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I: 5 1" '~::_:" 3 o M souri W 3 0 llfii 10-10 86159 GASOLINE: THE U.S. SHORTAGE (ARCHIVED--01/18/80) ISSUE BRIEF NUMBER IB79057 AUTHOR: Lindahl, David Environment and Natural Resources Policy Division Bamberger, Robert Environment and Natural Resources Policy Division Kumins, Lawrence Environment and Natural Resources Policy Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR Issums SYSTEM DATE ORIGINATED ggggggzg DATE UPDATED Qgggggzg FOR ADDITIONAL INFORMATION CALL 287-5700 0118 cRs- 1 IB79057 UPDATE-09/18/79 I§suE_nnrIN1TIgg The current shortage, as with past energy supply interruptions, has created serious concern on the part of the motoring public and its elected representatives. Because gasoline is so basic to the American lifestyle and economy, there is strong sensitivity to rapid changes in its availability and price. A consequence of this shortage is that a number of questions are frequently being asked which indicate the high levels of frustration and low levels of trust in the official explanations offered to date Is the gasoline shortage a manipulation by the oil companies to raise prices? Is the Executive Branch cooperating in order to force conservation? Why is the federal government requiring the use of unleaded fuel when there is not enough available? Did international oil production really drop during the Iranian crisis? Why were stocks drawn down to low levels prior to the Iranian crisis? Why is domestic production and refinery utilization lower than a year ago, despite sizable increases in oil prices and drilling activity? These questions and other variations of them defy simple explanation because of the complexity and number of the underlying causes of the problem. This issue brief, is therefore, an attempt to isolate some of these factors and to place them in perspective. The data included in this report are primarily from the Department of Energy and the American Petroleum Institute. Even though unusually cold winters and labor strikes have fostered spot shortages or impeded deliveries of natural gas, home heating oil, and coal at various times during the past few years, gasoline supplies have generally been adequate to meet demand since 197fl. Now, however, internationally tight supplies of crude oil, the rebuilding stocks of crude oil and refined products which are reportedly at very low levels, and growing gasoline demand have created the likelihood that supplies of gasoline may be inadequate to meet the demands of the summer driving season. The symptoms of shortage, long lines at gasoline stations and early service station closings, were initially confined principally to the State of California, though accounts of the shortage have led to a panic mentality that may have spurred drivers in many sections of the country to make frequent trips to service stations to “top off“ their tanks and to effectively reduce available gasoline supplies by hoarding it in their fuel tanks. The California experience may be a forerunner of a national problem for the summer and beyond if crude supplies and refining? capacity for gasoline prove inadequate -- as appears likely -- and if demand does not moderate. The issue can be summarized as follows: I. iGasoline’Demand:d Rate of Growth and Contributing Factors o Gasoline demand during summer 1978 was higher than in summer 1977 and did not decline as sharply into the fall and winter of 1978 and 1979 as it had the previous year. 0 Growth in the demand for gasoline was higher during the first four months of 1979 than during the comparable period of 1978; however, demand for gasoline during spring cRs- 2 1379057 UPDATE-09/18/79 and the first part of the summer may have been as much as 10% below demand in 1978. The apparent reduction in demand has been a function, in part, of demand constrained by physical limitations on supply, as well as a reflection of the deliverate choice by some motorists to reduce their gasoline consumption. with the easing of supplies beginning in mid-July, consumption has begun to increase. 1 0 Higher demand for gasoline may be partly attributable to growth in the size of the motor vehicle fleet, the number of drivers, and increases in fuel consumption by the light-duty truck sector, including pick-up trucks and vans. Were it not for an improvement of 40% in new car fleet fuel economy and a reduction in the average number of gallons of gasoline consumed per vehicle per year, spot shortages would arguably have been experienced before now and have been far more ‘ extensive. II. Crude and Gasoline Allocation Regulations o Because of allocations to priority users and exceptions in the gasoline allocation regulations which permit higher allocations to retailers who have experienced significant new demand, actual gasoline consumption is higher and the actual shortage at the pumps less acute than the allocation levels would imply. The ggndbegg getter estimates that gasoline deliveries in September 1979 will be 94.6% of deliveries in September 1978, up from 93.3% in August. However, because demand in September is customarily lower than demand in August, actual gallonage delivered will be as estimated 9.2 million barrels compared to 9.9 million barrels in August. "Allocation in September will be 83.3%, up from 81.9% in August. 0 Existing regulations provide for allocation of products at the wholesaler or jobber level, but with the disapproval by the House of the proposed standby rationing plan, no federal mechanism is in place to allocate gasoline to end-users during a severe shortage. Although the Administration does not believe conditions are severe enough to justify invoking any emergency authorities, the Emergency Petroleum Allocation Act (EPAA) and authorities promulgated pursuant to that Act provide the Department of Energy with considerable latitude for managing gasoline shortages without seeking congressional approval. 