The Federal Trade Commission today issued a report entitled “Gasoline Price Changes: The Dynamic of Supply, Demand, and Competition.” The Report analyzes the many factors that influence fluctuations in the prices that U.S. consumers pay for gasoline at their local gas station. It examines a wide range of gasoline price factors – including the cost of crude oil, increasing national and international demand, and federal, state, and local regulations – all of which influence the prices consumers pay at the pump. One of the Report’s conclusions is that over the past 20 years, changes in the price of crude oil have led to 85 percent of the changes in the retail price of gasoline in the U.S., while other important factors have included increasing demand, supply restrictions, and federal, state, and local regulations such as “clean fuel” requirements and taxes.
“U.S. consumers are frustrated by rising gasoline prices, and they deserve to know the facts. Further, only through a hard look at the facts can officials make what likely are tough decisions and devise meaningful responses to important consumer issues,” said Chairman Deborah Platt Majoras. “The Federal Trade Commission will continue to watch closely for signs of anticompetitive or fraudulent conduct in the petroleum industry, and will take swift action against any law violation.”
A Case Study Example
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, Arizona, 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 that occurred 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. 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 principles – principles that also apply to the nation as a whole.
Main Commission Findings
The FTC’s Report furnishes detailed information about the factors that lead to gasoline price spikes and other price changes. It also provides general conclusions about the larger factors that result in such changes, including the following:
The Report also examines state and local factors that can affect retail gasoline prices. It notes that, all other things being equal, retail prices are likely to be lower when consumers can choose among a greater number of gas stations and switch purchases among these stations. The study also discusses how the format of retail gas stations has changed over the past 30 years from primarily service bays to convenience stores and high-volume gas stations. The growth of high-volume “hypermarkets,” the Commission says, has led to lower gasoline prices for consumers.
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 minium mark-ups, 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.
The vote to release the Report, which is available on the FTC’s Web site, was 5-0, with Commissioner Jon Leibowitz issuing a separate statement.
Copies of “Gasoline Price Changes: The Dynamic Of Supply, Demand, and Competition” are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
(FTC File No. P052103)