II. U.S. Gasoline Demand at Record Levels
III. Tight Markets Cause Higher Gasoline Prices Throughout 1996 Driving Season
IV. U.S. Oil Imports Near 50 Percent of Total Supply
V. Lifting of Ban on Alaskan Oil Exports Not Expected to Have Much Effect
VI. Proposed Pipeline Would Bring Refined Product to Eastern Washington
Other Sites of Interest on the Web
nlike the electric utility industry, which
commands a great deal of the time and attention of policy-makers, journalists, activists
and advocates, the oil industry is noticed only during a crisis, such as the Gulf War or
the Exxon Valdez incident. But petroleum products make up approximately 55 percent of
Washington's energy consumption, and the combustion of petroleum products contributes
nearly 60 percent of the state's carbon dioxide emissions. Washington businesses and
residents consumed more than five billion gallons of oil in 1993 and spent $4.5 billion on
gasoline, diesel, jet fuel, and other petroleum products. [Note
1] That is 50 percent more than they spent on electricity.
Several recent developments have either affected or have the potential to affect Washington's petroleum consumers. Record demand for gasoline and declining domestic crude oil production leaves us more dependent than ever on imported oil, and more vulnerable than ever to oil price shocks.
That vulnerability was demonstrated during the spring and summer of 1996, when tight
supplies drove up the price of gasoline by 15-20 cents per gallon over 1995. Prices
climbed higher and stayed high longer on the West Coast, due to problems in the California
refining industry. Other developments included successful Congressional legislation to
allow the export of Alaska North Slope crude oil, and the Olympic Pipeline Company's
proposal to build a petroleum product pipeline across Snoqualmie Pass.
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hrough the first nine months of 1996, gasoline
consumption in the United States averaged a record 7.85 million barrels per day, an
increase of one percent over 1995 and three percent over 1994.
U.S. gasoline demand peaked at 7.4 million barrels per day in 1977, but fell rapidly after the Iranian revolution and the second oil shock in 1978, reaching a low of 6.5 million barrels per day five years later. Demand began to recover after prices fell in 1985, and new records for gasoline demand have been established in each year since 1993.
Why are we using so much gasoline? The biggest reason is that we are simply driving more and more miles each year. Per capita vehicle travel averaged approximately 9,000 miles in 1993, up from less than 6,000 miles in 1970.
The reasons for this are multiple and diverse. The proportion of people driving to work increased from 70 percent in 1960 to nearly 90 percent in 1990, while the per centage using transit declined from 13 percent to five percent. The length of the average trip to work increased from 9.2 miles in 1977 to 10.6 miles in 1990. And average commute trip vehicle occupancy declined from 1.3 in 1970 to 1.1 in 1990. Figure 1 depicts some of the major causes of high gasoline consumption in the United States.
What is the outlook for gasoline demand? Population and vehicle travel continue to increase, making it unlikely that growth in gasoline demand will slow. What is worse, growth in the fuel efficiency of the nation's stock of cars and trucks is slowing and may even reverse. The increasing popularity of light trucks and sport utility vehicles, combined with flat new car fuel efficiencies, has caused the fuel efficiency of an average new vehicle to decline in each of the last seven years, from a high of 26.0 miles per gallon (MPG) in 1987 to 24.6 MPG in 1994. [Note 2]
Recent trends in vehicle fuel efficiency are depicted in Figure 2. The top line represents new vehicle fuel efficiency, which has been declining slowly since the mid-1980s. [Note 3] Stock average fuel efficiency, represented by the dashed line, has leveled off since 1990. The shaded area represents the difference between new and existing vehicle fuel efficiency, or the efficiency that is left to be "wrung out" of the existing stock of vehicles. This area has been shrinking since 1986. In 1994, a new vehicle was only five percent more efficient than the average existing vehicle.
And, with average vehicle age at 7.5 years, the vehicles being replaced are no longer 1970s-era gas hogs. Unless current trends are reversed, the average efficiency of the nation's stock of cars and trucks will likely begin to decline by 2000.
Figure 3-1. Why Are We Using so Much Gasoline?
Figure 3-2. An End to Years of Fuel Efficiency Improvements?
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he increase in gasoline demand has left us
vulnerable to oil price shocks. This vulnerability was demonstrated during 1996, when a
spring price run-up turned into a summer of higher gasoline prices, attracting the
attention of policy-makers throughout the nation.
Crude oil prices, which increased 25 percent between January and April of 1996, a cold winter, turmoil in the Middle East, and problems in the U.S. refining industry were cited as the culprits. The extremely cold winter in most of the U.S. caused refiners to continue producing heating oil long after the time when they would normally begin to build gasoline stocks. Precarious political situations in Saudi Arabia, Iraq and the Israeli-occupied West Bank kept oil traders jittery throughout the summer.
New "just-in-time" inventory practices exacerbated the problem, as did fires that idled ten percent of California's refining capacity, shortly after the introduction of new reformulated gasoline standards by the California Air Resources Board. Longer-term contributing factors included increasing demand for gasoline and other petroleum products in the developing world, and the decline in U.S. refinery capacity. [Note 4]
Prices eased during the summer and fall, despite unexpectedly high crude prices due to the turmoil in Iraq, and were expected to remain low throughout the fall and winter. However, stocks of heating oil were extremely low heading into the winter of 1996-1997, and another cold winter could mean low gasoline inventories and higher prices in April and May of 1997.