0 It appears as if Congress intends that the states will play a more significant role in developing regional conservation plans that might better accommodate local conditions than would federally imposed conservation plans. III. Domestic Crude Oil Stocks and the World Oil Market c3s- 3 1379057 aPnATm—09/18/79 0 Imports of crude oil did not drop appreciably during the first quarter of 1979 but neither did they rise to match high demand. a 0 Even with the partial resumption of Iranian oil exports, world crude oil supplies continue to be tight because other suppliers have since reduced production. Combined with the recently relaxed U.S. policy of discouraging U.S. companies from purchasing crude oil in the international spot market and refining limitations, this has resulted in low stocks of crude oil, gasoline, and distillate fuel oil. 0 The price of imported crude oil has risen significantly during 1979 and this is now being reflected in pump prices, along with higher dealer profit margins to offset reduced sales volumes. IV. Gasoline Production in Domestic Refineries o The United States has enough total refining capacity, but it is to a large extent the wrong type of capacity to process the high-gravity, high-sulfur crude oil now most available. This is an especially vexing problem in certain refining districts and in PADD—V (0.5. West Coast) in particular. 0 These same crude oils yield less of the light products for which there is a strong demand and more of the heavy products that are already in surplus, particularly in California, but environmental regulations are reportedly slowing the reconfiguration of existing refineries and the construction of new ones to further refine heavy products into light fuels, such as unleaded gasoline and distillate fuel oil, for which there is strong demand. 0 Limits on lead and lead substitutes in gasoline and on sulfur in distillate fuel oil have hampered the ability of the refining industry to make these products. EAQEEBQEEQ é§2lEQLl§l AEéLZ§L§ GASOLINE DEMAND: RATE OF GROWTH AND CONTRIBUTING FACTORS Gasoline demand has escalated since 1975. As Table I shows,n the average daily demand for gasoline was slightly lower in 1974 as a consequence of the oil embargo in late 1973 and early 197a, but it began to grow again in 1975, through at a somewhat slower rate. Table I: DOMESTIC DEMAND FOR GASOLINE (1970-1978) (in millions of barrels per day) % Change Over Year Consumption Previous Year 1970 5.78 --- CBS- 4 1879057 UPDATE-O9/18/79 1971 6.01 4.0 1972 6.38 6.2 1973 6.67 4.5 1974 6.5a -1.9 1975 6.68 2.1 1976 6.98 4.5 1977 7.18 2.9 1978 7.411 3.2 Source: The Department of Energy (DOE) Demand for gasoline (see Table 2) in 1977 peaked during the summer, as customary, and fell off from levels of 7.6 million barrels per day (mbd) in July, to 7.3 mbd in September, to 7.1 mbd in October and November. Consumption rose slightly during the Christmas holidays and then fell to levels of 6.7-6.8 mbd in January and February. In the comparable months of 1978 and early 1979, however, demand has been considerably higher. Gasoline consumption in 1978 peaked at 7.9 mbd in June, averaged roughly 7.5 mbd for the period October-December, and averaged 7.2 mbd in January and February. A comparison of average growth rates between late 1978 and early 1979 consumption levels is shown in the table below: CBS-»5 1379057 UPDATE-O9/18/79 Table 2: GROWTH RATE IN DEMAND FOB GASOLINE: SELECTED MONTHS (1977¥1979) 9 (in millions of barrels per day) month Consumption % Change 1979/78 October 1977 7.13 October 1978 7.u6 u.6 November 1977 7.19 November 1978 7.51 4.5 December 1977 7.38 December 1978 7.fl9 1.5 January.1978 6.67 January 1979 7.20 7.9 February 1978 6.88 February 1979 7.21 u.8 March 1978 7.26 March 1979 7.1a -1.7 April 1978 7.21 April 1979* 7.10 ~1.5 may 1978’ 7.73 May 1979* 7.00 -9.4 June 1978 7.92 7June 1979* 7.10 -10.4 Four Weeks Ending 7/21/79 7.66_ -7.1 Four Weeks Ending 7/20/79 7.12 -7.1 Four Weeks Ending 8/24/79 7.19 Four weeks Ending 8/25/78 7.8a -8.3 * Preliminary estimates Sources:a Department of Energy Monthly Energy Review (April 1979), DOE Weekly Announcements. CRS- 6 IB79057 UPDATE—09/18/79 Growth in demand for gasoline during the, first four months of 197 averaged roughly 4% higher nationwide compared with 1978 levels. Demand in California was reportedly more than 7% above 1978 levels during the first part of 1979. 1 2 The figures indicate that growth in gasoline demand began to taper off in March and April as supply availability tightened in some areas of the nation, and as consumers either experienced or perceived that there were actual shortages. The most recent statistics show that gasoline demand (as measured by DOE) was at substantially lower volumes during May and June 1979 than it was one year earlier, but that demand has begun to recover since the supply situation eased. The DOE statistics define demand as “disappearance from primary supply” and are neither true measures of actual consumption nor reflections of what demand would be were supplies plentiful. The apparent reduction in demand is therefore a function, in part, of demand constrained by physical limitations on supply, as well as a reflection of the deliberate choice of some motorists to reduce their gasoline consumption. One cannot reliably calculate the proportionate responsibility that “free will" conservation (even if not not exercised cheerfully) and conservation induced by an inability to secure supply may bear in accounting for the reduction in overall consumption. The relative role played by each factor would vary regionally as well. The surge in demand ‘during the beginning of 1979 may be partly attributable to individuals driving more than before, but the steady growth in gasoline consumption over the last few years has been principally due t the growing size of the motor vehicle fleet, the number of drivers, and significant increases in fuel consumption by the light-duty truck sector, including vans and pickup trucks. The size of the vehicle fleet has markedly increased. Passenger cars have increased in number from 102 million in 1973 to an estimated 114 million in 1977. The size of the truck fleet increased during the same period from 23.2 to 29.2 million at more than twice the growth rate of the passenger car fleet. The total car, bus, and truck fleet increased from 125.7 to 143.8 million, an increase of approximately 14.4%. The number of licensed drivers increased from 121.5 million in 1973 to an estimated 137.9 million in 1977, and has presumably continued to grow. Estimated total vehicle miles traveled has increased from 1,285.6 billion miles in 1974 (slightly less than the 1973 level following the embargo) to an estimated 