FTC: Market factors explain ’06 gasoline price spurt

Sept. 10, 2007
Market factors ranging from reduced refining capacity to higher crude oil and ethanol prices led to dramatically higher gasoline prices in the late spring and early summer of 2006, the US Department of Justice’s antitrust division and the Federal Trade Commission jointly concluded on Aug. 30.

Market factors ranging from reduced refining capacity to higher crude oil and ethanol prices led to dramatically higher gasoline prices in the late spring and early summer of 2006, the US Department of Justice’s antitrust division and the Federal Trade Commission jointly concluded on Aug. 30.

Growing demand as the 2006 summer driving season approached, reduced refining capacity lingering after Hurricanes Katrina and Rita in 2005, further reductions in processing capacity as refiners switched to ethanol from methyl tertiary butyl ether, higher prices for ethanol and crude oil, and higher-than-expected demand during summer pushed up prices, the agencies said in their report to US President George W. Bush.

The determination that the higher prices resulted from these factors supports a conclusion that no antitrust laws were broken, they added. The FTC voted 4-1 to issue the report, with Commissioner Jon Leibowitz dissenting.

The report said about 75% of the spring and summer 2006 national average gasoline price increases resulted from growing demand leading into the summer driving season and increased crude oil and ethanol prices.

“The evidence further indicates that the remaining 25% of the price increases stemmed from declines in the production of gasoline-due to refiners’ transition to ethanol from other blending components, persistent refinery damage related to Hurricanes Katrina and Rita...and other refinery outages caused by unexpected events and required maintenance-coupled with increased demand,” it said.

While the FTC’s staff would not rule out other factors, it believed the causes it cited “adequately explain the 2006 price increases.” It said, “Our targeted examinations of major refinery outages revealed no evidence that refiners conspired to restrict supply or otherwise violated the antitrust laws.”

In his dissent, Leibowitz conceded that FTC staff members identified some plausible justifications for the gasoline price increases. But he warned that the oil industry, “which posted record profits in 2006,” should not consider the report vindication for its behavior. “The question you ask determines the answer you get. Whatever theoretical justifications exist don’t exclude the real world threat that there was profiteering at the expense of customers,” he said.

A congressional critic of the FTC’s gasoline price oversight approach immediately criticized the report. Bart Stupak (D-Mich.), who chairs the House Energy and Commerce Committee’s Oversight and Investigations Committee, called the findings “further proof that the Bush administration will ignore the evidence and distort the facts to protect big oil companies.”

Stupak, whose bill aimed at ending alleged oil product price-gouging passed the House earlier this year, said he would continue working with other members of Congress to send such legislation to Bush’s desk. “The fact remains that last year, when [the FTC] examined price-gouging under definitions supplied by Congress, the commission found evidence of gouging by refiners and other big oil companies,” he said.

A May 2006 FTC report of price increases following Hurricane Katrina in September 2005 noted 15 instances involving seven refiners, two wholesalers, and six retailers of “price-gouging” under a narrow definition in a 2006 appropriations bill. According to that definition, “gouging” occurred if the average gasoline price in the hurricane-afflicted area was higher after the storm than it was before (OGJ, June 5, 2006, p. 23).

The FTC made clear in its 2006 report that “other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases.”