Order Code RL32343
CRS Report for Congress
Received through the CRS Web
Gasoline Price Surge Revisited:
Crude Oil and Refinery Issues

April 8, 2004
Lawrence Kumins and Robert Bamberger
Specialists in Energy Policy
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress

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Gasoline Price Surge Revisited:
Crude Oil and Refinery Issues
Summary
Since late 2002, gasoline prices have been extremely volatile, with the national
average spiking above $1.70 three times. Most recently, the nationwide pump price
of regular fuel set a new record, exceeding $1.75 per gallon. Prices in some states —
at $2.15, California stands out — are much above the average. In addition to the set
of market forces applicable to pump prices in the United States, the Organization of
Petroleum Exporting Countries (OPEC) announced a supply cut effective in April.
At a minimum, this underpins very high crude oil prices, which are a component of
the current pump price situation.
Beyond higher crude oil prices, gasoline prices are strongly influenced by the
supply and demand situation at the pump. Since 1999, the only growth in U.S. oil
consumption has been increased gasoline demand, which has risen by 500,000 barrels
per day to a current annual average of 8.9 million barrels per day. While this might
seem to be a relatively small amount, it has translated directly into increased demand
for foreign gasoline, since U.S. refineries have not added capacity as gasoline
demand has grown. Demand for imported gasoline now exceeds one million barrels
per day.
In addition to the high demand for imported gasoline, the quality of gasoline
sought from foreign refiners has become a factor. As the specifications for
environmentally acceptable fuel have become more stringent, the complexity of
manufacturing “U.S. spec” gasoline has increased. Not all refiners can economically
make fuel that meets domestic requirements. U.S. gasoline marketers seeking imports
must shop world markets for a scarce commodity; accordingly, prices are high. These
high-priced incremental supplies play an important role in determining prices at the
pump, because all gasoline tends to be priced by the market at the cost of the last
units supplied.
Other factors contributing to the pump price situation include the state of
gasoline and crude oil inventories at U.S. refineries. Both are at low levels. Gasoline
inventories available for consumption amount to less than two days of supply. Crude
oil stocks — from which gasoline consumed is replaced — are still at low levels,
although rebounding somewhat from last winter’s record lows. Petroleum inventories
are low because global oil supplies are tight, in part due to strong demand, especially
in Asia. OPEC production policy is a consideration as well.
As gasoline prices rise, the matter is becoming more visible and politicized,
resulting in calls for some sort of public policy remedy. Among the options discussed
is release of crude from the Strategic Petroleum Reserve, a complicated measure with
a list of pros and cons, and the relaxation of Environmental Protection Agency rules
regarding gasoline composition.
This report will be updated to reflect significant changes in the factors impacting
gasoline markets and prices.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Gasoline Inventory Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Gasoline Supply — U.S. Production and Imports . . . . . . . . . . . . . . . . . . . . . . . . . 4
Crude Oil Inventory Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Other Factors Contributing to High Gasoline Prices . . . . . . . . . . . . . . . . . . . 9
Gasoline Prices and the Strategic Petroleum Reserve . . . . . . . . . . . . . . . . . . 9
Concluding Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Figures
Figure 1. Daily Prices for California & Nationwide Retail Gasoline and Crude Oil,
Jan. 2003 - Mar. 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. U.S. Gasoline Inventories, June 2002 to Present . . . . . . . . . . . . . . . . . 4
Figure 3. Gasoline Production and Imports, Jan. 2002 - Mar. 2004 . . . . . . . . . . . 5
Figure 4. New Gasoline Production and Gasoline Supply . . . . . . . . . . . . . . . . . . . 7
Figure 5. Crude Oil Refiner Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

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Gasoline Price Surge Revisited:
Crude Oil and Refinery Issues
Introduction