1,444.8 billion in 1977, an increase of 12.4% (Source: Federal Highway Administration (FHA)). Although new car fuel economy has improved roughly 40% from model year 1973 to model 1979, the average fuel economy, of the entire passenger car fleet has probably improved only about 9% during the same period. Given that it normally takes ten iyears for the entire passenger car fleet to be replaced, the relationship between these two percentages is not surprising. The average fuel efficiency of the entire fleet has improved modestly over the past six years, but average fuel consumption in gallons per vehicle per - year has declined significantly «since its fpeak prior to the 1973-197" embargo, as shown below in Table 3. Had it not, U.S. gasoline consumptic mwould be significantly higher than it is now. CRS- 7 1379057 UPDATE—O9/18/79 Table 3: AVERAGE ANNUAL FUEL CONSUMPTION PER VPASSENGEB CAR (in gallons) 6 Year Consumption % Change Per Vehicle 1967 684 -- 1968 698 2.0 1969 718 2.9 1970 735 2.4 1971 746 1.5 1972 755 112 1973 9 763 1.0 1974 700 9 ~7.7 1975 7121 . 1.1 1976 711 -0.1 1977 706 ‘0.7 Percentage Change 77/67 3.2% Source: Department of Energy. cns- 8 11379057 UPDATE-O9/18/79 Improvements in vehicle efficiency as well as the reduction in the averagt number of gallons consumed annually per vehicle may have forestalled a prospectively serious supply/demand imbalance to the present time. other influences - the number of drivers, the size of the vehicle fleet, and vehicle miles traveled - have continued to exert upward pressure on the rate of growth in demand for gasoline. CRUDE AND GASOLINE ALLOCATION REGULATIONS Regulatory authority governing the pricing and allocation of crude petroleum and petroleum products derives from the Emergency Petroleum Allocation Act of 1973 (EPAA, P.L. 93-159), signed into law in November 1973 to address crude and product shortages during the Arab oil embargo and extended by the Energy Policy and Conservation Act (P.L. 94-163). The essential purpose of the law was to mitigatew price increases induced by shortage conditions and to assure equitable distribution of available supplies. 1 énnnlierzPurchas§£-§ela2i2n§h;2§ To protect purchasers’ access to supplies of crude and products, the EPAA provided that existing supplier/purchaser relationships as, of a specified “base period" would be maintained. The base periods also establish the quantity of crude or products to which purchasers are entitled, generally referred to as “base-period volume." In times of shortage, purchasers may be entitled to only a pro rated percentage of their base period volumes. Crude oil producers are required to supply their purchasers in accordance with contracts in effect as of Jan. 1, 1976, with the exception of oil produced from the Naval Petroleum Reserves or from properties not producing as of that date, and transactions under the refiner buy/sell program described below. The regulations provide conditions under which these relationships may be terminated and also provide that contracts entered into for the sale of crude from new properties not producing before Jan. 1, 1976, are "frozen" and subject to the regulations. A Gasoline wholesalers or suppliers must also sell to purchasers of record during the base period. The original base period for establishing suppliers, as well as the amount of gasoline to which purchasers would be entitled, was calendar year 1972. Effective Mar. 1, 1979, however, the base period was updated to the corresponding month for the period July 1, 1977, to June 30, 1978, so that base-period volumes would reflect shifts in volume demand experienced by several purchasers during the intervening years. Effective May 1, 1979, the base period was advanced three more months (Oct. 1, 1977, to Sept. 30, 1978). §a§2line-All22a:i9n-22i9ri:i2§.2n£;n9 a §horta9e The regulations establish allocation priorities for the distribution of gasoline in the event of a shortage. National defense and agricultural functions are classified as "essential" uses and were initially entitled tn allocations in whatever quantities considered necessary to carry out these activities. Once these first—priority needs are satisfied, suppliers provide fuel to a CRS- 9 IB79057 UPDATE-09/18/79 secondary level of priority uses, including emergency services, energy production, sanitation services, telecommunication services, passenger transportation services, cargo, freight and mail hauling by truck, and aviation ground support vehicles and equipment. These users were also entitled to virtually 100% of their current requirements, adjusted slightly downward to allow for supplies that had been allocated to first priority users. A major objection raised against the allocation regulations was that first— and second—priority users were demanding supplies in excess of current needs in order to maximize their inventories out of uncertainty over future supplies, and to insulate themselves from anticipated price increases; Priority demand in excess of justifiable needs, it was argued, was exacerbating the shortages at the retail pump. On July 16, DOB ruled that, effective August 1, primary and secondary priority users, including agricultural production, emergency services, energy production, and others, would be entitled to.100% of base period demand instead of 100% of current requirements. Third-priority status is accorded to gasoline for industrial and commercial use and for government and social agency consumption. other purchasers are also entitled to a prorated share of normal base~period supply. Because of crude supply problems and low gasoline stocks, several refiners and some large independents in march 1979 began to allocate less than 100% of normal base—period gasoline volumes to the nretail outlets they serve. ccording to the ;gndpg;g_;§tt§r, allocations averaged 93.9% of base-period volume in March, 91.7% in April, 82.5% in May, 77.0% in June and 77.5% in July. Gasoline supplies began to improve significantly in mid-July following an announcement by Saudi Arabia in early July that that nation would temporarily boost oil production by 1.0 million barrels daily. Although the additional production would not reach American shores for several weeks, the Saudi announcement reduced the uncertainty of the major oil companies over future crude availability and prompted the release of more crude and product into the distributions system almost immediately. 