Gas pump price history

Louisiana oil experts have long insisted the refining industry's move away from large, on-site fuel supplies to more cost-effective "just-in-time" production plays little role in consumer gasoline prices.

That's largely because the nation quickly consumes all the fuel produced by refineries, which already run at full tilt.

U.S. refiners have steadily reduced the role of tanks in storing finished fuels. They instead move gasoline and other products into trucks and pipelines to more quickly reach the market, which cuts costs associated with large inventories and addresses some safety and environmental concerns.

But observers say smaller stores of finished fuels might inject new volatility into regional fuel prices if federal regulators insist metropolitan Baton Rouge switch to cleaner-burning gas blended with ethanol.

"That has happened in other places that use reformulated gas," says Allan Pulsipher, director of LSU's Center for Energy Studies.

Larry Wall, a spokesman for Mid-Continent Oil and Gas Association, agrees that sharper price spikes at local pumps are possible if regulators require reformulated gas in East Baton Rouge and four nearby parishes.

"Any time you use a 'boutique' fuel, you run that risk," Wall says. "It's too soon to say whether 'just-in-time' will influence prices. We don't know what's going to happen."

Conjecture about what consumers are likely to face could be moot. Last month a federal appeals court postponed the June 23 deadline for the new fuel even though most retailers already were selling it. The delay will let government and business groups argue that the U.S. Environmental Protection Agency's blended-fuel mandate will do little to reduce smog here.

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Steeper spikes ahead?

The logic behind possible steeper spikes in prices springs from market forces of law and demand. When supply is tight, prices rise.

Refiners make smaller quantities of specialty fuels because the market for each type is smaller than for the conventional gasoline used in most parts of the country. The trend toward smaller stores of finished gasoline means a smaller cushion when demand rises or supply is disrupted.

In Louisiana, only the five-parish region that includes East Baton Rouge would be required to use gasoline blended with ethanol. ExxonMobil's North Baton Rouge refinery would be a major supplier; some of Louisiana's 18 other refineries also plan to make the specialty gas, though it's not yet clear how many.

The dismantling of ExxonMobil's tank farm on Scenic Highway is evidence of the trend away from large fuel inventories. The company took down nearly all of its tanks several years ago; today the site is a field, says Hugh Helferty, technology manager for the Baton Rouge refinery. In any case, the tank farm stored a variety of products, not just gasoline, which took up just a few of the tanks, the company notes.

Helferty rejects the idea that reduced on-site storage of gasoline might play a role in possible price volatility in the region should blended fuel become the norm here. For one thing, the refinery makes bigger quantities of fuel than it did in the past.

Helferty also points out that the industry carries adequate stores of crude and other components--stored in the hundreds of tanks it still uses--to make a variety of gasoline blends at any time. And computerization has made refineries more reliable and able to react more quickly to market shifts, include local changes.

The improved reliability of refineries is more important to stable supply than the traditional tanks of the past, he says.

"You can carry less inventory because you have more insight into what's needed," Helferty says.

More importantly, the demand for gasoline already outpaces what the nation's refineries churn out, which is why the U.S. imports from foreign sources, he says.

"We run close to capacity all the time," he says.

Chicago's experience

Chicago provides an example of how the switch to cleaner-burning gas can cause consumer headaches. The city gets its ethanol-blended gas from two refineries. Interruptions in the supply in recent years have caused big surges in the cost of reformulated gas in that region.

The lesson again is that of supply and demand.

"If you have a small market with a few suppliers, people will scramble for that supply," says LSU's Pulsipher. "The history on that is clear, and common sense."

But Chicago's experience does not necessarily translate into a lesson for Baton Rouge. For starters, Chicago has fewer options when there's a break in its supply chain.

"Chicago has limited access," Helferty says. "Here we have multiple sources, so there's less of a threat."

The Gulf Coast has about 30 refineries that could provide additional gas in the event of a supply crunch here, he says. LSU's Pulsipher agrees that the local region is better placed than Chicago when it comes to gas supply.

Price volatility has been a bigger problem "when the gas is brought in from other places," he says.

The court battle over reformulated gasoline means questions about supply and prices here won't be answered for several months, if ever. And while the legal wrangling plays out, the ExxonMobil refinery here has switched back to producing conventional fuel for the Baton Rouge area.

SARA BONGIORNI covers economic development, banking and personal finance. Reach her at sbongiorni@businessreport.com.