Gasoline prices have been extremely volatile for well over a year, with three
significant price spikes focusing the attention of consumers and policy makers on the
gas pump. With the national average gasoline price recently breaking the old
summer 2003 record of $1.74, gasoline market developments have been viewed with
renewed concern. Crude oil prices also rose sharply during 2004, reaching as high as
$38 per barrel on the spot market, the highest price seen since Kuwait was invaded
during the Gulf Crisis. Crude prices have declined somewhat, although they may be
in transition awaiting the marketplace outcome of a 1 million barrel per day (mbd)
output cut announced by the Organization of Petroleum Exporting Countries (OPEC)
on April 1.
By late March, the crude oil price increase to $38 accounted for as much as 14
cents per gallon of a total increase at the pump of 23 cents. Simply stated, pump
prices are essentially determined by the supply of and demand for gasoline, although
the cost of crude figures into the equation. Other supply-side factors leading to high
prices relate to the ability of domestic refineries to meet growing gasoline demand.
With no new domestic refinery built for a quarter century, the nation relies on
imports of gasoline for roughly 10% of its needs. As U.S. gasoline specifications
become tougher for all refiners to meet, the supply of foreign fuel available to U.S.
importers has become tight, and this appears to be a factor contributing to gasoline
price increases exceeding those of crude oil.
Speaking at a refiners conference in late March 2004, Energy Information
Administration (EIA) Administrator Guy Caruso indicated that gasoline prices could
peak at $1.83 in April and May due to lower gasoline imports.1 In addition, he
expressed some uncertainty about the sufficiency of finished gasoline imports to meet
upcoming summer driving demand. Combined with attempts by OPEC to hold crude
prices high by limiting members’ production for the second quarter of 2004, the
gasoline refining and import situation may make for volatile pump prices as seasonal
demand picks up.
1 “Low Imports Pose Risk to U.S. Gasoline Supply: EIA.” Platts Oilgram News, March 23,
2004. p. 1.

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CRS-2
Gasoline Prices
According to the American Automobile Association (AAA) daily survey of
retail gasoline prices around the country, gasoline prices at the pump nationwide —
recently at $1.77 — have exceeded the previous record set on August 30, 2003. Since
the start of 2003, prices at the gas pump have fluctuated within a 30-cent-per-gallon
range, and reached peaks above $1.70 three times. Figure 1 shows pump prices for
the United States as a whole and California, where both price levels and peaks
exceed the national averages — a result of various local conditions. Recently,
California pump prices averaged $2.15 for regular, just down from the state record
of $2.18 set March 6, 2004.
Figure 1. Daily Prices for California & Nationwide Retail Gasoline
and Crude Oil, Jan. 2003 - Mar. 2004
$2.4
$2.2
$2
$1.8
$1.6
$1.4
$1.2
$1
$0.8
$0.6
$0.4
Jan '03Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecJan '04Feb Mar
California Gas
Nationwide Gas
Oil
Sources: Retail gasoline prices: Oil Price Information Service, Daily Fuel Gauge Report online,
sponsored by the American Automobile Association, [http://www.fuelgaugereport.com]
Spot oil prices: EIA, Weekly Petroleum Status Report, Table 14.
[http://www.eia.doe.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wp
sr.html]
Also shown on Figure 1 are crude oil prices for the benchmark NYMEX traded
crude oil, West Texas Intermediate (WTI, for delivery at Cushing, OK). This is often