0 on may 1, 1979, DOE instituted a rule known as the "10% growth yadjustmenty factor." Under the rule, if a station's average monthly gallonage for the period from October 1978 to February 1979 exceeded that of March 1978; for yexample, the allocation for March 1979 could be based upon the higher of the two amounts. Many argued that the growth adjustment rule had the effect of “tilting” supplies from regions of the country which experience mtraditionally cold winters to those regions of the country which enjoy a pleasanter climate during those months and which would more likely have experienced growth in demand during that period. The growth adjustment rule was cited as a major contributing factor to the shortages which began to plague the East Coast early in the summer.i In response to protest over the rule, DOE reviewed the growth adjustment factor but declined to drop it when it promulgated several other rule changes in mid-July. with the improvement in gasoline supplies by mid—July, concern over the growth adjustment rule had eased. The consequence of guaranteed supplies to priority users hand additional exceptions such as the growth adjustment factor has been that actual consumption is, in all likelihood, higher .than implied by the allocation levels themselves, and that the actual gasoline shortage at the pump his casp-10 IB7 9057 UPDATE-O9/18/79 somewhat less acute than the allocation percentages would suggest. A major supplier imposing an 85% allocation fraction may actually be selling wel over 90% of the volume sold in the corresponding month of the previous year. That extra increment, however, is not received by service stations or the motoring public.. The Lundberg Lstter (June 8, 1979) estimates that gasoline actually supplied during the months of March and April was, respectively, 1.6% and 0.1% higher than volumes supplied in 1978, and that may 1979 deliveries were probably roughly 7.0%. below deliveries in May 1978 despite an average allocation fraction that month of 82.5%. For the month of June 1979, the Letter estimated that the allocation fraction would average 77.5% of base period volumes and that actual deliveries would be about 8.6% below deliveries in June 1978. In turn, this may help to reconcile crude import levels with gasoline and product stock levels. Analysts have been unable to satisfactorily explain why the reduced allocations of gasoline over the past three months have not rpermitted.a greater buildup of gasoline and distillate ystocks. Crude imports, while higher than year-ago levels, were nonetheless lower in April 1979 than in the first part of 1979 and ihave been .apparently less than desirable to meet current demand and to rebuild stocks. It is possible that the combination of insufficient supplies of imported crude, management of existing crude stocks, and gasoline consumption in amounts closer to historic levels than the allocation percentages would imply, may explain why gasoline and distillate stock levels declined or remained relatively flat during March and April and increased only modestly during may despite apparent shortages of gasoline at the consumer level. .$.E§.1ll g§g§. (emphasis added) The gasoline shortages in California have also raised questions about DOE authority to allocate products from one section of the country to another. While the authority to do so is established in the tEPAA, the standby regulations promulgated in January 1979 do not specifically provide for the movement of products. That objective, however, could be achieved indirectly iby utilization of the refiner buy/sell program to move crude to the vicinity wf the shortage and then by invoking the refinery yield control program, Jhich permits the Economic Regulatory Administration (ERA) DOE to adjust the percentage yield of gasoline or any product in short supply. For the moment, the Administration has not thought it necessary to invoke these authorities or to risk a challenge of the extent of its authorities. cas-12 11379057 UPDATE-09/18/79 The Administration has instead maintained that the shortage can be absorbed with a modest conservation effort on the part of consumers. In a report t the President on gasoline supply in California, the Department of Energy expressed its belief that crude imports in June would reflect the resumed flow of oil from Iran and would ease tight supply conditions.i It is fairly clear that the states will now be expected to play a more significant role in managing, or preparing to manage, gasoline» shortages. Provisions in EPCA encouraged the states to develop state energy conservation plans that would reduce energy consumption by 5% in 1980, and provided for federal assistance for the development and implementation of programs establishing mandatory efficiency standards; incentives for vanpooling, carpooling, and public transportation; and right-turn-on-red. EPCA further encouraged the development of emergency standby conservation plans. While all the states have apparently developed overall conservation plans, only 31 states have developed emergency conservation contingency measures. On May 29, the President delegated limited authority (expiring Sept. 3, 1979) to State governors under the Emergency Petroleum Allocation Act (EPAA) permitting the governors to impose minimum gasoline purchase requirements, to institute an odd-even license plate system to help control lines at service stations, and to regulate the hours of operation at retail service stations. The Department of Justice determined that governors in the 19 states who lacked express energy emergency authorities granted by the state legislatures could legally exercise the authorities delegated to them by the President. Legislation introduced in both the Senate and the House would attempt to decisively encourage the development of state plans for managing energy shortages. The Emergency Energy Conservation Act of 1979 (S. 1030), introduced Apr. 26, 1979, was developed by members of the Senate Energy Committee to provide for meeting national emergency conservation needs during a shortage or emergency without necessarily imposing upon the states a federally implemented plan that might not be appropriate to all states. The legislation would require development of an emergency national ‘conservation plan within 90 days of enactment and would direct the governors of each state to develop conservation measures that would meet the national energy conservation target while fully accounting for local economic, climatic, and geographic conditions. If the states did not develop a plan, or; did not develop a plan acceptable to the Administration, the Federal plan could be implemented in that State. The legislation, as reported by the Senate, specifically prohibits the federal government from restricting weekend sales of gasoline; however, individual states may restrict weekend sales if they choose. The Senate passed 5. 