But prices were still extremely low by historical standards, as illustrated in Figure 3. When adjusted for inflation to 1992 dollars, gasoline prices in the 1960s did not drop below $1.20 a gallon. At $1.06 per gallon, 1994 featured the lowest average price since at least the 1940s, followed closely by 1995 at $1.07 per gallon and 1972 at $1.08 per gallon.
Figure 3-3. Gasoline is More Expensive in 1996, but Still Cheap
by Historical Standards
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igh gasoline demand and the continued decline in
domestic production pushed U.S. oil imports to a near-record 8.5 million barrels per day
through the first 8 months of 1996, an increase of 7 percent over the same period in 1995.
With low heating oil inventories keeping demand for crude oil high, the United States is
set to import 3.08 billion barrels of oil in 1996, second only to the record 3.13 billion
barrels set in 1977. Imports are expected to reach a record 3.14 billion barrels in 1997,
exceeding 50 percent of U.S. consumption for the first time (see Figure
4).
While the level of oil imports is commonly viewed as an indicator of vulnerability to oil price shocks, overall demand for petroleum products is a better yardstick. Because crude oil is fungible, prices do not differ substantially from one location to another. Although the prices of various crude streams are not directly comparable due to differences in specific gravity, sulfur content, transportation costs, and other factors, Figure 5 shows clearly that the price of domestically produced crude oil rises and falls in tandem with world oil prices. For consumers, the distinction between domestic and imported oil is meaningless.
Figure 3-4. U.S. Oil Imports Set to Exceed Levels of 1970s
Figure 3-5. Domestic Crude Prices Rise and Fall with World
Prices
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he fluid nature of world crude oil markets also
explains why little long-term impact is expected from the export of Alaska North Slope
(ANS) crude oil, which became legal for the first time in April of 1996. In a press
release announcing the lifting of the ban, the White House stated there was "no
likelihood of adverse impacts from ANS exports on Washington State's consumers, refiners,
or environment." [Note 5]
However, since Washington refineries obtain nearly 90 percent of their crude oil supply from Alaska's North Slope, there is some concern about seasonal and shorter term effects. The primary impact would occur during winter months, when West Coast demand and prices are lower and local conditions allow for higher ANS production.
In the past, ANS producers faced the choice of continuing to ship crude oil to West Coast markets, suppressing prices there, transporting crude oil through the Panama Canal Pipeline to Gulf Coast refiners at a substantial discount, or producing less. As a result of lifting the export ban, the U.S. Department of Energy predicted that ANS production could increase by 100,000 barrels per day, as "surplus" oil is now free to find higher prices in East Asia. [Note 6]
This means that Washington refiners could see slightly higher winter crude prices as
ANS producers begin to export surplus crude. However, most of the surplus will result from
the cessation of seasonal shipments to the Gulf Coast, and from increased ANS production.
This will raise revenues for Alaskan producers, but should have little effect on West
Coast markets.
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he Washington Energy Facility Site Evaluation
Council is currently reviewing the Olympic Cross Cascade Pipeline Project (Application No.
96-1). The Olympic Pipeline Company is proposing to construct and operate a 230 mile
pipeline which would carry gasoline, distillate, and jet fuel from Woodinville to Pasco.
The Cross Cascade Pipeline would be the third with a terminus in Eastern Washington. The Chevron Pipeline currently transports refined products from Utah to a terminal in Pasco, while Spokane is the main Washington delivery point for the Yellowstone Pipeline, which brings product from a refinery in Billings, Montana.
The Cross Cascade Pipeline would primarily replace the trucks which currently transport
product across the Cascade mountain passes and barges which carry petroleum products from
Vancouver to Pasco on the Columbia River. If the project is found to be environmentally
acceptable, it could considerably reduce the cost of transporting petroleum products from
the Bellingham-area refineries to Eastern Washington, potentially resulting in a more
diverse and economical supply of gasoline and diesel fuel. 
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Note 1. These figures do not include over one billion gallons of non-energy uses of petroleum, such as asphalt, lubricants, and plastics.
Note 2. The efficiency of the average new car has not increased appreciably since oil prices dropped in 1985. New car fuel economy reached 28.2 MPG in 1986, topped out at 28.8 MPG in 1988, and stood at 28.2 MPG in 1994.
Note 3. New fuel economies have been adjusted to reflect actual driving conditions. The Energy Information Administration estimates that the difference between EPA-rated fuel economy, which is determined through laboratory tests, and actual performance is approximately 16 percent. That is, a vehicle rated at 25 MPG by EPA will average 21 MPG in on-road conditions. Personal communication with David Chien, Energy Demand Analysis Branch, Office of Integrated Analysis and Forecasting, Energy Information Administration.
Note 4. According to the EIA's Annual Energy Review 1995, domestic refinery capacity declined from a high of 18.6 million barrels per day in 1981 to 15.0 million barrels per day in 1994.
Note 5. White House Press Release, April 28, 1996.
Note 6. DOE Press Release, April 28, 1996.
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United States Department of Transportation
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The print version of the 1997 Biennial Energy Report is available free of charge. To order, contact Julie Palakovich at (360) 956-2098, or send e-mail to wepg@ep.cted.wa.gov.