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CRS-3
referred to as the “spot market” price; the weighted average cost of different types of
crude used by refiners tracks the NYMEX price, although it generally averages less
than this benchmark. Gasoline is manufactured from crude oil, and this price series
provides a baseline comparison between retail prices, wholesale prices (excluding
tax), and raw material cost. As of early April, crude oil for May delivery traded for
about $36 per barrel on the NYMEX, the equivalent of 86 cents per gallon, an
increase of about 10 cents from the December 2003 average of $32 per barrel. Crude
oil prices fluctuate markedly on a daily basis, posing a difficulty in updating the
figures cited here.
While an oversimplification, every gallon of gasoline requires a gallon of crude.
For much of the Figure 1 time frame, crude oil prices track national average pump
prices reasonably closely. But the peaks in gasoline prices — spring, late-summer
2003, and most recently in March 2004 — exceeded what could be attributed to
increased crude costs. While crude oil price increases are generally passed through
to the gas pump on a penny-for-penny basis, and help explain much of the change in
gasoline prices, the divergence between gasoline and crude points toward changed
gross margins in refining and marketing. This is due to the fundamental supply and
demand situation for gasoline, relating specifically to an imbalance between the two
that is resolved by a change in price.
Rising gasoline prices often elicit questions about the federal government’s
ability to intervene in the market and roll back price hikes. It must be kept in mind
that gasoline prices are not currently regulated, and there is no statutory authority to
do so. A period of price controls, accompanied by supply allocation requirements,
was in effect from August 15, 1971, until January 20, 1981. Those controls were
often associated with shortages, resulting in episodes of long lines at gas pumps. In
retrospect, it is not clear that the price controls resulted in retail prices that were
lower than they might otherwise have been. As a result, the concept of government-
mandated price controls during periods of rapid price increases has seen little support
as a policy option since the 1970s.
Gasoline Inventory Considerations
Figure 2 shows U.S. gasoline inventories during the past two years. The gray
area highlights the normal operating range — including seasonal fluctuations — for
gasoline stocks. The horizontal line across the bottom of the figure shows the “lower
operational inventory,” which the Department of Energy (DOE) places at 185 million
barrels, the equivalent of about 20 days of nominal supply. That is the level at which
sporadic physical shortages begin to appear around the nation. The 185 million barrel
figure can be thought of as the “fill” needed to keep the distribution system in normal
operation; it cannot be drawn upon to meet a demand increment at the pump. There
is virtually no extra supply to act as a price cushion, and price spikes, spot shortages,
and localized “run-outs” are a likely possibility.

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CRS-4
Figure 2. U.S. Gasoline Inventories, June 2002 to Present
Source: EIA, Weekly Petroleum Status Report, Figure 4.
The recent peak gasoline demand — recorded in mid-summer 2003 — was a 4-
week average of about 9.4 million barrels per day (mbd). The difference between
current stocks of about 200 million barrels (measured in late-March 2004) and
DOE’s “minimum operating level” is roughly 15 million barrels, the equivalent of
less than two days of driving season supply available from refiners’ stocks.
While gasoline inventories have been lower, they are currently under the normal
range for this time of year, a time when stocks should be building for the upcoming
driving season. Taken together with crude oil stocks that are below the seasonal
norm, the overall petroleum situation reflects a fragile balance between low gasoline
inventories, the crude available to make more, and the driving season’s arrival.
Gasoline Supply — U.S. Production and Imports
U.S. refineries cannot currently manufacture all the gasoline called for by the
nation’s motorists.2 About 10% is imported either as finished, ready-to-market
gasoline or as blending components that can be mixed into the gasoline pool. Thus,
two sets of gasoline supply figures should be watched; the “products supplied” series
compiled by EIA, and “new gasoline supply,” the combination of imports of finished
gasoline, gasoline blending components, and net U.S. refinery production of gasoline.
The “products supplied” data show gasoline flowing to consumers from inventory.
2 For a discussion of the economics of the U.S. refining sector, see CRS Report RL32248,
Petroleum Refining: Economic Performance and Challenges for the Future, by Robert L.
Pirog.

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CRS-5
“New supply” data show the amount of newly available gasoline — be it produced
or imported — that may flow into inventories or directly to the pump.
Figure 3 shows new gasoline supplied to U.S. markets since the start of 2002.
These data consist of domestic refinery production,3 imports of finished gasoline that
meets U.S. specifications, as well as a significant amount — currently about 300,000
barrels per day — of blending components from refineries abroad.4
Figure 3. Gasoline Production and Imports, Jan. 2002 - Mar. 2004
10
9.5
9
8.5
8
7.5
7
Jan '02
Apr
Jul
Oct
Jan '03
Apr
Jul
Oct
Jan '04
Imported Finished Gasoline
Imported Blending Components
Net U.S. Refinery Production
Source: Finished Imported Gasoline: EIA, Petroleum Supply Monthly, Table 54. Blend Components:
EIA, Weekly Petroleum Status Report, Table 9 (p. 15). U.S. Net Refinery Production: see text of
report.
These imported blending components lend a complexity to tabulating the data
on gasoline production. EIA includes the blending components in its series on
refinery production, even though they are not produced in U.S. refineries. Blending
components are added to gasoline supplies at refineries and terminals. They appear
in the EIA data collected from refiners and terminal operators as if they were the
same as output from U.S. refineries' manufacturing process, whereas they are really
imported. EIA does this in order to avoid counting the components twice — as
imports and as refinery output. Without these imports of blending components,
gasoline supplied by U.S. refiners and terminal operators would be less on a
barrel-for-barrel basis. Once they are blended into the pool of U.S. refinery output
3 Defined as finished motor gasoline production at U.S. refineries minus imports of blending
components, which are refined offshore.