1030 on June 5 (77-13) and the bill was referred to the House Committee on Interstate and Foreign Commerce on June 7. non May 31, 1979, the Emergency Gasoline and Diesel Fuel Conservation Act, of 1979 (H.R. H283), sponsored by Rep. Moffett, was introduced in the House. The ‘Act would require the, President to designate emergency energy conservation targets for individual states and the nation as a whole. The states would be required to design conservation plans to meet the statewide conservation goal designated by the President. The state plans could utilize both voluntary and mandatory measures, and would be subject to DOE review to ensure that the plans were not inconsistent with federal law, would not placs an undue burden on commerce, and that the plansv did not rely upon taxes, tariffs, or user fees. « The proposed legislation also incorporates a mandatory conservation plan to restrict the use of passenger cars that was originally proposed ‘by Rep. cns-13 12379057 UPDATE-O9/18/79 hoffett as a simpler alternative to the standby gasoline rationing plan developed by the Administration and defeated in the House. Failure to meet established conservation targets would trigger the plan whereby the use of a passenger automobile would be banned one day per week on a day chosen by the owner of the automobile and identified by a sticker affixed to the car. Emergency, agricultural, and defense vehicles would be exempt as would be taxicabs, rental automobiles, and cars used exclusively or predominantly for commercial purposes. For further discussion of these bills and their legislative histories see IB79001: Gasoline Rationing: Proposed Standby Contigency Plans. It is uncertain whether the states, if required to develop their own emergency conservation contingency plans, will be able to accommodate local variables while devising more equitable distribution schemes or more effective means to achieve conservation than those that were proposed by the Administration. Mandatory restrictions are no more palatable when imposed by the state than by the federal government. It is possible that a shortage managed more effectively on a regional rather than a national level could be more efficient and sensitive in responding to hardship applications or adjusting regulations to suit changing local circumstances. However, the assumption that there is a substantial repertoire of policy options that the states could devise as substitutes for federal conservation contingency plans may be questionable. DOMESTIC CRUDE STOCKS AND THE WORLD OIL MARKET Disruptions in world crude oil supplies resulting from the political situation in Iran, the world's second largest crude exporter atl the time, began in late 1978. During winter 1979, much of the five mbd lost because of the shutdown in Iran was replaced by increased ioutput from other sources. Saudia Arabia, Iraq, Kuwait, and other countries increased output such that world supply was as much as 2 mbd higher in early 1979 than the comparable period in 1978. Whether or not world demand grew to the extent that there was an actual worldwide shortage in the first months of 1979 is unclear. Since Iranian exports have resumed (although at about half the 1978 rate) production in those countries has since returned to prercrisis levels. This has resulted in a continuing tightness in world oil supplies along with higher prices, especially in «spots markets for cure e oil and refined products.t The federal government has discouraged high-priced spot market purchases by U.S. ’companies to reduce the pressure for even higher prices. As a result, some foreign crude oil that would have otherwise been imported into the United States went elsewhere.i This policy however, was recently relaxed. Despite disorder in the international petroleum market, a number of points can be made with certainty about the situation in the United States: (1) Imports of crude oil .and refined products did Snot fall below comparable 1978 amounts, but neither did they rise to meet ihigher ~demand.t Moreover, crude and product imports for April 1979 averaged 800,000 b/d below Vecember 1978 levels. A likely explanation is that with inventories low at ;he outset, more crude oil was available late last year than there is available now.t Because of transportation, refining, and product distribution delays there is a time lag of several months before such tshortages tare apparent at the consumer level. w cns-1n 1379057 UPDATE-O9/18/79 (2) Crude oil stocks in early March (307 million barrels) were barely above DOE “minimum acceptable standards" of 300 million barrels for tha period, a sign of probable product shortages. The crude stock level has improved slightly since then. (3) Demand during the first quarter of 1979 exceeded demand during the first quarter of 1978 by an average of 500,000 b/d, (20.5 million b/d vs. 20.0), based on preliminary DOE data. (4) Gasoline inventories rose in January and February 1979 at a desirable, rate, but fell sharply by about 20 million bbls from mid-February to early April and came close to DOE "minimum acceptable levels,“ despite a subsidy of $5.00 per barrel for importing distillate away from the European spot market. (5) Distillate stocks, which normally fall during the, earlier part of each calendar year, fell by over 100 million barrels during early 1979. They declined below DOE "minimum acceptable levels,“ where they still remain. Table 4 shows inventories of crude oil, gasoline, and No. 2 heating oil since January 1978. All three categories show lower figures for 1979 than the comparable 1978 period, and indeed all inventories are considered "dangerously low“ as most recently reported. Crude oil and gasoline inventories never really recovered from pressures exerted upon them by the high gasoline demand in 1978. when gasoline stocks decline below 225 million barrels, market dislocations often occur. 