Gasoline Price Changes - Federal Trade Commission

GASOLINE PRICE CHANGES:
June 2004, they were supplying RBOB to the East Coast. 23 By mid-June, Venezuelan refineries
were sending regular shipments of RBOB to the East Coast as well. 24 The switch to RBOB
blended with ethanol went smoothly in New York and Connecticut.
Price data confirm that the transition went well. The data show that, despite some
substantial differences between the price of gasoline in the Northeast and on the Gulf Coast,
gasoline prices in the Northeast in 2004 were not noticeably more volatile than in previous years.
D. Other Factors Can Reduce Average Gasoline Prices but Exacerbate Gasoline
Price Spikes.
1. Low inventory levels.
As noted in Chapter 3, refineries have begun to keep lower inventories of crude oil and
gasoline, which reduces the cost of supplying gasoline to consumers. The advent of
computerized and other “just-in-time” inventory techniques now allows the delivery of crude oil
much closer to the time when a refinery needs it and delivery of gasoline to terminals much
closer to the time when distributors need it. Although “just-in-time” inventory techniques can
make refineries and distribution systems more efficient and thus lead to lower average gasoline
prices, low inventories at refineries and terminals may exacerbate price spikes. 25 For example,
in May and June of 2000, a variety of factors – several refinery breakdowns, longer-thananticipated
refinery maintenance, unexpected difficulties in producing the new summer-grade
RFG required by EPA regulations for use in Chicago and Milwaukee, and unexpected supply
disruptions in the two major refined product pipelines that serve the Midwest – combined to
cause gasoline price increases in the Midwest. 26 Low gasoline inventory levels at that time in
the Midwest exacerbated the price spikes by limiting the gasoline supplies available to mitigate
price increases. 27
2. High rates of capacity utilization.
Also as noted in Chapter 3, technical advances now allow refineries to operate for longer
periods of time at relatively high utilization rates. One recent survey of refinery industry
executives indicated that a very high utilization rate – 96 percent – is the maximum sustainable
level. 28 High utilization rates can improve a refinery’s efficiency and potentially lead to lower
average gasoline prices, but high utilization rates also can contribute to price volatility and
periodic supply problems. When unexpected gasoline supply disruptions occur or gasoline
demand increases unexpectedly, then high refining utilization rates can mean that no or little
extra refining capacity is available to remedy a supply shortage or satisfy an increase in
demand. 29 Indeed, in its Midwest Gasoline Report, the Commission concluded that “[t]he
current high capacity utilization rates in the oil refining industry leave little room for error . . . .
Assuming that demand continues to grow, occasional price spikes in various parts of the country
are likely unless refining capacity is increased substantially.” 30
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Initially, such shortages may be met by reallocating supplies from nearby areas, or
FEDERAL TRADE COMMISSION, JUNE 2005