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CRS-6
and meet marketability standards they become part of U.S. gasoline supply, although
they are not identified by EIA as imports per se.
Imports of gasoline and components peaked at 1.1 mbd — including 426,000
barrels per day of components — in April 2003. Venezuela has historically been a
supplier of refined gasoline to the United States, but petroleum sector labor unrest
has hindered refining operations. U.S. gasoline supplies from Venezuela have
suffered since late 2002, when a two month oil workers strike crippled production
and refining. Reformulated gasoline (RFG) supplies in particular have suffered, with
the first post-strike cargo shipped to the United States in June 2003.5 Subsequently,
supplies from Venezuela — whose refineries have operated as if they were a part of
the U.S. supply system — have been sporadic, as operational and labor problems
have limited the output of difficult-to-produce gasoline that meets U.S.
specifications.6
U.S. refineries maintained gasoline production of about 8.4 mbd through most
of 2003, operating between 92% and 96% of capacity. But refiner utilization typically
falls in the month of January, as refiners “turn around” production to emphasize
gasoline output instead of heating fuels and perform scheduled maintenance.
Consistent with this pattern, capacity utilization in February and March of 2004 has
run in the 89% area.
Total gasoline supplied to end markets peaked in August 2003 and declined
through the winter. It will likely increase as the 2004 driving season starts; the
August peak is an often-observed seasonal factor. If seasonal consumption patterns
prevail — Figure 4 shows these data — low demand during the early months of the
year will allow stocks to increase, if post-turnaround production and import levels
are sustained. Figure 4 compares the total of gasoline produced and imported with
gasoline supplied, defined as withdrawals from refiners’ stocks for sale at the
nation’s gas pumps — in other words, this is gasoline demand.
Noteworthy in Figure 4 is the early 2004 gasoline supply situation, including
the January turnaround at 8.5 mbd and a February (the most recent data) supply
rebound to 9.3 mbd. Demand — measured by gasoline supplied — is at winter levels,
8.6 to 8.7 mbd. Here is a situation where “supply” exceeds “demand” (at least for the
moment). This has contributed to gasoline inventory buildup. Inventories are above
minimum levels but below EIA forecasts for this time of year.7 Were the above-
minimum gasoline inventory levels to continue to expand, the increased gasoline
availability could be a price stabilizing factor. But to maintain such an inventory
expansion, domestic refiners would need to produce sufficient gasoline, and imports
— which have not been robust — would need to increase. For U.S. refiners to run
5 “Venezuela Plans Cut in RFG Exports to U.S.” Platts Oilgram News, August 29, 2003. p.
3.
6 Refiners must deal with several challenges, including a requirement effective at the start
of 2004 calling for a substantial reduction in gasoline sulfur content, and the need to reduce
volatility while meeting fuel performance standards.
7 “U.S. Gasoline Prices at Risk of Rising Due to Below Normal Imports.” Platts Oilgram
Price Report, March 23, 2004. p. 11.

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CRS-7
more gasoline, their own supplies of crude must exceed minimum operating levels
by enough of a margin to support expanded operations.
Figure 4. New Gasoline Production and Gasoline Supply
Source: Finished Imported Gasoline: EIA, Petroleum Supply Monthly, Table 54. Blend
Components: EIA, Weekly Petroleum Status Report, Table 9 (p.15) U.S. Net Refinery Production:
see text of report.
Crude Oil Inventory Considerations
Crude oil in refiner inventories is shown of Figure 5. Note that crude stocks
recently fell below the lower observed limit during December and January, but
recovered, reflecting lower refinery runs during January. For gasoline supplies to
maintain levels sufficient to avoid run-outs and price spikes, crude must be available
at refineries. With domestic crude production at its maximum, imported crude oil
will be called on to provide the needed incremental supply.
Crude oil imports peaked in September 2003 at 10.4 mbd and have declined
steadily to current levels of about 9.5 mbd. Crude availability may ultimately be a
factor in the current gasoline price and supply situation. Absent sufficient inventories
— and some assurance that they can be replaced at prices commensurate with current
selling prices for gasoline and other refined products — refiners may be reluctant to
run barrels of what might be viewed as scarce crude. In other words, a refiner may
be unwilling to refine high-priced crude, and sell the resulting gasoline at a lower
effective price, having driven down his own market by making more gasoline.