1 This happened in June 1978, and it caused enough distortion for DOE to base the 1979 allocations on 1977 data starting with June 1979 rather than wit comparable months of 1978. while gasoline stocks were being rebuilt in December 1978, the pressure of low crude inventories cut refinery utilization in early 1979 to about 85%. Gasoline inventories peaked in February and began to decline sharply during the next two months as refiners apparently tried to protect crude stocks. In addition, distillate supplies, have not yet been rebuilt to the levels considered to be_acceptable minimums. CRUDE OIL, January aw Um am In -a 0 4 CD 1979 Week Ending SOUICGS 3/2 3/9 3/16 3/23 3/30 4/5 4/13 4/20 4/27 TABLE §§EQ§ 340.1 335.8 345.3 343.2 329.0 333.2 332.7 316.7 321.2 324.8 314.2 314.5 296.6 297.1 CRS—15 4: 307.82 316.2 314.1 5321.8 318.8 325.6 326.6 323.7 318.8 Monthly Energy Review (DOE) Weekly Petroleum Status Report Gasoline 272.3 271.1 259.8 249.1 233.6 219.7 216.5 209.2 216.7 213.7 220.9 237.2 245.6 251.0 255.7 252.3 246.4 243.7 242.7 234.9 235.5 233.3 231.8 (DOE) IB79057 GASOLINE AND MIDDLE DISTILLATE INVENTORIES 1978«- April 1979 (in millions of barrels) 213.2 165. 137.9 136.2 145.0 157.5 180.5 200.4 220.8 233.1 232.9 216.2 165.0 127.1 128.4 123.4 119.4 116.6 115.0 112.5 113.9 114.4 115.5 UPDATE—o9/18/79 ;§:;;;2:2 CRS-16 1379057 UPDATE-09/18/79 Table 5 shows the profile of gasoline yields during the January 1978 April 1979 period. As refineries begin to plan for summer demand, they typically raise gasoline yield toward 49% (and sometimes higher) as spring approaches. Gasoline yields during March and especially April 1979 averaged two percentage points below this average, due in part to the heavier crudes being refined. Distillate yields remained at historic levels and there is little evidence that refiners produced No. 2 oils at the expense of motor fuel. It is notworthy, however, that gasoline yields fell while distillate yields did not. This may have been the result of DOE pressures. cas-17 1379057 UPDATE-O9/18/79 TABLE 5: Refinery Output and Yields of Gasoline and Distillate January 1978 - April 1979 (in millions of barrels per day) Gasoline % Of Refinery Distillate % Of Refinery 1992299929 2r2992:i99 -----R99§-_._ 2299992299 Runs-_.-- 1978 Jan. 6.9 48.9 3.1 22.0 Feb. 6.6 47.1 2.9 20.7 Mar. 6.8 48.2 3.0 21.3 Apr. 6.7 48.2 2.9 20.9 may 7.1 47.3 3.2 21.3 Jun. 7.2 49.0 3.1 21.1 Jul. 7.3 49.0 3.1 20.8 Aug. 7.5 49.3 3.3 21.7 Sep. 7.4 49.0 3.2 21.2 Oct. 7.2 48.0 3.3 22-0 Nov. 7.6 49.4 3.4 22.1 Dec. 7.8 50.3 3.4 21.9 1979 Jan. 7C3 49.3 3.1’ 20.9 Feb. 7.0 49.0 3.0 21.0‘ Week Ending 3/02 6.7 47.0 3.0 21.0 3/09 6.6 46.8 3.0 21.1 3/16 6.9 47.9 3.0 20.8 3/23 6.7 47.2 3.1 21.8 3/30 6.6 47.1 3.0 21.4 4/06 6.5 47.4 2.9 21.2 4/20 7.0 47.0 3.1 20.8 4/27 6.7 46.2 3.0 20.7 Source: Monthly Energy Review—Weekly Data from API. CRS-18 1379057 UPDATE—O9/18/79 Each percentage point of yield is the equivalent of about 140,000 tr 150,000 b/d of production, roughly 2% of average gasoline demand. If fully committed to inventory, this extra output would raise inventories roughly 4.5 million barrels per month. This latter factor has done little to increase distillate stocks nationally (due in part to heavy demand) and gasoline yields are lower than would be expected given the short inventories reportedly held by refiners. This would indicate that the 6-month long shortage of light, sweet crude -- which would yield greater percentages of these products -- is now being reflected in low stocks. The lower gasoline yields are difficult to explain. Lower gasoline yields are a tradeoff to obtain higher distillate production, but recent data do not substantiate this. During the past two months distillate yields constituted a relatively normal percentage of refinery runs. Recent gasoline yields are, on average, lower than could be expected given such low stocks. moreover, these lower yields of gasoline apparently are not resulting in significantly higher heating oil output. Imports during the past several months have been lower than desirable from a supply perspective, given low crude inventories. Optimum imports would exceed 9 mbd, but present-levels are nearly one mbd below this theoretically desirable level. The apparent shortfall of suitable crude oil is holding refinery runs to the present depressed level (80.9 percent of capacity according to the most recent data for the week ending 5/25/79) and is affecting the supply of all light products. EElE§§ Prices of crudes have risen sharply this year. Refined product prices, especially those traded on spot markets, have risen even more than crude prices. These are primarily the result of OPEC price increases levied on Jan. 1, 1979, and Apr. 1, 1979, as well as various surcharges imposed by individual producing nations. DOE estimates that price rises during the second quarter of 1979 have been 18% above price levels that prevailed at the beginning of 1979, which were already higher than 1978 levels. In November 1978, domestic refiners. paid a weighted average price of $12.76 for the mix of controlled, uncontrolled, and imported crudes they ran. DOE has not published comparable data for the most recent months, but it can be estimated with some accuracy. Refiners acquired a mix of crudes in April 1979, whose price and quantity are estimated in Table 6. CBS-19 IB79057 UPDATE*O9/18/79 Table 6: Quantity and Price of Crude Oil Input to Refineries 29B§§§lE Q2aa-;:z Pricezbbl Lower tier 3.0 mod $ 6.50* Upper tier 3.0 mbd $13.50* Stripper 1.3 mbd $18.00* Alaskan North Slope 1.2 mod $13.50 Imports 6.4 mbd §12;§Q_ Weighted Average $14.50 *Includes 50 cents transportation cost between wellhead and refinery. Source: CRS estimates based on DOE data. CBS-20 IB79057 UPDATE-09/18/79 This suggests that the weighted average price of crude oil has risen by a; average of $1.83 per barrel from $12.76 to $14.59 between November 1978 to April 1979, a period of six months. This is due primarily to higher world oil prices, which may continue to rise, as indicated by frenetic spot market crude trading and the