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Economy in Brief

Petroleum Prices: Supply Uncertainty & US Demand Strength
by Tom Moeller September 20, 2005

Supply uncertainties have wreaked havoc on prices for crude oil and petroleum products. As of last week, the US average retail gasoline price fell to $2.79 per gallon, down from the weekly high of $3.07 set two weeks earlier and the NY harbor spot price for regular unleaded last Friday was down to $1.82 from a high of $3.13 just before Labor Day.

Demand strength, however, has left even these lower gasoline prices both up 40-50% versus the year ago levels.

Hurricane Katrina caused the initial anxiety over supply. Figures from the Oil & Gas Journal Weekly indicate that in the first two weeks of September, US refining production of gasoline was off 5% versus August. Some of that decline is seasonal, but the threat from Hurricane Rita yesterday caused the spot gasoline price to jump 10% d/d to $2.00 per gallon.

Alternatively, US gasoline demand has been consistent and strong. Through August demand was running 3-4% ahead of last year helped by a 1.5% y/y gain in the number of miles being driven. In September, demand is estimated to have fallen sharply, perhaps 10% m/m, in the wake of Hurricane Katrina, although the decline probably is temporary. Strong gasoline demand is a trademark of the United States. From 1994 to 2004, growth in US gasoline demand averaged 1.8% per year versus a 0.7% annual rate of decline in Europe during that ten year period. Some of that reflects differing economic fortunes, but ...

Wholesale natural gas prices at $11.17/mmbtu last week were more than double the prior year's level and very much reflect the recent supply dislocations. Regulation, however, has limited the price increase for residential gas as measured by the Consumer Price Index. For the first eight months of 2005 versus 2004, gas prices rose 11.5% while the gain in household electricity costs also was limited to 4.6%. Further gains are in store if yesterday's gas price rise over $12/mmbtu holds. (Many plants which generate electricity are fired by natural gas.)

Movement in crude oil prices has been similarly volatile with an upward bent. Yesterday's spot market price for West Texas Intermediate jumped 7% d/d to $67.40 though prices have eased a bit today. Under laying the strength has been a steady decline in US crude oil production, off 2.2% y/y through the first eight months of 2005 and off 38% versus twenty years ago.

For the latest Short Term Energy Outlook from the US Department of Energy click here.

Oil Prices and Consumer Spending from the Federal Reserve Bank of Richmond can be viewed here.

Energy Prices 09/19/05 12/31/04 Y/Y 2004 2003 2002
US Retail Gasoline, Regular ($/Gal.) $2.79 $1.79 49.3% $1.85 $1.56 $1.35
Natural Gas, Henry Hub, LA ($/mmbtu) $11.17 $6.35 123.4% $5.89 $5.47 $3.35
Domestic Spot Market Price: West Texas Intermediate ($/Barrel) $63.12 $41.78 42.2% $41.78 $32.78 $31.23
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