API blames fuel spikes on market, downplays boutique effect

Maureen Lorenzetti
OGJ Online

WASHINGTON, Aug. 2 -- Gasoline prices shot up dramatically last spring simply because of supply and demand, the American Petroleum Institute told federal antitrust regulators Thursday.

"Nothing more, nothing less," John Felmy, API's chief economist told the Federal Trade Commission.

FTC held a public conference to examine why retail gasoline prices rise and fall (OGJ Online, July 12, 2001). Felmy's testimony, along with information from other stakeholders will help set the agenda for formal public hearings later this year.

Felmy told regulators the reasons why API maintains that recent price spikes were largely beyond industry's control.

"For a variety of reasons, there were lower-than-usual inventories of gasoline on hand in the spring. In part, that was true because we had a colder winter than most recent winters. That meant refineries supplied large amounts of heating fuel to keep American families warm," Felmy said.

"And if refineries are producing large amounts of heating oil, they are producing less gasoline. You can only squeeze so much out of any one barrel of crude oil. Meanwhile, the decline in gasoline production was accompanied by a drop in imports of gasoline and a 2% increase in demand. Taken together, those are the immediate causes for the price spikes earlier this year."

In a departure from earlier comments, API downplayed the role so-called "boutique" fuels -- made solely for consumption in localized markets due to environmental rules -- played in price increases, although the group did say inefficient environmental regulations sometimes have complicated an already strained infrastructure.

FTC also heard Thursday from consumer groups, states, and energy economists. Some had harsh criticism about alleged price gouging.

Citing a recent report on the issue, Consumer Federation of America Pres. Howard Metzenbaum, former Ohio senator, said industry can and does manipulate gasoline prices.

CFA officials said recent mergers and consolidations in the US downstream have meant US refiner and marketers can more easily manipulate and profit from price fluctuations.

"A concentrated, vertically integrated industry has responded slowly to price shocks and has even acted to keep supplies off the market," CFA said in a July report.

"While the industry complains that clean air standards requiring different additives in different markets restrict region-to-region flows of gasoline, those requirements actually give individual suppliers greater market power, aggravating the concentration problem" (OGJ Online, July 12, 2001).

Felmy said the general public may run hot and cold on energy issues but politicians still should seek long-term solutions.

"Prices of gasoline, natural gas and electricity have declined over the past 2 months, but we should not be lulled into complacency. No sane homeowner would quit repairing a leaky roof simply because it's stopped raining. Likewise, it would be foolish for our nation and its leaders to forego seeking long-term solutions to our increasing energy needs simply because gasoline prices have gone down," he said.

Contact Maureen Lorenzetti at maureenl@ogjonline.com