Closer to Home
Pipelines, refineries affect regional fuel-price volatility
Published in CSP Daily News
BISMARCK, N.D. -- From California to Florida, local supply issues can cause gasoline- and diesel-price disparities as volatile as crude futures, with a case in point being North Dakota. Last fall, that state experienced an extreme supply crunch, where refinery maintenance shut-downs led to high prices and talk among legislators about building a state-run refinery.
While global or even national examinations of fuel-price volatility can answer larger questions and possibly predict how events will play out, what matters most to retailers is the situation in their particular market.
Regional [image-nocss] pricing differences occur for many reasons, with transportation of product being key. Logistically, raw crude (as well as refined product) has to travel via pipeline or other means of transport from its source to a retailer's pumps. For that reason, much of the pricing disparity begins with the nation's pipeline footprint. That network basically starts at the Gulf Coast in Houston and fingers its way up into areas of the Midwest, as well as areas northeast and southwest. Isolated areas on either coast receive product either by import or area refiners.
"Generally, the closer you are to the origin of a [pipeline] system, the greater supply you'll see and less volatility," Jeff Morris, president of Alon USA, Dallas, told CSP Daily News. "And the closer to the end of a system you are, the more volatility you'll see in supply and price."
Other data puts added emphasis on the pipeline system when trying to follow regional fluctuations in price. Recently a federal study released by the U.S. Government Accountability Office (GAO) said pipeline infrastructure and the lack of sufficient capacity could put several key states—Arizona, California, Colorado, Nevada, North Carolina and Florida—in jeopardy.
The problem is not enough pipe. The study, released this past December, said pipeline capacity in the Southwest, in Arizona generally and in metropolitan Las Vegas have reached "maximum utilization" or have become "constrained."
Elsewhere, it's the same issue. Researchers noted that even a new petroleum product pipeline from the Gulf of Mexico to El Paso, Texas, is already approaching full capacity. Denver's pipeline system has reached the point where it may be unable to meet gasoline demand for summer travel. Similarly, a key product pipeline going from the Gulf Coast to North Carolina is reportedly constrained.
For states like Florida and California, supply problems occur because no pipelines exist to support those states, the GAO report said.
The report said that in instances when pipelines are full, shippers must make alternative arrangements by more costly rail or truck.
Besides proximity to the country's petroleum infrastructure, other factors, such as demand from agricultural businesses as well as the summer-traveling public, allow prices to rise, which ripples back up to the refinery and pipeline level, Morris said.
If the past is any indication, California and the Midwest will see the most volatility in pricing. Tom Kloza, chief oil analyst for Oil Price Information Service (OPIS), Wall, N.J., said California has the "best fundamental case for tight supply, with its shallow inventory and limited supply [sources]."
In the Midwest, refinery maintenance shutdowns are a big concern, which was the case in 2007, Kloza told CSP Daily News. North Dakota consumers in particular felt that pinch last fall with some of the highest gasoline prices in the nation. Today, local lawmakers seem determined to keep proactive regarding supply, especially in a state that actually has a sizeable amount of area crude production.
"We can't be running out of product," state Rep. Rod Froelich told The Bismarck Tribune recently. "We can't have farmers sitting out there not being able to harvest when we're one of the largest producing oil states in the nation. That's ridiculous."
[CSP magazine's February cover story explores fuel-price volatility and how record-setting crude prices are affecting retailers and marketers.]