at some point needs to touch on that topic. In this case, we’re not even talking about an absolute reduction in consumption—just a reduction in the rate of growth.
The flip side of this is that even with a price scare, demand for gasoline continued to rise. Voluntary conservation in usage helps, but it doesn’t solve the problem. More structural changes are needed for that, either in policy (e.g., rationing, which most find very unattractive) or technology (cars and the fuels that feed them).
Reducing the magnitude of the expected surge in summer driving has kept prices down for the moment, but don’t be lulled into price complacency.
This seesawing left the refining industry over a barrel. Gasoline inventories, currently at 208 million barrels, are up 10% from where they were this time last year, according to the U.S. Energy Dept. On Aug. 16, wholesale gasoline for delivery in September closed at $1.30 per gallon on the New York Mercantile Exchange, down 4 cents from last week.
Meanwhile, the surging cost of crude...is squeezing the refiners. In the past three months, their profits have been cut in half, to $5 a barrel on the U.S. Gulf Coast, according to Rousseau. He’s recommending that investors avoid the shares of large refiners, including Valero Energy (VLO ), Sunoco (SUN ), and Tesoro Petroleum (TSO ). “High crude prices aren’t good for us or our customers,” says Bob Beadle, senior vice-president for feedstock, supply, and trading at Valero. “We have to pay the higher prices, too.”
And that’s why pump prices could be going up again very soon. “It’s scary. You don’t want to talk about it,” says Mark Baxter, director of the Maguire Energy Institute at Southern Methodist University.
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