WASHINGTON -- Changes in the price of crude oil have led to 85% of the changes in the U.S. retail price of gasoline, while other major factors have included increasing demand; supply restrictions; and federal, state and local regulations such as clean fuel requirements and taxes, said a new report, Gasoline Price Changes: The Dynamic of Supply, Demand & Competition, just issued by the Federal Trade Commission (FTC).
The report examines state and local factors that can affect retail gasoline prices. It said prices are likely to be lower when consumers can choose among a greater number of stations and switch purchases among them. It also discusses how the format of retail outlets has changed over the past 30 years from service bays to convenience stores and high-volume stations. The growth of hypermarkets, the FTC said, has led to lower gasoline prices for consumers.
The report begins with a case study that illustrates several important points regarding gasoline price spikes on the regional level. As a useful example, the FTC staff focused on retail gasoline prices in Phoenix, Ariz., during August 2003. Phoenix gasoline prices were $1.52 per gallon at the beginning of August 2003, but rose to $2.11 per gallon by the third week of the month. A pipeline rupture on July 20, 2003, and the failure of temporary repairs, led to reduced gasoline supplies in the Phoenix area. The reduced supplies caused the price increases. Once these disruptions were corrected, prices quickly returned to their original levels.
The Phoenix example provides three basic lessons regarding the supply of and demand for gasoline and the prices that consumers pay, said the report. First, in general, the price of gasoline reflects producers' costs and consumers' willingness to pay. Gasoline prices rise if it costs more to produce and supply gasoline, or if people wish to buy more gasoline at the current price. Gasoline prices fall if it costs less to produce and supply gasoline, or if people wish to buy less gasoline at the current price.
Second, how consumers respond to price changes will affect how high prices rise and how far they fall. Limited substitutes for gasoline restrict the options available to consumers to respond to price increases. Consumers can change their driving habits, walk, ride a bike, take the bus or the subway, or eventually buy more efficient vehicles, but these are difficult choices.
Third, how producers respond to price changes will affect how much prices rise or fall. In general, when there is not enough of a product to meet consumers' demands at current prices, higher prices will signal a potential profit opportunity and may bring additional supply into the market. Phoenix is a good illustration of these principlesprinciples that also apply to the nation as a whole.
Worldwide supply, demand, and competition for crude oil are the most important factors in the national average price of gasoline in the United States. Over the past 20 years, changes in crude oil prices have explained 85% of the changes in the prices of gasoline nationwide. Since 1973, according to the report, production decisions by OPEC have been a significant factor in the prices that refiners pay for crude oil. The demand for crude oil has grown significantly over the past two decades, as well, leading to higher prices at the pump.
Gasoline supply, demand and competition produced relatively low and stable average real U.S. gasoline prices from 1984 until 2004, despite substantial increases in U.S. gasoline consumption. The report indicates that U.S. consumer demand for gasoline has risen substantially, especially since 1990. Since 1984, increased gasoline supplies from U.S. refineries and imports helped meet increasing demand and kept gasoline prices relatively steady. For most of the past 20 years, real average retail gasoline prices in the United States, including taxes, have been at their lowest levels since 1919, with U.S. refiners adopting more efficient technologies and business strategies that have allowed them to produce more refined product for each barrel of crude they process.
And despite a somewhat different trend in the last few yearswith the average U.S. retail price for a gallon of gasoline increasing from $1.56 in 2003 to $2.04 in the first five months of 2005it is difficult, if not impossible, to predict whether this sharper rate of increase represents the beginning of a longer-term trend.
Regional differences in access to gasoline supplies and environmental requirements for gasoline affect average retail prices and the variability of regional prices. Different regions of the country differ in their access to gasoline supplies, and these differences affect gasoline prices. Gasoline prices on the East Coast, in the Midwest and in the Rocky Mountain states are significantly more variable than Gulf Coast gasoline prices, due to the availability of excess refining capacity along the Gulf Coast. In addition, regional environmental requirements for boutique fuels, such as California Air Resources Board (CARB) gasoline requirements in California, can limit substitute gasoline supplies and can thus lead to cost increases during supply shortages.
The report discusses how state and local taxes can be significant factors in the retail price of gasoline. The average state sales tax in the U.S. is 22.5 cents per gallon, with New York state having the highest tax at 33.4 cents per gallon. Other state laws, such as bans on self-service stations and laws prohibiting below-cost sales or requiring minimum markups, also affect gasoline prices.
Over the past 30 years, the FTC has investigated nearly all petroleum-related antitrust matters and has held public hearings, undertaken empirical economic studies, and prepared extensive reports on relevant issues. Since 2002, the staff of the FTC has monitored weekly average retail gasoline and diesel prices in 360 cities nationwide to search for pricing anomalies that might indicate anticompetitive conduct and to take action where appropriate. This is the only industry in which the FTC maintains such a price monitoring project. Moreover, in 2004, the FTC staff published a study reviewing the petroleum industry's mergers and structural changes as well as the antitrust enforcement actions the agency has taken.
Click here to read the full FTC report.
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