Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
production disrupted, consumers quickly depleted gasoline supplies, especially when gasoline
demand surged, as people in the greater Detroit area drove greater distances to fill up their
vehicles. Anticipating difficulties in finding environmentally compliant substitute gasoline for
the Detroit area, like those experienced in June 2000, Governor Granholm sought the EPA’s
approval to waive the environmental specifications for gasoline used in southeast Michigan the
day after the blackout. 16
The August 2003 depletion of gasoline supply and surge in gasoline demand in the
greater Detroit area still had an impact on price, although prices did not rise as much as if the
waiver not gone into effect. One week prior to the blackout, the average price for a gallon of
gasoline in the greater Detroit area was $1.59. Ten days after the outage, gasoline prices in the
greater Detroit area had increased to an average of $1.77, and just before Labor Day, weekend
prices peaked at nearly $1.88 per gallon. As refineries came back on line and production started
to regain normal levels, gasoline prices began to fall. 17
2. In the Northeast, a major shift in the type of environmentally
mandated fuel occurred without significantly increased gasoline
prices or price variability.
One type of environmentally safer gasoline used in many parts of the U.S. is reformulated
gasoline (RFG). RFG requires the addition of an oxygenate to the fuel. The two oxygenates
used in the U.S. are ethanol and methyl tertiary butyl ether (MTBE). MTBE has been the
primary oxygenate used in RFG in many areas of the country, including the Northeast. The use
of MTBE has raised concerns about groundwater contamination and other environmental issues,
however, and various governmental entities have banned, or considered banning, MTBE.
Beginning on January 1, 2004, New York and Connecticut prohibited the use of MTBE
as an oxygenate. This decision meant that not only would gasoline distributors use ethanol to
replace MTBE, but it also required a different blendstock (referred to as “reformulated
blendstock for oxygenate blending” (RBOB) 18 ) in which to mix the ethanol. New York and
Connecticut distributors needed RBOB from refineries, but could not rely on nearby refineries to
meet the new demand for RBOB. The Northeast lacks refinery capacity sufficient to meet
gasoline demand; gasoline distributors rely on imported refined gasoline to meet consumer
demand. Refineries on the Gulf Coast send gasoline via pipelines, and Europe and South
America also send refined petroleum products to New York and Connecticut.
Whether refineries in Europe and South America would make the investments necessary
to produce RBOB in quantities sufficient to meet the new demand in New York and Connecticut
was unclear; 19 producing low-vapor-pressure RBOB is a more costly and difficult process than
producing RFG with MTBE. 20 In late 2003, anticipating the MTBE ban in New York and
Connecticut, a number of petroleum traders and the Energy Information Administration (EIA)
predicted that the Northeast could expect gasoline price volatility and price spikes in the spring
of 2004, when refiners would first have to supply RBOB for blending with ethanol. 21
Nonetheless, by March 2004, a number of European refineries were making RBOB, 22 and by
CHAPTER 4: THE REGIONAL LEVEL 75