OPEC price action anticipated in late June. Phased decontrol of domestic crude could add further upward pressure on prices later in 1979. ‘ Although national average crude costs have risen by about u.u cents/gallon in six months, refined product prices have risen even faster. While there is little homogenous data to document nationwide average prices for most products, near-term data on gasoline prices is collected by the‘ Lundberg Survey. Lundberg data show gasoline prices rising from a nationwide (all grades; full and self-serve) weighted-average price of 66.10 cents/gallon in November 1979 to 77.28 cents/gallon in April 1979. This 11.2 cents/gallon figure exceeds the average increases in the price of crude by 6.8 cents/gallon. r The benefit of higher gasoline prices have not accrued solely to refiners, however. According to the Lundberg Survey, dealer margins rose from 6.19 cents per gallon to 9.57 cents per gallon during this time, a 3.4-cent (or 55%) increase. Gasoline is the only product still under price controls. Regulations set prices at the refinery, jobber, and retailer level, but the 180,000 service stations each have individual controls on their margins. DOE cannot possibly police each dealer and as a result some dealers may have circumvented margin ceilings for lack of enforcement. Lundberg data seem to suggest that this could be fairly widespread and could account for prices a the pump that are apparently above the DOE ceiling price authorized. This, however, would be an action on the part of the individual dealer, possibly to increase his profit margin to offset the lower volume of sales resulting from reduced allocations. Alternatively, dealers may have substantial banked costs - expenses that could legitimately be passed on under controls except that market conditions did not permit the higher prices involved. They can now pass these on. Given the current shortage, market conditions should facilitate guick pass-throughs which mean sharp price increases. The components of the 11.2—cent per gallon rise in gasoline prices can be categorized as follows: u.u cents ~- crude cost 3.u cents -— higher dealer margins 3.4 cents -- higher refiner margins The higher refiner margins are supported by the so-called gasoline tilt, implemented by DOE in March 1979. This measure allocates more crude cost to gasoline for the purpose of computing gasoline control ceilings, and it was designed to raise refiners’ margins to account for inflation and to better reflect the higher costs of refining unleaded fuel. Each increase in the price of gasoline of one cent nationwidev translates into a total price rise of more than $1.1 billion per year. Gasoline ,price. alone, therefore, have risen at an annual rate of $12.3 billion during the past half year. The increased cost for this one oil product has wprobably added at least 1/2 to 3/u of a percentage point to the rate of inflation so far this year. Similar, although probably smaller, increases in other cas-21 1379057 UPDATE-09/18/79 petroleum products may make mthis year a very bad one with respect to oil—fueled inflation. GAS0lINE PRODUCTION IN DOMESTIC REFINEBIES One of the most important factors contributing to the current shortage ofi petroleum products is the lack of appropriate refining capacity. It is important to note that the problem is not so much a shortage of total, capacity as it is an inadequate capacity to process the most desire products from the heavy crude oil now available to refiners. Domestic refiners have traditionally favored light (low-gravity), sweet (low-sulfur) crude oil because it yields the highest percentages of products such as gasoline andy distillate fuel oil for which there is a strong market. Production of that type of crude oil, however, has declined both in the United States and in, foreign producing countries. To a large extent, it has been replaced in the crude oil markets by heavier, more sour (high-sulfur) crude oil. Unfortunately, these crude oils yield products such as fresidual fuel oil, asphalt, and petroleum coke for which there is a limited domestic market. These heavy products can be further refined into the lighter products in high demand, but to do so requires desulfurization, coking, and cracking, reforming equipment which is expensive and which may not be permitted to operate under EPA regulations promulgated to implement provisions of the Clean Air Act. Faced with a need to reconfigure and to expand existing refineries so that these heavy, sour crudes, can be used to meet demand for light products, the oil companies claim that they have been unable ito obtain the necessary permits in many cases. EPA regulations that require the use of the best available technology on all refineries in non-attainment areas, as defined by the Clean Air Act, apply to most U.S. refineries. The practical effect of this, however, has arguably been vto eliminate potential environmental tradeoffs that could have been used to upgrade the refineries in the «future. The incremental emissions that would have resulted from expansions or the addition of equipment to handle more of the heavy, sour crude oil might have been offset by applying new refining technology to the older parts of they refinery to keet the total emission level constant. The requirement that the’ best available technology be required now rather than as part of an mexpansion, however, has precluded its future use in the construction of new facilities. The same stringent air quality regulations, as well has those resulting A from the National Environmental Protection, the Coastal Zone Management Act, and state and local laws ——-which in many cases are even more restrictive ~+ have created a situation in which it is virtually impossible to site ya new refinery and extremely difficult to expand or reconfigure existing ones. This is ironic because these are the very changes that are needed to permit the production of the fuels that are most needed to reduce air pollution at the consumer level, particularly for unleaded gasoline and for low-sulfur distillate fuel oil. The situation is especially acute yin California, where the refining capabilities are clearly mismatched with the crude oil now available. Light, tweet crudes from Indonesia and the Western U.S. are no longer available in sufficient quantities in the crude oil market, but heavy, sour crudes from Alaska and other sources are in surplus. California refiners haves increased ,their use of Alaskan crude oil over the :past year, but few can use it exclusively because the excessive sulfur leads to corrosion and mother operational problems which severly damage refineries not equipped to handle «:35-22 IB7 9057 UPDATE-09/18/79 it. This oil can be processed if it is blended with light, sweet oil but cannot completely replace it short of a major reconfiguration. Californi crude oil is even heavier than Alaskan oil, so the products derived from it are particularly unsuited to the California market, which is heavily biased toward lighter products.