	Introduction

Average U.S. gasoline prices have risen sharply during 2004, beginning the year at $1.50 pergallon and peaking at $2.06 in late May. Among the factors causing 2004's gasoline price volatility has been a shortage of domesticrefining capacity, which has affected gasoline supply availability, creating a need for substantialimports. Potential policy concerns raised by growing reliance on gasoline imports include theavailability of foreign supplies that meet U.S. specifications, the speed at which incremental foreignsupplies can be provided to meet shifting domestic demand, and the delivered price of importedsupplies. This would have made it easier to ship gasoline between markets when neededto balance supply. On June 16, the House passed the United States Refinery Revitalization Act( H.R. Gasoline Demand

Gasoline demand in the United States continues to grow. Between 1999 and 2003, petroleum consumption increased byhalf a million barrels per day (mbd), rising from 19.5 mbd in 1999 to 20.0 mbd in 2003. Figure 1. Gasoline use has continued to grow during the first half of 2004, as almost 9.0 mbd ofgasoline was supplied to consumers, an increase of about 1.9% over the previous year's first half.While there is some preliminary evidence that high pump prices may have begun to retard growthin gasoline demand, it is still too soon to evaluate whether this trend has shifted, and how overallpetroleum demand might track for all of 2004. Gasoline Supply

Gasoline is manufactured in U.S. refineries and imported from foreign refiners as well. Gasoline components are imported with increasing frequency, amounting to50% of imports during 2004. (3) Imports of finished gasoline and components -- which have averaged, respectively, about 500,000barrels per day and 400,000 barrels per day during the past 12 months -- bridge the gap betweenU.S. refinery production and demand. Without this supplement, there would be a supply shortfall. The increasing use of blending components in building up the gasoline pool is seen in the riseof components as a proportion of nationwide gasoline inventories. Currently, one-third of gasoline imports comes from Canada and the U.S. Virgin Islands. Another third comes from Argentina, the Netherlands, Russia, the United Kingdom, and Venezuela;the remainder is imported in smaller quantities from a diversity of nations. In addition to Canada and the Virgin Islands, increased gasoline imports now come from theUnited Kingdom and the Netherlands, where refinery utilization is much lower than in the UnitedStates; many other nations with spare refinery capacity are suppliers as well. A recent enhancement to the supply of imported gasoline has been made by PDVSA, whichhas started shipping the complete cocktail for ethanol blended gasoline (without the ethanol, whichis blended near the point of sale). The higher import costs impact the last units of gasoline supply, providing a price umbrellafor domestic refiners, whose pricing -- like all industrial pricing -- is linked to the cost of the lastincrements of the good involved. Lags in getting foreign supply may have contributed to 2004's price increases. H.R. 4517 , theRefinery Revitalization Act -- which passed the House, but has not seen Senate action -- is aimedat facilitating increases in capacity by fast-tracking the environmental review and permitting offacilities in a designated Refinery Revitalization Zone.
Gasoline demand in the United States has grown consistently during the past decade,increasing by a total of 20%. Between 1999 and 2003, gasoline consumption grew by 500,000barrels per day, accounting for all of the increase in petroleum consumption during that period. While 2004 may see growth slow down because of high prices, during the first seven months of theyear gasoline demand was up by another 1.9%.
The fact that gasoline supply has not kept up with demand has been reflected in pump pricesthat have risen from $1.50 at the start of 2004 to as high as $2.06 per gallon in late May. Whensupply and demand become out of sync with their previous relationship, prices change to establisha new balance. The outcome has been a period of volatile gasoline prices, which have set recordhighs that have become a focal point for consumers and policy makers, and raised concerns abouttheir impact on the economy.
Gasoline is supplied both by U.S. and foreign refiners. Domestic producers' capacity islimited. As a result, nearly 1 million barrels per day of gasoline and its components are imported.Imported blending components -- especially those used in ethanol-blended fuel -- are increasinglyimportant to total U.S. supply. Without this supplemental supply, gasoline would be less availableand prices likely higher.
Imports most recently have come from Canada and the U.S. Virgin Islands, which supplyone-third of the off-shore supply. Argentina, the Netherlands, Russia, the United Kingdom, andVenezuela provide another third. Imports peaked in March 2004, took a dip, and reached new highsin July. Increased imports may have contributed to pump prices backing off their May highs in latesummer.
New gasoline blending components from Venezuela and the rehabilitation of a refinery inAruba may also contribute to enhanced gasoline component supply later this year. Gasolinecomponent availability -- which has increased during 2004 -- gives domestic refiners an addedmeasure of flexibility in using their capacity, and contributes to enhanced supplies of fuels neededto meet demand for ethanol-based gasoline and other specialized regional blends.
Potential policy concerns raised by growing reliance on gasoline imports include theavailability of foreign supplies that meet U.S. specifications, whether incremental foreign suppliescan be provided quickly enough to meet shifting demand, and the delivered price of importedgasoline.
Two legislative efforts were debated in the House regarding gasoline supply issues during2004. One, H.R. 4517 , has passed the House but not been taken up in the Senate. Itwould provide for easier permitting for refinery capacity expansion. And H.R. 4545 ,which did not pass the House, would have limited the growth of special regional fuel blends, oftencalled "boutique fuels."
This report will be updated as events warrant.