Factors and Trends Affecting Gasoline Prices: Comerica Bank Economic Analysis
16 June 2000
Factors and Trends Affecting Gasoline Prices: Comerica Bank Economic Analysis
DETROIT - A week's worth of commuting or a typical weekend get-away trip now
costs Michigan motorists at least $40 more in gasoline than it did in June a
year ago. The one-dollar surge in the price per gallon of regular unleaded
gasoline already is adversely affecting retail sales, including decisions to
purchase large vehicles.
There are four principal factors underpinning the recent acceleration in
gasoline prices in Michigan:
1. Supply and demand for crude oil
First and foremost, crude oil prices have risen from roughly $10.73 per
barrel at month-end February 1999 to more than $32.00 per barrel in June 2000.
The crude oil prices have risen from extremely low levels because the U.S. and
world economies are now expanding in tandem, whereas most foreign economies
were still in the doldrums in the wake of the 1998 financial and economic
collapses in Asia and Latin America. With recession on the international
scene, demand for oil products declined, leaving oil producers and drillers
scrambling to curtail output that had been geared to the heady economic growth
trends of 1996-98. By early 1999, oil rigs were being shut down in response
to falling petroleum prices on world markets, and oil producers were busily
attempting to reduce output by enforcing new quotas and political disciplines
on OPEC and non-OPEC nations.
Now that demand for oil has accelerated, along with global recovery for
more than a year, and oil supplies have been capped by the oil cartel, crude
oil prices have advanced swiftly. Some 25-30 cents of the dollar increase in
price per gallon reflects shifts in this supply-demand relationship.
Prospect for remediation:
By late summer, the demand for oil, worldwide, will again be decelerating.
Central banks around the globe have been engaged in policies to slow
inflation, and these efforts are usually accompanied, with a lag of 9 to 12
months, by economic deceleration. But oil producers, still encouraged by
rising prices and profit potential, will increase oil supplies, placing
downward pressure on prices for the balance of 2000. Moreover, the incentives
to "cheat" on the cartel production quotas are at an all-time high. Despite
efforts to discipline member and non-OPEC member oil producers, the history of
the oil markets reveals a clear pattern of cheating by nations eager to
capture revenues before prices plummet.
2. EPA requirements
A second factor compounding the pain of rising oil prices in Michigan and
other parts of the nation is EPA regulation requiring reformulated gasoline to
conform with Energy Department environmental targets. Reformulated gasoline
costs more to refine. Nationally, the new rules, effective June 2000, have
added nearly 10 cents per gallon to the pump price. But, in the Midwest, with
added difficulties in blending the oxygenate ethanol, added costs per gallon
amount to 35-40 cents.
Prospects for remediation:
As new and old facilities are equipped to accommodate EPA requirements,
refinery capacity to generate reformulated gasoline will rise and equilibrate
mandated supply with contrived demand. Pump prices will remain at least 8
cents higher for the remainder of this year, based on recovery of higher
refinery costs.
3. Rupture of pipeline
An early-June break in a pipeline that carries nearly 30 percent of
Michigan's gasoline has ratcheted pump prices upwards by approximately 45
cents per gallon. At a time when national prices were averaging $1.63 per
gallon of unleaded regular, comparable product prices in Michigan were
averaging well over $2.00 per gallon. Unrelated disruptions to another
pipeline and a refinery in Michigan exacerbated prices here.
Prospects for remediation:
Within a month, repairs of breaks and restoration of normal gasoline flows
will remove most or all of the disparity in prices caused by problems unique
to Michigan and the Midwest.
4. Taxes
The federal government last hiked the excise tax per gallon of regular
unleaded gasoline by 4.3 cents in October 1993 (to 18.4 cents). Michigan last
hiked its excise tax by 4 cents in August 1997 (to 19 cents), but also hiked
the sales tax by 50 percent (to 6 percent) and effectively also added another
1.14 cents of tax per gallon by cascading the sales tax upon the excise tax.
Prospects for remediation:
Despite record total budget surpluses in Lansing and Washington, including
much-higher-than-projected revenues from gas taxes, there is scant prospect
for lower gas taxes.
Favorable Trends In Oil Prices Contrast Sharply With Rising Government
Taxes On Gasoline
Technology and competition in the oil industry have resulted in very
impressive downward trends in crude oil, manufacturing, and transportation
costs since 1918. Over the past 82 years, the oil industry price trend fell
sharply: On average, and despite inflation and government regulations, the
per-gallon price of regular gasoline fell by 1.23 cents per year. Government
taxes on gasoline offset some of this trend. Over 8 decades, gas taxes rose
an average of .08 cents per gallon per year. Thus, U.S. retail pump prices
declined only 1.15 cents per gallon annually.
Conclusion: relief by late summer
If no further tax or regulatory burdens are imposed on the industry, and
if the unusual factors plaguing pipelines and refineries are contained by
early July, retail prices of unleaded regular fuel should be down nationally
by at least 30 cents per gallon by late summer, and down at least 70 cents per
gallon in Michigan.
Comerica Bank, the largest bank in Michigan, is a subsidiary of Comerica
Incorporated , a multi-state financial services provider
headquartered in Detroit, with banking subsidiaries in Michigan, California
and Texas, banking operations in Florida, and businesses in several other
states. Comerica also operates banking subsidiaries in Canada and Mexico.