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CRS-8
The current world crude situation is characterized by many cross-currents,
notably OPEC production policy and growing demand, chiefly from Asia. OPEC has
pursued a supply and price policy that has resulted in prices that — at $33 in mid-
March — are well above its currently stated target band of $22 to $28 per barrel
(measured at the point of export). This has resulted in much higher prices in the
United States, with trading on the NYMEX recently peaking at $38 per barrel.
At its March 31 meeting, OPEC — acting on the expressed concern that a drop
in demand at the end of the northern hemisphere heating season would cause prices
to fall — cut members’ output quotas by 1 mbd. How this will play out in a market
where NYMEX prices are down about $3 from the recent high will be determined
when (or if) a reduced crude flow physically reaches the marketplace.
Asian demand appears to be growing at a much higher rate than previously
expected. The International Energy Agency (IEA) reports that surging demand in
China and other non-OECD Asian economies has raised the assessment of global oil
demand growth for 2004 to an average of 1.65 mbd over 2003.8 Growing demand
for the world’s oil — even U.S. demand grew by 300,000 barrels per day between
2002 and 2003 (a 1.5% increase) — has given OPEC some pricing power as it tries
to manage markets.
Figure 5. Crude Oil Refiner Inventories
8IEA, Oil Market Report, March 11, 2004. See Highlights.

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CRS-9
Other Factors Contributing to High Gasoline Prices
U.S. gasoline quality and composition regulations have created unusual fuel
requirements that are not easily met by foreign refiners. In a nation where refinery
capacity can only meet about 90% of gasoline needs, calling for significant supplies
from abroad, meeting U.S. product “specs” for imports can present a barrier to
supplying market demand. In addition to U.S. requirements for reformulated
gasoline, low sulfur requirements began in 2004. Further, the ban on use of the
additive MTBE now in effect in California, New York, and Connecticut has resulted
in increased need for low-volatility gasoline, because the MTBE ban necessitates the
use of ethanol in the gasoline “cocktail.” Since ethanol increases the vapor pressure
(volatility, measured by the Reid Vapor Pressure Index or RVPI) of gasoline, low-
cost, high vapor pressure components such as butane and pentanes must be removed
from the RFG pool. The gasoline base stock suitable for blending with ethanol such
that an acceptable RVP is achieved is relatively difficult and costly to refine, and not
available from every refiner.
There is also a volumetric loss with ethanol blended gasoline. Because
approximately two gallons of MTBE are being replaced by one gallon of ethanol, the
net volume loss must be replaced with some other high-octane blend component with
low vapor pressure. In addition to the need for more gallons of gasoline in the blend,
the availability of blending components of the needed quality, such as alkylate and
iso-octane, is limited.
In addition to manufacturing challenges at U.S. refineries, two purely economic
factors have operated to raise the cost of importing gasoline. There is a shortage of
smaller, clean tankers in which gasoline cargoes are transported, resulting in high
tanker rates, which are passed on to the pump.9 If the incremental cost of imported
product is high by virtue of this, it tends to erect a price umbrella, supporting higher
prices for all gasoline sold in the nation.
The other is the present structure of gasoline price futures, a situation traders
call “backwardation.” This refers to the current hierarchy of prices for gasoline for
delivery in future months, in which near months have higher prices than out-months.
A purchaser of current-market gasoline knows that, at the time it is scheduled to be
shipped and delivered, the market price at that future point in time is expected to be
lower than the price paid when the deal was crafted. If this event comes to pass, the
purchaser may not be able to sell the gasoline for what he paid for it. This
phenomenon tends to discourage the immediate purchase of gasoline for future sale,
keeping inventories from growing.
Gasoline Prices and the Strategic Petroleum Reserve
The recent increase in the prices of crude oil and gasoline have prompted calls
for use of the Strategic Petroleum Reserve (SPR). While some have called for a
drawdown, the first issue is whether to cease the current fill program, which critics
9 “Low Imports Pose Risk to U.S. Gasoline Supply,” Platts Oilgram News, March 23, 2004.
p. 1.

