*Written May 17, 2007*

U.S. gasoline stocks fell for 13 weeks in a row, but finally there was an uptick this last week - in West Coast inventories only. We are still well below historical averages for this time of year, a time when inventories should be high in preparation for the summer driving season, which begins next week with the long Memorial Day weekend. The current high prices are starting to have some effect reducing demand and increasing supply, but it's looking less likely at this point that there will be either enough of a demand reduction in the near term, or enough of a supply increase to significantly ease the situation this summer. Matt Simmons says "At this stage, the risk of shortages starting to crop up is Red Alert." A number of well-connected insiders are saying things like "we are one major incident away from a 1970s-style gasoline crisis."

DavidM

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"Anybody who blames record high US gasoline prices on "gouging" at the pump simply reveals their total ignorance of global oil supply and demand fundamentals. The real reason for high pump prices is the lack of global gasoline supply relative to demand. Just in the US, overall US refining capacity, at 17 million barrels per day (mb/d), is far below demand at 22 mb/d. In turn, pump prices are effectively set by import prices. With strong demand outside the US on the back of global economic growth and a weak dollar, the era of abundant US oil supply augmented by willing international sellers is dead. ... It is fair to say that as we enter driving season in 2007, we are one major incident away from a 1970s-style gasoline crisis. For this summer, be prepared to take emergency measures ... should an emergency develop. We are not there yet, but we are close." - Paul Sankey, from Deutche Bank in May 15, 2007 Senate Testimony.

"Figure 2 in the above report
(http://fpc.state.gov/documents/organization/33168.pdf) gives us 185 mb of gasoline as the level at which we start seeing spot shortages. Let's define this as Minimum Operating Level (MOL). We currently have 195 mb, and we have already had reports of isolated spot shortages. My guesstimate is, based on the 185 number, that the non-West Coast Minimum Operating Level (MOL) is about 160 mb, while current non-West Coast gasoline inventories are about 167 mb. So, based on the foregoing, the non-West Coast has less than one day's supply above MOL."
- Jeffrey Brown, independent geologist, The Oil Drum, May 18, 2007

"we have a minimum requirement for 185 million barrels in the system just to keep the pipelines running and process equipment primed, so our real inventories are much smaller than 200,000,000 barrels-really a two or three day supply." - oilmanbob, The Oil Drum, May 18, 2007

"If we have an uneventful summer, prices may not go too much higher. But in my opinion we will go through the summer about one gulf hurricane away from nationwide average gasoline prices rushing past $4/gallon. They could go much higher in the event of a major refinery disruption ala Hurricane Katrina. It is really hard to imagine where gasoline prices could top out given current inventory levels." - Robert Rapier, The Oil Drum, May 18, 2007 http://www.theoildrum.com/node/2560

"Here is a quick run down on the possible disaster we face this summer as we head into Memorial Day with the lowest beginning-of-driving-season stocks in US history. It would have been convenient had someone found out exactly what Minimum Operating Levels* really have become. I suspect we will answer this riddle this summer. Minimum Operating Levels of petroleum inventories are when all cushions have been used up and the system is now starting to “rob Peter to pay Paul." At this stage, the risk of shortages starting to crop up is Red Alert. Sadly, the last serious study of where this invisible line of minimum stocks is was a NPC study done in 1988.

...The reality of gasoline demand is that it will rise during July and August unless we have some roads blocked off to stem demand. Rising late-summer demand has happened almost every year, even as prices rose from $1/gallon to over $3! To supply this market, several things have to work in unison.

1. Refineries need to crank up to over 16 million b/d instead of current 15 as they struggle to get into compliance from too little maintenance for too long.

2. Imports need to average well over 1 million b/d, and probably need to hit 1.5 million b/d, matching the all-time record set last year.

3. No hurricanes can hit the Gulf producing region.

4. Stock draws are the last plug in the dike.

From the looks of things as we view Memorial Day weekend starting in just over a week, we fail on all four counts. ...The burning question is how much lower stocks can drop before shortages sweep our fragile gasoline supply system. Historically, it has been critically important that we build up gasoline stocks during the spring shoulder season (April-May) so that they can be liquidated during peak demand to prevent shortages. We seem to have run out the clock to fix the problem this summer.

...The painful last 13 weeks ran out our USA gasoline clock. We must be right at the edge of genuine "minimum operating supplies" in at least a handful of states. I am certainly glad I drive a diesel where the stock pool or inventory is tight but not nearly as tight as MOGAS [motor gasoline]. This could get really ugly real fast. On that cheery note..." - Matthew Simmons, energy investment banker, Simmons International, May 14, 2007 http://www.energybulletin.net/29657.html