Roanoke Times
                 Copyright (c) 1995, Landmark Communications, Inc.

DATE: TUESDAY, July 3, 1990                   TAG: 9007030388
SECTION: BUSINESS                    PAGE: C4   EDITION: EVENING 
SOURCE: The New York Times
DATELINE:                                 LENGTH: Medium

OIL GLUT FAILS TO TRIGGER A DROP IN GASOLINE PRICES

The main reason is a bottleneck at the nation's refineries, which are producing all the gasoline they can. Because the oil companies have been unable to produce any extra gasoline and demand has remained more or less constant, gasoline prices are not falling, and refinery profits are soaring.

In other industries, a long-term shortage of production capacity would induce companies to build new plants to make more of their product. But no new refineries are on the drawing boards because of public opposition and strict rules on new pollution sources.

"While everyone agrees they want cheap gas, nobody wants a refinery in their back yard," said Peter Beutel, an oil expert at Merrill Lynch Futures.

Given the shortage of refinery capacity, the crude price has been nearly irrelevant lately.

"I don't care where crude prices go," said George Babikian, president of ARCO Products Co. of Los Angeles. "They could drop $3 a barrel, and it won't make any difference." The reason, he said, is "the market is short here, and you can't buy a lot of gasoline for immediate delivery."

The situation leaves drivers paying an average of $1.08 a gallon for self-serve unleaded fuel, and more for higher grades.

The companies that own refineries are, at least for now, making large profits in a business where prices are no longer regulated.

And a generation of consumers who learned in the 1970s that gasoline prices surged when the supply of crude oil was reduced are learning a new and difficult lesson: a glut of oil does not a price drop make.

"Whenever oil prices fall, there is always this stickiness in gasoline prices on the way down," said Ed Rothschild, an energy expert at Citizen Action, a Washington-based consumer organization. "You never see this stickiness on the way up."

Oil industry analysts agree that the problem is a shortage of refining capacity, but some say the industry has carefully maneuvered itself into this situation.

"One of the things refiners have done to get to this stage is to promote high-octane gasoline, which requires more crude oil and produces less gasoline," Rothschild said. "If they reduced 93 octane gas to 92, we would get 140,000 barrels a day more product, nationwide."

Total gasoline production in the week ended June 22, the latest period available, was 7.1 million barrels a day.

Demand is so strong for high-octane premium gasoline that prices have been rising even as prices for lower-octane fuels have been stable. Even within the oil industry, many experts acknowledge that motorists are paying more for higher-octane gas that gives them little additional benefit.

Octane is a measure of gasoline's ability to withstand knocking, or premature detonation in the cylinders.