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Published: Monday, 8/30/2004

Bouncing gas prices are fueling confusion

BY CHRISTOPHER D. KIRKPATRICK
BLADE STAFF WRITER

Curtis Lancaster held the gas pump like a watering can as he nourished the small engines in the back of his open trailer.

Gas is his livelihood, like it is for many small business owners, and lately his head has been spinning over the uncertain prices and the strange relationship between historically high crude oil prices and falling gasoline prices.

Mr. Lancaster's two-person, grass cutting, snow plowing, and excavating operation, Lancaster & Son, relies on cheap and stable fuel prices to run the fleet of lawn mowers and other equipment he was filling last week at Fuel Mart on Airport Highway. He pays close attention to the price of crude and the price at the pump.

"They have played with the price of gas. When crude oil was down, they had the gas price up," he said. "You go to one side of town and the price is different."

Falling gas prices in the face of crude oil approaching $50 a barrel last week seems counter to logic. Conversely, gas prices skyrocketed in the spring, when the price of light crude was at a lower level, closer to the traditional $30 a barrel mark.

Although the price of light crude started to slide back down last week on the New York Mercantile Exchange, it still was above $40 a barrel, closing at $43.18 on Friday.

Crude oil and gasoline are closely linked, but it's not a straight relationship, experts say. Between the oil rig and the gas pump, a lot happens to the price of gas at the pump.

"It does seem confusing because in the past it seemed whenever crude prices would go up, retail prices would go up. But I don't think anyone's complaining that prices are lower now," said Susan Stewart, spokesman for AAA Ohio Auto Club, the largest of the Buckeye clubs with more than 900,000 members. AAA tracks gasoline prices around the country and takes public positions on some energy policies.

Unfortunately, she said, there are no cut-and-dried answers to explain it. Oil is a commodity traded on the world stage and gas is a fabricated retail product, like a wheat crop's relationship to loaves of bread.

Among experts and pundits there's talk of gasoline oversupply and overzealous traders pushing crude oil to unreasonable levels last week. And many who independently analyze the industry say a mix of war, terrorism, politics, and U.S. Environmental Protection Agency regulations is responsible this summer.

Regardless of crude prices and politics, most of those interviewed said a basic supply-and-demand relationship has been in play for gasoline this summer. Refinery production of gasoline is more efficient this year and more refineries have come online. But demand from consumers for gasoline for summer vacation travel was somewhat less than expected - perhaps a reflection of unemployment and job insecurity in places like Ohio and Michigan - sending the price lower.

Gas companies, such as BP and Amoco, overestimated the miles that would be driven this summer and so produced too much of the special blend summer fuel, Ms. Stewart said. The cleaner summer blend is required by the EPA because heat and car exhaust mix together to produce harmful ground-level ozone.

"What we know is that they did a better job of creating summer blend fuels this year," she said.

The newer regulations for certain cleaner-burning gas took effect in 2000. The federal government also requires California and some major metro areas to use an even cleaner fuel, called RFG.

Although RFG is not required in Ohio or Michigan, use of refinery production to make it affects prices here.

"It's like running a lemonade stand," Ms. Stewart said of gasoline refineries. "You have to decide: Am I going to make regular lemonade, pink lemonade, lemonade with artificial sweetener? They have to try and guess how much they are going to need of each," she said.

David Ramberg, vice president of publications for Economic Insight, an international energy consulting firm, said crude oil production is at its limit. Some gas companies have been forced by various governments, such as the state of California, to reactivate once-mothballed refineries. U.S. drilling and exploration also are up, he said.

But the price of crude still has been rising because of uncertainty in American and international politics, including a growing demand from China and other countries where more and more people now own automobiles, he said. Gasoline is not the only product produced from crude, and heating oil demand also affects crude prices as winter approaches, he said.

Mr. Ramberg agreed with Ms. Stewart that the industry overestimated the number of miles driven by Americans this summer, leading to a surplus.

"Part of it too is the perception of what's going to happen. Part of the reason they didn't drive more this summer is that people don't feel financially comfortable to travel because of the economy," he said.

Despite the gasoline price drop this summer, gas is still more expensive than it was seven months ago, Mr. Lancaster said with a flash of irritation.

Back in December, he calculated all of his yearlong contracts using a $1.50 a gallon price, allowing for some upward movement. He still was losing 21 cents a gallon Tuesday as he fed the machines that help pay his bills.

At the BP station at Cherry Street and Central Avenue, the Dec. 30 price was $1.29 a gallon, said manager K.C. Ibrahim, who has been in the business for three years. The high was $2.23 per gallon in April, he said.

Gas station operators only make a couple of pennies per gallon, and some even sell below cost to stay competitive, he said. Most profits are made in the mini-marts, he said.

"I have no idea why it does that," he said of the price. "I always ask and sometimes they say, it's the weather or the truck drivers can't get there. It's always an excuse."

Last week, the world of logic seemed to be righting itself with the price of crude falling back 11 percent from its high toward $40 a barrel. But continuing uncertainty on the global stage and worldwide demand continues to inflate the price that averaged $28.50 a barrel last year and $24.09 in 2002, according to the U.S. Department of Energy.

At the pump, gasoline prices across America averaged $1.56 a gallon last year and $1.35 a gallon in 2002, the agency said.

"The crude prices came down this week because of the lower gasoline prices. The inventories throughout our energy supply I believe are up 4.7 percent over last year," said Matt Piotrowski of Energy Intelligence, an international publishing firm that reports on the worldwide oil and natural gas markets.

Ultimately, Mr. Piotrowski said, crude oil and gasoline prices are connected. Light crude was falling back from historic highs because the price of gasoline also has been falling, he said.

"There's a lag effect: gasoline came first and now crude is following," he said. Pietro Nivola, director of the Governance Study Program for the Brookings Institute, a Washington-based think tank, said higher crude prices mean that months down the road, gasoline will have a higher price. At the higher crude price, the market can get flooded with suppliers, he said.

"It may take months for that price to ripple through the system," he said.

Over the short-term, though, gasoline prices have been falling.

In one day, from Monday to Tuesday last week, the price fell more than a dime a gallon from in the $1.80-plus range, depending on the station, to around $1.71 on Airport Highway, where Mr. Lancaster filled up near Toledo Express Airport. On Central Avenue, the price fell six cents a gallon from $1.83 to $1.77 at the BP station at the intersection of Cherry Street and Central Avenue.

When it comes to unstable gas prices, nothing surprises Mr. Ibrahim.

"I've been here three years watching the gas price go up and down," he said.

Contact Christopher Kirkpatrick at: ckirkpatrick@theblade.com or 419-724-6077.



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