This time last week, I posted the diary US gas prices: are you being gouged? It showed that unlike all other post-Katrina price fluctuation which has been very closely matched to world crude prices, the May 2007 gas price rise is a uniquely American event that has broken this correlation.
New prices have now been added to the weekly data sets I used for my graphs and analysis, so here is an update. Since my diary last week, the new weekly mean pump price from the DOE shows a further 4.6% rise in one week, from $3.07 per gallon of May 14 to $3.21 now - but oil prices remain on a par with last year. In short, the May rise continues to be all-American.
First, here is a visual history of American (regular conventional) gas pump prices under George W. Bush.
Plotting each year individually shows the recent trend of summer seasonal peaks:
The 2007 pre-summer rise started in line with 2006, but has continued where 2006 plateaued.
To see how closely the American at-the-pump price correlates with the world crude price, here is normalized price data for the past year. Each line on the next graph below represents a price normalized to its 2006 mean, so the mean price over the 52 weeks of 2006 is 1.00.
The black line shows a smoothed three-week average of All Countries Spot Price FOB Weighted by Estimated Export Volume from data here. The red line shows the United States mean weekly at-the-pump price for regular conventional gasoline, more data here.
The graph shows a remarkable trend. The correlation between weekly world crude and US pump prices for 11 months from May 22 2006 to April 23 2007 is extremely high: 0.966. However, when the last four weeks of prices are added that correlation is reduced to 0.936. That's a massive drop from only four new pairs of values.
Here is the weekly ratio of US at-the-pump price to the export-weighted world crude oil price for 2006 and 2007, measured in cents per gallon divided by dollars per barrel. This ratio is useful despite non-linear effects such as taxes, because the oil price has been relatively stable in a narrow 20% range for that period: consistently between $55 and $70 a barrel.
With oil in this price range, the graph shows that the normal ratio is in the range 4.0 to 4.5. But over the past four weeks, that has spiked to more than 5.
Since the start of April, crude oil (by the measure used here) has been stable in the $62 to $65 range, currently at $64 which is about the same as this time last year. Internationally, many people in developed nations are paying the same or less at the pump than they were a year ago. They're typically paying less because oil is about the same price in US dollars, but most major currencies have strengthened at least 10% against the greenback. (Down under in New Zealand which has gas taxes higher than the United States but lower than Europe, we are paying about US$4.35 per gallon now - that's several cents less than May last year.)
One exception to the lower gasoline price trend outside the USA is the market most intertwined with the United States: Canada, where the latest data at the government website shows retail prices are slightly higher now than any time in 2006, and pressure to produce has sent refining margins to record highs.
What has caused the high North American prices? US crude oil stocks are on a par with this time last year, at the high end of their normal range. But gasoline stocks are down 11% on May 2006, and as low as the weeks after Hurricane Katrina. The key graph is this: US gasoline stocks, reproduced here on the right.
The DOE's This Week In Petroleum (TWIP) report of last week had this to say, bold emphasis added:
- Why are gasoline prices so high?
- Gasoline inventories have recently been drawn down at a dramatic rate to bridge the gap between supply and demand. ... This is the sharpest decline in gasoline inventories over a consecutive 12-week period in EIA’s recorded historical data. Lower import levels than last year and numerous refinery outages, due to both maintenance and unexpected incidents, have slowed supply growth, while at the same time, demand continues to grow, even with prices around $3 per gallon. ... gasoline demand is still 1.0 percent (or nearly 100,000 barrels per day) greater than year-ago levels.
- Is there an end in sight or will gasoline prices continue to rise all summer?
- Although gasoline inventories are expected to remain lower than normal throughout the summer, high prices have encouraged more supply and inventories have increased slightly the last two weeks. ... Should imports continue at such levels and more domestic refinery capacity come back online, supplies will improve and wholesale prices could come down. However, with gasoline inventories likely to remain low all summer, retail prices are expected to remain close to $3 per gallon during the entire summer season.
Across the northern border, the Supplement of the May 11 Fuel Focus report from Natural Resources Canada finishes with this interesting speculation:
In most years, the Memorial Day weekend in the U.S. marks the beginning of the peak demand for gasoline. However, this year, demand has been showing signs of increasing sooner. Since the U.S. and Canadian governments decided to advance daylight savings time (in an effort to reduce energy consumption), it seems that demand for transportation fuels has increased. Although there is no hard evidence to link this increase to the time change, many analysts believe that the additional hours of daylight have increased travel in the evenings.
News of the recent declines in stock levels, combined with the earlier than usual up-tick in gasoline demand, has market analysts speculating about possible gasoline shortages this summer. This has sent speculators and traders scurrying to the market to secure contracts for summer delivery. This trader activity has driven up wholesale prices of gasoline across North America and, subsequently, prices at the pump. Prices are likely to remain high until inventory levels begin to build or analysts are comfortable that there will be enough gasoline to meet summer demand.
I don't agree much with the daylight savings speculation: the impact of a few extra weeks of lighter nights has been dwarfed by weather differences, and prices have only spiked above year-ago levels in the past four weeks. The rest of it sounds about right, though. Unless Americans curb gasoline use, prices will probably remain above 2006 levels all summer.