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