Ups and downs of US gas prices: what's behind the volatile market

If those homespun students of US gasoline prices -- the redoubtable American motorists -- look puzzled as they reach for their wallets after a fill-up, it's probably because they're having a tough time deciphering the recent ups and downs in gasoline prices.

For example, Exxon Company U.S.A. raises wholesale gasoline prices in response to the higher cost of oil. But Shell Oil Company, focusing on falling US gasoline demand, lowers prices in some parts of the country.

Despite the appearance of confusion, energy industry analysts insist that there is rhyme and reason to these recent price patterns. They reflect varied responses to an unusually turbulent domestic energy market.

Still, these analysts say the basic trend in gasoline prices this year is up, although motorists may get a short-term respite from increases over the next few months.

In the view of some, the mixed pricing activity is a good sign. "What we see is evidence that the marekt is working," asserts business professor Gerald Keim of Texas A & M University. Rollbacks of wholesale gasoline prices by some companies after nearly uniform increases earlier this year shows that "oil companies cannot set the prices anywhere they want and make it stick," he contends.

Indeed, there is evidence some oil companies were overzealous in raising prices after President Reagan lifted gasoline price controls in January.

"Those increases were not accepted in the markeplace," concedes an executive with Shell Oil Company, which has cut wholesale prices in two regions of the country so far in March.

Some eight oil companies in recent (From page 1) days are reported to have either lowered their wholeale price of gasoline or promised lower prices to dealers as an incentive to boost sales. To what extent these actions on wholesale prices will be reflected in the retail price at the pump remains to be seen.

Retail prices are set by individual dealers, who from the middle of last December through March 5, 1981, had passed along about 14 cents in average retail gasoline price increases, according to the American Automobile Association.

Still, many analysts feel the rate of increase in gasoline prices is bound to slow in the weeks ahead. Forces now restraining prices include bulging inventories and continuing strong conservation by US motorists.

Recent statistics suggest a textbook example of gasoline oversupply: as of March 13, domestic gasoline stocks were at a record level of 286 million barrels. US gasoline consumption so far this year has been averaging about 5 percent below the level of 1980. And US refiners are operating at about 70 percent of capacity, which a spokesman for the American Petroleum Institute calls "the lowest rate in memory."

It all adds up to a glut of gasoline that has reached such proportions that the oil industry is beginning to wince at the cost of storage. The Petroleum Industry Research Foundation (PIRF) in New York estimates that it costs about 70 cents store each barrel of gasoline for a month. Taken against the amount of gasoline currently on hand, that works out to about $20 million a month in storage charges alone.

Since the shortages of 1979, oil companies have been eager to build inventories and have been loath to scale back purchases from foreign countries for fear of jeopardizing future contracts. However, because of the rising cost of storage "industry has just about run out of that option," the executive with Shell Oil asserts.

Bubbling beneath these downward pressures on gasoline prices are higher world oil costs. Most oil companies say it is the price of crude that brought about the quick gasoline price boosts early this year, more than the Reagan administration's decontrol policy.

The higher cost of crude continues to press oil companies to charge higher gasoline prices to maintain their profit margins. Gulf Refining and Marketing Company, a division of Gulf Oil Corporation, estimates its oil cost increases since January have boosted the cost of making gasoline by 20 cents per gallon while it has raised wholesale gas prices 12 cents per gallon. Even assuming no further price hikes by the Organization of Petroleum Exporting Countries (OPEC), Gulf will need to raise its wholesale price another 8 cents per gallon to "catch up" with the price of oil, a company official says.

Lawrence Goldstein of the PIRF concurs that despite sagging gasoline consumption, "the cost of production is still moving up."

Under the pinch of rising oil prices and falling gasoline demand, the major oil companies are mothballing some refineries. And the end of federal price controls on gasoline has removed the cost allocation and entitlements programs that helped small, independent refiners survive, threatening to force some out of business.

Each company handles the cost-demand squeeze differently. Some elect to lower prices, sell more gasoline, and reduce storage costs. Others routinely pass along the higher oil costs, which may result in smaller sales and growing inventory expenses.

Many forecasters see further gasoline price hikes in 1981 not only because of the already higher oil costs, but also a conviction that OPEC will at least keep oil prices rising with inflation this year.

However, Professor Keim suggests forecasts are often wide of the mark.

"Overall, gasoline prices should be stabilizing," he asserts, pointing to the present conditions of brimming supplies and falling demand. Prices for the long term, he says, depend on the uncertainties of future demand and the level of investment in altern ate energy sources.