Spring Gas Price Increases: Background

In spring, our thoughts typically turn to … the seasonal increase in gasoline prices (what did you think I was going to say?). It all started with this New York Times article on 6 March, which noted that consumers are complaining about high and rising gas prices. They concisely summarized the most apparent causes of the price increase:

Reasons for the increases include prices for crude oil, which sold for a high of $37.45 a barrel on Friday on the New York Mercantile Exchange. Worldwide supply of crude appears to be tight, partly because O.P.E.C., the world’s largest oil cartel, plans to cut production next month and because of political and industrial turbulence in Venezuela, a major provider of oil for the United States.

In addition, many refineries in the United States are changing over to production of so-called summer fuels, an expensive process in itself, and refinery operators say they are also having to pass on some of the increased costs of producing gasoline with newly mandated levels of oxygenates, primarily ethanol.

Tyler Cowen picked up on this article in his discussion of whether or not to boycott gas stations. Tyler related an important fact from his reading of a recent Gregg Easterbrook column: in real terms, the current gas price is well below the all-time high, which occurred in 1981. Then Steve Verdon picked up on Tyler’s thread with a couple of posts, including a reference to this SF Chronicle article that discusses the increase in gas prices in California, and Senator Boxer’s request for an FTC investigation:

Various investigations of the oil industry have failed to find any illegal market manipulation during earlier spikes. The most recent state inquiry, concluded last year by the state Energy Commission, found nothing amiss.

Joe Sparano, president of the Western States Petroleum Association, an oil industry trade group, insisted that that the rise in gas prices this time around is no different. Increasing prices during the past three months, he said, have simply been a consequence of supply and demand.

Sparano, who spoke on Lockyer’s panel Thursday, advocated that the state streamline permitting of refineries and gas terminals. He also emphasized that oil company profits, though up recently, are not out of line with other industries.

“Our industry had a profit margin of about 6.3 percent and all industries are at 6.7 percent” for the fourth quarter of 2003, Sparano said. “That’s not excessive.”

That profitability fact is important, because it is consistent with the hypothesis that the root cause of higher gas prices is fuels regulation. The seasonal pattern of price changes is also consistent with that hypothesis. The profits in the petroleum refining industry being not too high on average also suggests that Bill Lockyer is misguided when he worries about a “lack of competition”, particularly given these data:

One of Lockyer’s chief complaints about California’s gas market is what he calls a lack of competition. He said that seven oil companies control 98 percent of the state’s refining capacity and then market 90 percent of the gasoline they refine through their own service stations.

Seven is a pretty big number, especially when you are discussing an industry as complicated, capital intensive, and regulated as petroleum refining and marketing. Put another way, oligopolies can be very aggressive and competitive, and just going by the number of firms in an industry is a naïve and unsophisticated approach that is certain to lead to bad “competition” policy. My opinion, YMMV, so to speak.

Last week Northwestern Newsfeed interviewed me about gas prices. You can find the transcript and the audio feed at the Northwestern Newsfeed website.

In a separate post I will analyze the causes of the current increase in gasoline prices.


3 thoughts on “Spring Gas Price Increases: Background

  1. Investigations of the oil industry do not need to find collusion or gouging – all they need to do is occur. The pols get lots of press at the onset; the conclusions appear months or years later on page 16b, below the fold, never to be heard of again.

    If only the state controlled or regulated the industry, none of these problems would occur. The industry could follow the model of government education, with its outstanding record of reduced costs and improved student performance; or, the model of state government itself, with its outstanding record of tax reductions and improved service for all.

    Just wait until the MTBE cleanup starts and the industry is castigated for passing the cost on to consumers. Thank you, California!

  2. Is this a fact that Bush has a contract with Saudia Arabia to lower gas prices before the election?

  3. It sure is funny(NOT) that the oil companies and the beef market and the ciggerette companies and every other greedy pri// that can get away with yelling we have to raise the price because it cost more to produce a product are full off chit .
    Grocery stores sell four half racks of coke for ten dollars and the price has been the same for two years and hasnt changed and twelve cans of coke equal 144 oz which is over a gal of liquide yet the cost hasnt gone through the roof on coke and if you listen to the rich polititions and the corporate screwges since the cost of gas has gone up then the shipping cost of coke should of gone up also yet it hasnt and no soda prices have gone through the roof and candy bars are still 3 for a dollar but these items arnt a nesesity like gas or milk and food ide like to see some corporate weeny go through 3 heart attacks and then spend 500.00 a month on meds and have to drive 60 miles to a cardiologist and work his ass off so he can take home 253.00 a week and social security denies him any benefits because their in the hole and now deny legitimite claims because theyve been mismanaged so badly in the past. Bottom line the people of this country have had a dollar value tattood on the forheads just like Hitler did to the jews and either your in the rich upper class and can buy the favors you need and write your exspensives off on your taxes or your a poor working person that cant afford to buy your rights and pay off the favors you need so you get kicked in the face and stepped on what ever happened to the pride of a citizens of this country we get tripple taxed now days and everyones a scared to raise hell and rebell because of the goverments scare tactics .
    dont sell your self respect and dont give it away SPEAK OUT .

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