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The peak oil crisis: The minimum operating level

There has been much discussion about gasoline inventories in the US lately and rightly so. Every Wednesday morning the Department of Energy releases a snapshot of US oil and product inventories at the end of the preceding week. As US gasoline inventories fell dramatically during the past few months, it is this report, as interpreted by many buyers and sellers of gasoline, that is largely responsible for the record high prices we are paying for gasoline.

Last Thursday, after the report was issued, gasoline prices jumped nearly 10 cents in a single day. On Tuesday of this week, before the report was issued, gasoline prices fell by 10 cents a gallon based on analysts' guesstimates that inventories would increase and there would not be serious shortages this summer. It is clear that the size of our gasoline stockpile has become an important number, not only for everyone who drives, but also for the future of our economy.

The number is currently around 197 million barrels, but there is more to the story than one number. Now that we are all fixated on gasoline inventories, it is important to know that America has two largely unconnected oil worlds - the five west coast states (California, Oregon, Washington, Nevada, and Arizona) and the rest of the country. The West Coast gets its imported gasoline supplies by tanker across the Pacific. The rest of the country gets its imports from tankers across the Atlantic. As there is little transfer of gasoline between the two regions, what comes to the west coast is consumed on the west coast. Thus when one reads of a big change in gasoline imports, it is important to find out which coasts got the imports. Last week for example, 1.2 million of the 1.7 million barrel increase was on the west coast leaving very little to increase the stockpile in the rest of the country.

The next important point about gasoline stockpiles is that not all of it is useable. As gasoline is largely delivered by pipeline, barge and coastal tankers these days, a lot of gasoline is tied up in transit. Thus the amount of gasoline "trapped" in transport is substantial. This "trapped" gasoline is known as the "minimum operating level."

The Department of Energy used to publish this number, but stopped doing so a few years ago on the grounds they were not confident that it was accurate. This week, however, the old number for the minimum operating level surfaced in a 3-year-old government report and it turned out to be 185 million barrels - very close to the 197 million in the inventory. It really does not matter what the actual minimum level is, for any figure remotely close to 197 million is cause for concern. If stockpiles - on either coast - drop much more, we are going to find out, the hard way, exactly where the minimal operating level is, for that will be the day the shortages develop.

Another important factor in the gasoline situation is the increasing amounts of ethanol we are burning. Last year when Consumer Reports tested a bi-fuel Chevrolet first with gasoline and then with 85 percent ethanol, they confirmed that using ethanol drops mileage by 27 percent. The more ethanol produced the more motor fuel we will have to buy just to go the same distance.

This week's stockpile report was on the whole neutral regarding prospects for the summer ahead. Although US refineries managed to increase gasoline production by 100,000 barrels a day to 9.2 million, imports dropped by 200,000 barrels to 1.3 million - still a high number. Total US gasoline inventory increased by 1.5 million barrels last week to 196.7 million barrels, still well below normal and still a cause for concern given the increased demand and the proximity of the summer driving season.

Demand for gasoline over the last four weeks increased by 1.2 percent over the same period last year; however some of this increase is caused by the ethanol mixed into the gasoline in some parts of the country. There is still no sign that $3+ gasoline is having a substantial impact on demand.

There is still a good possibility of trouble ahead; last week's stockpile increase certainly was not enough to prepare us for a Gulf hurricane, or any other kind of major disruption, but it may be enough to get us through the first part of the summer driving season without shortages. These issues are how much we continue to consume and whether imports will stay high. We will know shortly. The distribution of the US stockpiles is still not good with the Midwest and East Coast being the most vulnerable to shortages.

Large US imports of gasoline, mainly from Europe, are starting to raise questions. Last weekend gasoline in Germany went over $7 per gallon and analysts are talking about the possibility of $8 gasoline later this summer. The Europeans note that the US is now importing roughly 1 out of every 8 gallons of gasoline consumed and that there is no end to this imbalance in sight. Some Europeans are beginning to ask whether their governments should be taking action to slow the exports to the US.

What do you think? Leave a comment below.

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