‘ The tightness in the world crude supply and the official discouragement of spot market purchases has been reflected in crude oil runs which were about 14,160,000 b/d in March 1979 compared to 14,141,000 b/d one year ago. Despite small increases in refining capacity due to minor expansions, the. capacity utilization rate dropped slightly from 84.8% to 84.1%, according to DOE figures for April, because of the limited availability of refinable crude oil. This is much lower than the 92% of capacity that is considered by refiners to be the most efficient operating level. The utilization rate dropped from 91.2% in December 1978 to 87.2% in January 1979, 84.5% in February, and 84.1% in march. Because of demand increases for gasoline and reduced gasoline yields, a gasoline shortage, particularly for unleaded, has developed. In February 0 1979, domestic demand for gasoline, according to DOE was 7,213,000 b/d but production was only 6,959,000 b/d, leaving a shortage of 253,000 b/d, about 163,000 b/d of which was met with expensive imported gasoline. The shortage at the time was only 90,000 b/d but has since become larger, although precise data are not yet available. In addition the shortage has been more severe in areas where allocations have not kept pace with rapid populations growth. The gasoline shortage has been exacerbated by the lead limits for leaded gasoline which are now 0.8g per gallon and which were scheduled to drop, t 0.5g on Oct. 1, 1979. Those limits were waived until Oct. 1, 1980, when the 0.5g standard will apply, when it was pointed out that they could reduce refinery output by about 100,000 b/d in California alone. wIn addition to the lead phasedown, prohibition of the use of MMT as an. octane booster and restrictions on gasoline vapor pressures have severly reduced available gasoline supplies in California, and they are likely to have the same effect nationwide if similar standards are applied. The ban on MMT was suspended until Oct. 1, 1979, to permit increased short-term production of unleaded gasoline. The need to substitute octane boosters for lead is reportedly responsible_for an additional 30,000 to 60,000 b/d decrease in the supply of unleaded gasoline. California refiners estimate ithat these three factors alone are responsible for a five-percent reduction in gasoline supplies there, which is probably more than half of the shortage. The Administration estimates that the relaxation of the MAT ban and lead standards, plus an incentive of two cents per gallon above their current base price for unleaded gasoline, produced above current levels, could result in the shift of up to 800,000 b/d from leaded to unleaded gasoline. ' The gasoline supply problem has also been compounded by other factors. The effects of the Iranian shutdown of oil production combined with the low stocks of gasoline that resulted are now being felt at the pump. Even though Iran has resumed production it has not returned to pre-revolutionary levels. Much of the resumed production, which is about two million b/d less than’ export levels in previous years, is being sold in the spot market. The federal government has urged U.S. refiners to avoid such purchases because of the inflationary effect such purchases would have on world oil prices Because other countries were less reluctant to pay the asking price in the spot market, the United States has borne a ydisporportionate share of the crude oil shortfall. At the same time, Saudi Arabia has reduced its production levels to 8.5 mbd from the 10.5 mbd rate of early 1979, and it has cns-23 11379057 UPDATE‘-O9/18/79 recently announced that it will shift crude oil sales of up to 500,000 b/d from U.S. companies to the Third World, possibly as an expression of dissatisfaction with 0.5. policy in the Middle East. The price control regulations for gasoline prohibit profits on new refining investment. Even though current regulations allow refiners to include amortization of new investment as an allowable cost pass-through, the regulations do not allow any return on,that investment ton be allocated to gasoline. Since most of the required new investment is needed to increase gasoline yields, particularly those of unleaded, this regulation may well work against increasing gasoline supply. Faced with severe inflation and the need to upgrade many of their existing facilities, many refiners maintain that even if sites were available and reconfigurations were permitted, expenditures of the magnitude required would be difficult to make. The cost of adding one barrel per day of refining capacity is now more than $uooo. Befiners contend that without higher investment tax credits and accelerated depreciation schedules, these high costs combined with project limitations on output greatly reduce the present value of future cash flows. In that investment climate, the prospect for reconfiguration, expansion and construction of new refineries is not considered to be very promising. Critics of this view contend that ample oil company profits from production and marketing can and should be used to underwrite refinery construction investment. Given the current lead times of five to ten years or more for some of these projects and the regulatory and economic constraints that prevail, the domestic refining situation is not likely to improve significantly for at least several years, and it could easily grow worse. As a result, much needed capacity may be built overseas rather than in the United States, a situation that could lead to even greater petroleum product supply problems in the future. “LIBRARY OF W WASHINGTON UNIVERSITY ST. LOUES — MO. ¢ T