The gasoline market and its players have formed the opinion that crude oil and ethanol can be price determinants, but not profit margins. The margins in refining gasoline is slowing down, 50-cents-per-gallon lower than its year-ago level, according to Lundberg data, and year-to-date is less than half its calendar-year 2007 size. The margin in retailing is losing out too. The retailers, fortunately, have year to date about the same good margin on regular that they had in 2005, 2006 and 2007 (about 11 cents).
In the short term, refiners and retailers need to gain margin unless one of two things happen:
1. crude oil prices plunge, cutting costs for refiners and wholesale gasoline prices for retailers, or
2. demand growth has to resume handsomely which isn’t likely.
With the moving of demand during spring along its normal seasonal curve, the pressure is building up to pass through higher costs. Idle capacity in refineries will need margin incentive to come back, as do the sluggishness in gasoline import levels, to satisfy the upcoming three-month summer demand plateau.
Meanwhile, ethanol which is taking more share of the gasoline market by federal mandate is often underestimated as an input factor by those hazarding a guess in gasoline price projection.
Further forced purchasing by the refiners and marketers of the additive, whose prices have been zooming up of late, with the inclusion of this growing volume in spring refining exacerbates rising processing costs, and giving the motorist fewer miles per gallon at higher prices, are all part of the spring 2008 market.
As one refining industry leader said of ethanol last month at the annual meeting of the National Refining & Petrochemical Association [NPRA], "We don't make it, but we have to sell it." And they would be required to shoulder the cost and pass it on to the consumers who would soon become more aware that they are getting short-changed in terms of miles per gallon.
The possibility of street price surge by June of 50 cents to about $3.82 nationally, from ethanol-related rising costs and leading to the increase in industry’s margin. As the anti-oil antics in hearings and other public forums increase along with price and seasonal gasoline demand, those in the hot seat—from dealers to major oil companies—will be hard pressed to explain the multiple ill effects of this tax-subsidized, energy-short, environmentally handicapped, logistics-cost-hiking corn derivative, to defend themselves against the witch hunts.
As NPRA points out, U.S. ethanol has three market fixes: the fuel tax break, the sales mandate and the barrier against Brazilian competitors, courtesy of the federal government. When refining margins recover, as they must, and retailers expand theirs if they can, negative scrutiny of the gasoline industry will intensify. The general public may learn more about the consequences of ethanol's role than ever, in 2008, if politicians and anti-petroleum advocates elicit such information from those they accuse of profiteering.