Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
addition, as shown in Table 4-2, conventional gasoline and boutique fuels do not differ
significantly in price variability in the Gulf Coast. In this case, neither pipeline limitations nor
differences between conventional and boutique fuels alone appear to account for these results.
Rather, the reason for the difference appears to lie in the fact that no regions along the
Colonial and Plantation pipelines south of Virginia require the use of RFG. Any RFG in those
pipelines is being shipped to Virginia or Maryland. If Virginia or Maryland experiences a supply
shortage of RFG, the pipelines have no ability to divert supplies from other locations along the
route into Virginia and Maryland. Instead, a shortage of RFG in Virginia or Maryland requires
new shipments of RFG from the Gulf, which slows supply responses and thus increases price
variability. For conventional gasoline, by contrast, the diversion of additional supplies to states
along the pipelines experiencing supply shortages would be much faster and less costly and,
accordingly, any effect from a supply shortage would be spread across a much broader area. The
interaction between boutique fuel requirements and pipeline distribution limitations appears most
significant in explaining these particular differences in standard deviations in Texas and
Maryland for RFG retail-to-WTI margins.
5. Conclusion.
In sum, the analyses discussed above indicate that boutique fuel requirements do not, in
and of themselves, cause greater gross product margin variability. For example, boutique fuel
gross product margins in the Gulf are not significantly more variable than those for conventional
gasoline. Nonetheless, boutique fuels may exacerbate the variability in areas, such as California,
that are not interconnected with large refining centers.
Interconnections via pipelines can reduce variability in gross product margins, but local
refining capacity also appears to be important. The Gulf Coast, with its very large refining base,
has less variable gross product margins than the East Coast, the Midwest, and the Rocky
Mountain states. Pipeline interconnections will help reduce variability in an area. The
effectiveness of pipelines in reducing gasoline price variability seems to be stronger when
adjacent areas along the pipeline are using the same type of fuel, which may reduce the time it
takes to reallocate supplies in case of a local supply disruption. For example, the variability of
gross product margins for conventional gasoline, which is sold all along the Colonial and
Plantation pipelines, is similar in the Gulf and in Maryland, but the variability of gross product
margins for RFG, which is not sold between Texas and Maryland, appears to be higher in
Maryland than in the Gulf.
Endnotes
1. The Clean Air Act, as amended in 1990, 42 U.S.C. §§ 7401-7626, mandated the establishment of reformulated
gasoline requirements for “non-attainment areas” that had not met federal goals for air quality. See FED. TRADE
COMM’N (FTC), MIDWEST GASOLINE PRICE INVESTIGATION 4 (final report, 2001) [hereinafter MIDWEST
CHAPTER 4: THE REGIONAL LEVEL 97