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CRS-10
assert has aggravated a tight oil supply situation and contributed to high gasoline
prices. On November 13, 2001, the President ordered fill of the SPR to its current
capacity of roughly 700 million barrels, principally through royalty-in-kind (RIK)
acquisitions of the government’s share of production from federal offshore leases.
Historically, the Treasury has taken this royalty in the form of a cash equivalent.
However, an RIK program was established for the purpose of adding crude to the
SPR. Deliveries of RIK oil are currently scheduled through October 2004, and if left
in place will average between roughly 65,000 and 200,000 barrels per day (b/d),
depending upon the month. Further deliveries will be scheduled with the intention
of filling the SPR to capacity sometime in 2005.10 The SPR currently holds roughly
650 million barrels.
Some have argued that these RIK deliveries are contributing to currently high
oil prices and should be suspended so that the RIK oil can be offered in markets.
Others have argued that the volumes involved are too small to have a significant
impact, and that fill should continue in the interests of national security. On March
11, 2004, in its debate on the FY2005 budget resolution, the Senate called for a
suspension of deliveries and a sale instead of 53 million barrels of RIK oil. Proceeds
(pegged at $1.7 billion) would be used for deficit reduction and increased homeland
security funding for states. Some Members of the House have also voiced support for
deferring fill. The Administration has argued that the volumes of RIK being added
to the SPR are too small to put significant pressure on crude oil prices, and that it will
continue its current fill policy.
If there is to be any use of the SPR in the current situation, the deferral of oil
deliveries — and allowing this oil to enter into markets — might be a logical first
step. However, some supporters of using the SPR are also urging President Bush to
also authorize a “swap” or exchange of SPR oil, comparable to one held in
September 2000 when the Clinton Administration made 30 million barrels
available.11 Under the terms of a swap, interested parties are invited to bid to borrow
crude from the SPR, to be returned at a later date. Awards are made on the basis of
how much oil a bidder will return in exchange for a barrel now; in other words, for
every barrel taken in a swap, the refiner or bidder will return something more than
one barrel at an agreed-upon future date. The bidding and award process was
completed in two weeks in 2000, with oil picked up soon thereafter. Oil borrowed
in the fall of 2000 was returned to the SPR by early 2004. The swap had the effect
of ultimately adding oil to the SPR at a time — as is the case now — when Congress
was not authorizing funds for outright purchase of oil for the reserve.

While historically the use of the SPR (or simply announcement of its intended
use) has resulted in some decline in crude prices, nearly every occasion has been
1 0 DOE posts the delivery schedule under “Current Inventory” at
[http://www.fe.doe.gov/programs/reserves/].
11Under the original statute (P.L.94-173), the SPR was not supposed to be used to affect
prices, but to compensate for a loss in physical supply that may express itself in higher
prices. An amendment in the Energy Policy Act of 1992 (P.L. 102-486) broadened the
drawdown authority further to include instances where a reduction in supply appeared
sufficiently severe to bring about an increase in the price of petroleum “severe” enough to
“likely . . . cause a major adverse impact on the national economy.”

