While a broad range of factors influence gasoline prices, worldwide crude oil prices continue to be the main driver, the US Federal Trade Commission’s Bureau of Economics concluded in a new report.
“Our report spells out the factors that determine what consumers pay at the pump, and why [gasoline] prices seem to ‘rocket up’ but ‘feather down’,” FTC Chairman Jon Leibowitz said on Sept. 1.
He said it also looks at how quickly retail gasoline prices adjust to wholesale gasoline and crude oil price changes; refining margins; the possible impact of futures speculation; and the effect of the Organization of Petroleum Exporting Countries.
The latest report builds on previous FTC staff reports, including a 2005 study of gasoline price factors and parts of a 2004 report that examined petroleum industry mergers, structural changes, and antitrust enforcement, according to FTC. The new report also summarizes and comments on new information from academic and other researchers, it added.
In its discussion of retail price “rockets and feathers” or asymmetric pass-through, the report said that causes are not fully understood, but researchers have suggested several possible causes. “The explanation currently with the most support is that consumers search for lower cost gasoline more intensely when prices are rising than when they are falling,” it said. “As a result, [retailers] do not face as much competitive pressure as prices fall and are less compelled to reduce price.”
While there is some evidence that consumer search intensity is different when prices are increasing as opposed to decreasing, it is not clear why search costs would vary across cities which display differing degrees of price asymmetry, the report continued. It said FTC may examine consumer welfare effects of asymmetric pass-through further in the future.
The report also examined price cycling, which it described as a recurring “saw tooth” pattern of retail price movements characterized by periods of a relatively small number of large price increases, followed by a period of more numerous, but smaller price decreases.
It said analysts who have studied retail gasoline pricing in all 50 US states have not found price cycling outside of the Midwest, and only since 2000. “A number of studies that consider US data find that Midwest cycling is explained, in part, by the greater presence of independent, nonrefiner, firms in that region,” it said.
The report also found that worldwide crude prices have changed since 2005 from shifts in both supply and demand. While demand fell during the recent global recession, overall consumption grew by almost 7% between 2004 and 2010, putting upward pressure on crude prices, it said. Production increased and additional supplies moderated upward price pressure somewhat, but more than 70% of the world’s proved reserves are in OPEC member countries, it noted.
“Because OPEC’s production increased at a slower rate than that of non-OPEC countries between 1974 and 2010, its share of global production has fallen from 54% to 42%, despite its significant reserves,” the report said. It added that while OPEC has some ability to affect crude prices by trying to have its members limit exports, its effectiveness as a cartel is limited. The largest increases in non-OPEC crude supply have come from the US, Russia, Canada, and Azerbaijan, it said.
Other price influences
Factors beyond oil costs that have significantly influenced US retail gasoline prices since 2005 include refinery capacity losses and pipeline disruptions following Hurricanes Katrina and Rita that year, the report said.
“Gasoline prices also increased significantly relative to crude prices in mid-2006 and mid-2007, due to several factors including increased demand, higher ethanol prices, reduced refining capabilities, and the lingering effects of the 2005 hurricanes,” it said. “Prices fell during the 2008 recession, and generally remained low, relative to crude prices, between 2008 and fall of 2010.”
FTC analysts found only minor changes in the US petroleum and refining market structure since 2005. “While there has been a small decrease in the number of US refineries, overall refining capacity has increased by 3.6%,” the report said. “Refiners now appear to be less integrated into gasoline retailing, as several large refiners have sold parts of their retail operations.”
It said refinery capacity utilization rates have gone down recently, and the trends of a decreasing number of domestic refineries and increasing industry consolidation have abated. “Refining capacity increased by 2.3% between 2006 and 2011, a smaller increase than the 3.7% increase for between 2000 and 2005,” it said. “But despite lower distillation capacity growth, average annual capacity utilization in recent years fell below 90%, reaching about 84% in 2010, the lowest level since 1987.”
Several reasons account for the refinery capacity utilization rate reduction, including capacity additions (although at a slower rate than in the early years of the last decade); increased use of ethanol as a gasoline blend stock since 2005, which effectively expanded refining output capacity; and reduced refined product demand after 2008 during the general economic recession, the new FTC report said.
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