Study reveals causes of 1996 CARB RFG price spike

Model-Predicted Carb Rfg Price Spikes [83,248 bytes] Following the introduction of California Air Resources Board Phase II reformulated gasoline in spring 1996, gasoline prices at the pump rose dramatically in the state. A civil antitrust suit was later brought against California refiners, claiming they had acted in concert to create the price increase and thus gouge consumers. The judge in the case determined that the alleged collusion was "nothing more than separate businesses each using all

Jan. 5, 1998

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Model-Predicted Carb Rfg Price Spikes [83,248 bytes]

Following the introduction of California Air Resources Board Phase II reformulated gasoline in spring 1996, gasoline prices at the pump rose dramatically in the state.

A civil antitrust suit was later brought against California refiners, claiming they had acted in concert to create the price increase and thus gouge consumers.

The judge in the case determined that the alleged collusion was "nothing more than separate businesses each using all available pricing information to maximize their individual profits."

Economists William Wade of Foster Associates Inc., San Francisco, and Robert Trout of Deloitte & Touche, San Diego, studied the events surrounding the CARB RFG price spike. In an unpublished report, Wade and Trout concluded that, "The sharp rise in CARB gasoline prices in spring 1996 can be explained both by the usual forces bearing on gasoline prices and a sequence of unforeseen events that occurred concurrent with the introduction of the new CARB gasoline."

The events

Events contributing to the price increase included unexpected refinery outages in Texas and California, say Wade and Trout.

The fluid catalytic cracking unit at Chevron Corp.'s El Paso refinery shut down just as two refineries in New Mexico and Texas serving the Arizona market were idled for scheduled turnarounds. This caused a sharp increase in conventional gasoline prices in Arizona and California.

In addition, a fire at Shell Oil Co.'s Martinez, Calif., refinery caused fears of a disruption in CARB RFG supplies, as Shell's share of the CARB gasoline market is 12%. Also, failure of Iraq to reach an agreement with the United Nations on exports caused the disappearance of 750,000 b/d of crude oil supplies from the market.

"These unexpected events fell on top of the usual spring seasonal demand increase to boost gasoline prices between March and May well in excess of the expected CARB gas cost increase," said Wade and Trout, "proving only that, in petroleum markets, as in other commodity markets, disruptive but explainable events can cause prices to get out of line once in a while."

The model

Wade and Trout performed a statistical analysis on the data relevant to the CARB RFG price spike. They developed two "time-series" models based on the relationships among crude oil prices, gasoline inventories, and seasonal demand variations, as well as other forces.

One model predicted wholesale prices; the other estimated the gasoline price spread (wholesale gasoline price minus crude cost).

Wade and Trout used the price-spread model to analyze prices during January 1990-July 1996.

"The time-series model was accurate in predicting wholesale price spreads over the 1990s," said Wade and Trout. "The model very accurately predicts the jump in price spread in April 1996" (see graph).

In this analysis, the variables described earlier explained 70% of the monthly variation in price spread during the study period. In the analysis using the model based on price alone, the variables accounted for 82% of the monthly variation in wholesale price during the period.

Wade and Trout conclude that, "After controlling for all of the relevant economic and exogenous factors affecting gasoline prices in California, the CARB effect (the effect of introducing the new gasoline) on wholesale margins was only about 5¢/gal."

These results show conclusively that there was no antitrust price manipulation on the part of oil companies.

Will history repeat?

"The West Coast gasoline price spike was similar to the tripling in methanol prices in the fourth quarter 1994 in preparation for the expected big demands for MTBE to make federal RFG effective Jan. 1, 1995," said Wade and Trout.

There also was a sharp price increase-especially in California-with the introduction of low-sulfur diesel in 1993.

Given this pattern, the oil industry can expect, and perhaps prepare for, a similar problem when the U.S. Environmental Protection Agency introduces Phase 2 federal RFG in 2000.