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CRS-11
unique. Each situation has had other external circumstances surrounding the event
such that it is difficult to isolate the extent of any price moves that can be attributed
solely to the use of the SPR.12
More to the point in this particular report is whether the availability of SPR
crude would have an effect on gasoline prices. As noted elsewhere in this report,
gasoline supply — in some regions — is constrained by the refining capacity to
produce fuel that meets local or seasonal requirements. While a release of SPR oil
may soften crude prices to some extent, it may be little reflected in local gasoline
prices if demand for fuel remains high where refining capacity is tight. (It may even
be possible that a release of SPR crude, to the extent that it benefitted supply in some
regions of the country, might widen the observed disparity between gasoline prices
on the West Coast and elsewhere.) Moreover, in the spring of 2004, prices appear
especially sensitive to weekly reports on crude and product stocks. While release of
SPR might benefit crude stock levels, gasoline stocks will improve only if demand
levels and refining capacity (plus imports) allow refiners to add to stocks. As
suggested, this is likelier in some regions of the country than others.
In sum, opinion appears divided on the effect that the Administration’s current
fill policy is having on crude price and product supply, as well as on the benefits that
might be more than short-term if RIK oil is diverted to the markets, or a
swap/exchange of SPR is held.
Concluding Observations
The nation is now experiencing its third gasoline price spike in little more than
one year, with a new nationwide record for the average price for unleaded regular
reaching $1.77 in early April. Several general gasoline supply issues have contributed
to the current price spike:
! A shortage of refinery capacity — resulting from a lack of new construction
— such that the nation needs to import about 1 mbd of blending components
and finished gasoline from foreign refineries. Increasingly challenging fuel
specifications — including the MTBE ban in several states and the 2004
standards for reduced sulfur content — add to the complexities of refining and
distribution.
! Steadily growing gasoline demand, which has increased by 500,000 barrels
per day since 1999, rising from 8.4 mbd to 8.9 mbd for the whole of 2003.
This has accounted for virtually all the nation’s increase in oil consumption.
! Gasoline inventories were low; as of early April, there was less than two days
of available supply in the system.
12For details on the historical use of the SPR, see CRS Issue Brief IB87050, Strategic
Petroleum Reserve, or see the detail provided by the Department of Energy at
[http://www.fe.doe.gov/programs/reserves/spr/drawdown.shtml].

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CRS-12
! Crude oil stocks are below normal seasonal levels, having just rebounded
from below minimum operational levels. There is little refining capacity to
make more gasoline, and crude might not be available even for that small
increment.
! OPEC has gained power on crude supply and price. The past several months
have seen tight supplies and higher prices globally. OPEC recently announced
a controversial production cut; some members contended that production
should be cut, but others disagree. It remains to be seen if members will
actually reduce oil exports. For example, Kuwaiti Deputy Oil Minister al-
Aoun reportedly stated: “There’s no indication that demand will come down
any time soon. The U.S. and U.K. depleted inventories due to very cold
winters, and China continues to be a source of demand increase.”13
The recent gasoline price surge has been especially severe in California, where
prices averaged $2.13 per gallon at the end of March, a bit of a decline from the state
record of $2.18 set on March 6. This price drop — while prices elsewhere are rising
— may be due to recovery of a few key refinery units that had recently suffered
unplanned outages.
California’s situation is unique because of state requirements for especially
clean gasoline and its ban on the use of MTBE. Fuel meeting California
specifications is not readily available from all refineries, especially those abroad.
Additionally, California has no east-to-west pipeline system through which gasoline
can be shipped from Gulf Coast refineries. Even high prices — which would under
other circumstances attract extra supply — cannot easily self-correct a supply
shortfall. With insufficient West Coast refinery capacity to meet regional needs and
a dependency on imports, California has generally seen gasoline prices trending
above national averages for the past several years. And because the state cannot
quickly get make-up supply from other domestic refineries, small operational
difficulties in the refining and transport system can lead to out-sized price spikes.
An important energy policy aspect of the gasoline price situation involves the
potential use of the SPR. Various measures involving release of SPR crude — by
whatever mechanism — to stabilize the market have been proposed, and it is likely
that more will be forthcoming as price volatility is seen as continuing into the driving
season. Options for using SPR oil must be evaluated in context of the complex nature
of oil markets, challenges in determining the appropriateness of using the SPR to
stabilize prices, the mechanics of an actual release, and increasing political
polarization.
The gasoline price situation is a stream of many currents. Taken together, they
trend toward higher prices, with EIA predicting average prices reaching $1.83 in the
April/May time frame, and possibly going higher.14
13 “OPEC Should Delay Oil Cuts Until June, Kuwaiti Says.” Bloomberg News, March 25,
2004. At Bloomberg.com.
14 See footnote 1.

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