Several factors upsetting supply-demand balance

Q: What's driving gas prices higher?

A: The cost of crude oil is the largest component in the price of gas.

Oil passed the $75-a-barrel mark last week, largely because of concerns that geopolitical tensions over Iran's nuclear program could interrupt exports from that country, the world's No. 2 exporter. Traders operating in a continuous state of what they call "petronoia" are worried as well about political turmoil from key suppliers such as Nigeria, Chad or Venezuela.

The high cost of oil, often passed quickly from the futures markets to daily crude purchases, is responsible for about half the price at the pump, experts say. But other factors also are pushing up current retail prices.

U.S. refineries do not have enough capacity to meet the country's demand for gasoline and other fuels. This makes what they do more valuable in the eyes of traders who buy and sell fuels on commodities markets. Other factors include heavier-than-usual maintenance at refineries which has reduced supplies, the implementation of tighter sulfur regulations on gasoline and diesel fuel to reduce pollution, and the switch to ethanol as a gasoline additive.

Q: Why did gas stations run out of gas the past week?

A: The switch from MTBE — methyl tertiary butyl ether — to ethanol has caused numerous bottlenecks in the fuel-supply system.

Terminal operators must empty tanks and install equipment to blend ethanol with gasoline as it goes into the tanker truck.

This process dramatically reduced the number of tanker trucks that could go through terminals last week. This meant drivers could not make nearly as many delivery runs during a shift as they normally would.

Q: How long will the shortages last?

A: Refiners set the goal of eliminating MTBE by May 5, which means that by then, at the latest, the supply problems should be worked out.

Q: Oil-company profits are way up. Are they taking advantage of the situation?

A: In a local market, oil companies charge what the market will bear, while taking cues from commodity and spot markets. Higher prices eventually attract additional supply to the market, which will push prices down.

Some gasoline-station operators raise prices during supply disruptions to avoid running out of fuel. That is because they have fixed costs to cover whether or not they are selling fuel.

Q: Will prices eventually level off or even go back down?

A: Gasoline prices are likely to fall from the levels caused by the ethanol conversion, but the federal Energy Information Administration said this month it expected regular gasoline to average $2.62 per gallon nationally this summer. But that estimate assumes nothing goes wrong.

Meanwhile demand is up 1 percent so far this year and is expected to be strong this summer. That will keep upward pressure on gasoline prices.

Q: President Bush announced that he will stop making deposits to the U.S. Strategic Petroleum Reserve. What is that reserve, and what will halting deposits do to reduce prices or eliminate shortages?

A: The strategic petroleum reserve was established after the 1973-74 Arab oil embargo to prevent a disruption of oil supplies from damaging the economy.

The current stockpile is 687.5 million barrels in salt caverns along the Gulf of Mexico coast.

Stopping the deposits is unlikely to have much impact on the markets. So far this year, net deposits into the reserve were 4.8 million barrels, which is less than half the amount of oil imported into the country every day.

Besides, keeping more oil on the market does nothing to increase refining capacity, which is a key factor in higher fuel prices. Witness the impact of hurricanes Katrina and Rita last year. Oil prices surged only briefly, checked by releases from government reserves, but gasoline prices still soared.

Q: What can President Bush and Congress do?

A: Very little in the short term. Bush has said the country needs to move away from its addiction to oil. But developing alternatives such as hydrogen fuel cells for transport is decades away. Hybrid gas-electric cars still represent only a small fraction of car sales and supplies of corn-based ethanol — a substitute for gasoline — are limited. The cost-effective development of cellulostic ethanol is still under research.

Q: Congress enacted broad energy legislation last year. Why hasn't it had an impact?

A: Most of the measures in that law are aimed at the long term. In fact, some provisions have added to the recent jump in gas prices, i.e., requiring the use of more ethanol.

Information on traders' fears was reported by the Los Angeles Times.