Factors Behind the Increase in Gasoline Prices

Since the beginning of 2005, U.S. retail gasoline prices have been generally increasing, with the average price of regular gasoline rising from $1.78 per gallon on January 3 to as high as $3.07 per gallon on September 5, as Hurricane Katrina further tightened gasoline supplies. But the hurricane is only one factor, albeit a dramatic one, which has caused gasoline prices to rise in 2005.

A major factor influencing gasoline prices in 2005 was the increase in crude oil prices. The price of West Texas Intermediate (WTI) crude oil, which started the year at about $42 per barrel, reached $70 per barrel in early September. Crude oil prices rose through-out 2004 and 2005, as global oil demand increased dramatic-ally, stretching capa-city along the entireoil market system, from crude oil produc-tion to transportation (tankers and pipelines) to refi nery capacity, nearly to its limits. With minimal spare capacity in the face of the potential for significant sup-ply disruptions from numerous sources, oil prices were high throughout 2005.

In addition, Hurricane Katrina had a devastating impact on U.S. gasoline markets, initially taking out more than 25 percent of U.S. crude oil production and 10-15 percent of U.S. refi nery capacity. On top of that, major oil pipelines that feed the Midwest and the East Coast from the Gulf of Mexico area were shut down or forced to operate at reduced rates for a significant period. With such a large drop in supply, prices spiked dramatically. Because two pipelines that carry gasoline were down initially, some stations actu-ally ran out of gasoline temporarily. However, once the pipelines were restored to full capacity and some of the refi neries were restarted, retail prices began to fall. Increased gasoline imports in the fall of 2005, in part stemming from the Interna-tional Energy Agency’s emergency release, also added downward pressure to gasoline prices. However, retail prices are likely to remain elevated as long as some refineries remain shut down and the U.S. gasoline market continues to stretch supplies to their limit.