Gas Price Disparity Seems Here to Stay

Source: JEFF SOMMER • New York Times  • Posted: Monday, March 12, 2012

Eddie Seal/Bloomberg News  An oil tanker in Corpus Christi, Tex. Gasoline prices are lower in the Midwest and South partly because their refineries are closer to crude oil sources.

THE price of gasoline is rising, but the nation isn’t sharing the pain equally.

The average price of a gallon of regular was $3.76 a gallon on Friday — up 8 percent in the last month — a tabulation that masks significant regional disparities, said Avery Ash, manager of federal relations for the AAA.

A gallon of regular was only $3.33 in Colorado, for example, and in Wyoming it was $3.28, the lowest in the nation. Along the Gulf of Mexico, the price was a bit higher: $3.59 in Texas, $3.60 in Alabama and $3.62 in Louisiana. For nastier numbers, turn to the Northeast and the West Coast: $3.99 in New York and Connecticut and a whopping $4.35 in California.

Global energy markets determine the national trend for oil and gasoline prices, and those markets have been rattled by tensions with Iran. Yet energy markets are also resiliently local, as the patchwork quilt of gasoline prices illustrates. A flood of relatively cheap oil and gasoline is washing through parts of the American heartland, but it’s barely reaching consumers in the rest of the nation.

“Energy is all about infrastructure and logistics,” said Edward L. Morse, global head of commodities research at Citigroup and a former deputy assistant secretary of state for international energy policy. “While energy markets are global,” he said, “if oil is just sitting in the ground — or if you can’t move it from Point A to Point B — it’s not going to do you a whole lot of good.”

In the United States, a combination of infrastructure constraints and legal impediments makes it very likely that regional price disparities will widen in coming weeks. This is probable even if the government decides to tap the Strategic Petroleum Reserve to bring down overall prices, interviews with industry experts suggest

First, the global backdrop: Factors tightening supplies include harsh weather in Europe, a cutback in exports from producers like Syria, Yemen and South Sudan, growing demand from India and China, and, increasingly, international measures imposed on Iran. Because of concern about Iran’s nuclear program, the United States is restricting bank transactions with Tehran, the European Union has set an embargo on Iranian oil for July 1 and many international insurers have stopped covering tanker pickups of Iranian oil.

The insurance cutoff is already having an effect, said Morten Arntzen , the nonexecutive chairman of Tankers International, a consortium of supertankers based in London. Tankers International is “not going to Iran any longer,” he said. (Mr. Arntzen is also chief executive of the Overseas Shipholding Group, the largest United States tanker operator, which, he said, has not taken part in the Iran trade as a company since 2002.)

The possibility that Iran might block shipping in the Strait of Hormuz has added a risk premium to oil futures markets, which are regionally bifurcated, said Robbert Van Batenburg, head of equity research at Louis Capital Markets. The price for Brent crude, widely viewed as the global benchmark for oil, was about $126 a barrel on Friday, far higher than for West Texas Intermediate, often called the American benchmark, which was about $107.

The gap has been widening. North American oil “is trading at a discount to world prices, because it is landlocked and can’t easily be transported to world markets” — or to refiners in the Northeast or the West Coast, said Andrew J. Black , president of the Association of Oil Pipe Lines. And East Coast gasoline prices reflect the higher Brent crude price, said Tom Kloza, chief oil analyst for the private Oil Price Information Service.

Crude oil production has increased sharply in Canada and in the central United States in recent years — including initial production from the Bakken Shale, an oil-rich deposit in North Dakota. This has created what the White House calls a bottleneck in Cushing, Okla., the midcontinent storage hub.

Pipelines connect Cushing to ports and refineries in the gulf, but they flow in only one direction at a time, and were originally designed to move imported oil north from the gulf into the Midwest, Mr. Morse said. In a laborious process, the flow of some pipelines is being reversed and a new one — the southern part of the Keystone XL pipeline — is being built to ease the glut. (The pipeline’s owner has reapplied for permission to build a northern portion, which would run from Alberta, Canada, to Cushing, after President Obama said that more extensive environmental reviews were needed.)

In the short term, if prices spike further in a geopolitical crisis, the government could release oil from the Strategic Petroleum Reserve, a series of storage sites on the gulf in Louisiana and Texas established in the wake of the 1973 oil shock. But Mr. Morse said that moving oil through the north-south pipelines connected to the reserve no longer made sense because of the glut to the north. “It’s not needed there,” he said.

Moving reserve oil by tanker from the gulf could run into another series of problems. The 1920 Jones Act requires purely domestic cargo to move on ships built in the United States, carrying the American flag and using American crews. Large tankers meeting these requirements are in service on the Alaska-California route, but few are available for additional shipping, according to government reports.

To release oil from the reserve quickly during the Libya crisis last year, the government waived provisions of the Jones Act. Some labor and industry groups oppose a repeat performance.

“In a time of high unemployment in the United States, ignoring the Jones Act, which has been central to American national security and protects American jobs, just makes no sense,” said Dan Duncan, secretary-treasurer of the maritime trades department of the A.F.L.-C.I.O.

And Thomas A. Allegretti, president of the American Waterways Operators, which represents tug and barge operators, says that there are plenty of small to midsize vessels available that are Jones Act-compliant. “Our barges are transporting a great deal of petroleum products already,” he said. “We have a fleet that is ready and able.”

But even if there were enough American-flagged ships to move substantial amounts of additional oil, the price of shipping from the gulf to the Northeast or the West Coast is prohibitive, several industry executives said, because American-flagged vessels charge much higher rates than foreign-flagged ones.

That helps explain why gasoline in the Northeast is so expensive. “If we could get that cheaper American oil in our Northeast refineries, we would have been using it,” said Thomas Golembeski, a spokesman for Sunoco, which is closing its refineries in the region. Those operations are unprofitable, he says, partly because Sunoco must import more expensive oil from Europe and Africa.

Prices may ultimately decline nationwide. But as Northeast refineries close, the federal Energy Information Administration says, prices for refined petroleum products in the region are likely to rise compared with the rest of the country. That should be true even when differences in local taxes are taken into account.

Eventually, market forces will bring the Northeast’s prices down some, the agency says, but infrastructure and shipping constraints are likely to preserve regional disparities.

Meanwhile, if you are a consumer in a less-favored region, be prepared for more unpleasant price comparisons.