Gasoline Price Changes - Federal Trade Commission

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GASOLINE PRICE CHANGES: Commerce ordered Kwik Trip, Inc. and Murphy Oil USA Inc. to cease and desist from selling gasoline at too low a price. 31 In both cases, the state alleged that the respondent had “engaged in the offer and sale of gasoline below the minimum allowable price.” 32 Although these restrictions ostensibly are designed to prevent the predatory pricing of gasoline, there is economic evidence that they lead to higher retail prices. 33 These laws are likely to harm consumers by depriving them of the lower prices that more efficient gas stations can charge while still covering their costs, including their fixed costs. 34 Even if a gas station has lower wholesale costs, and presumably may charge a lower price than other stations with higher wholesale costs, it still does not have the ability to compete by charging the lowest price it may be willing to charge when a below-cost sales law is on the books. See also Box 5-2 for a discussion of federal law on gasoline distribution. Box 5-2: The Petroleum Marketing Practices Act The Petroleum Marketing Practices Act is designed to prevent major oil companies from exerting control over retail prices through the termination of branded dealers. 15 U.S.C. §§ 2801-2806 (1994). The purposes of the law are “to balance the perceived unequal bargaining power between dealers and their suppliers” (William R. O’Brien, <strong>Federal</strong> Laws Affecting the Right of a Franchisor to Terminate or Not Renew a Franchise: Petroleum Marketing Practices Act, 49 ANTITRUST L.J. 1371, 1371 (1980)) and “to establish a uniform, nationwide set of rules governing [motor fuel] franchise relationships” (American Bar Ass’n, Section of Antitrust Law, Monograph No. 9, Refusals to Deal and Exclusive Distributorships, app.C at 60 (1983)). The Act sets forth the circumstances that govern termination or non-renewal of retailer franchises. The Act essentially has frozen into place whatever branded distribution networks existed in 1978. According to some, the Act likely has had the effect of institutionalizing inefficiency by encouraging systems with too many lessee or contract dealers relative to company-operated stations. Williams 8/2 at 151-52. The economics of any market are constantly changing, driven by entry, exit, new technology, and changes in supply and demand. Different kinds of distribution systems may be costeffective during different time periods. To add a statutory impediment to changing the distribution system runs the risk that refiners will not be able to react in a timely manner to changing market conditions. II. DIFFERENCES IN VERTICAL RELATIONSHIPS INFLUENCE HOW GASOLINE ARRIVES AND IS SOLD AT RETAIL STATIONS. We next examine two downstream stages in the distribution of gasoline: the delivery of gasoline from the refinery to a storage terminal and wholesale distribution from the terminal to the gas station. Firms differ in the extent to which they perform these operations themselves or contract to have others provide these operations. This section reviews gasoline storage at terminals and sales of gasoline at wholesale. 114 FEDERAL TRADE COMMISSION, JUNE 2005
THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION A. Terminaling – Storage of Bulk Supplies of Refined Petroleum Products. Once gasoline leaves the refinery, it typically travels – primarily through pipelines and marine vessels – to a storage terminal. 35 Generally, the gasoline next is dispensed from units at the terminal called “racks” into tank trucks for delivery to gas stations. Terminal charges for gasoline are typically less than $0.025 per gallon 36 and are not a major component of the final retail price. Some refined product terminals – sometimes referred to as “public” terminals – are owned and operated by pipeline companies or other firms with no upstream interests in refining and no downstream interests in marketing. Public terminals typically sell services to all types of wholesalers. Other terminals – generally called “proprietary” terminals – are integrated upstream with a refiner, downstream with branded retail gas stations, or both. Proprietary terminals distribute gasoline primarily to retailers and jobbers associated with the firm’s brand, although they may supply other branded or independent retailers through various contractual arrangements. As Figure 5-8 shows, the overall number of terminals in the United States declined between 1982 and 1997. 37 These terminal closures appear to reflect a reduced need for storage capacity due to, among other things, terminals’ reductions in their inventory holdings through supply management technologies, such as “just-in-time inventory.” 38 Another technological development that has reduced the need for greater storage capacity is “in-line blending.” In-line blending allows gasoline, such as mid-grade gasoline, to be blended at the terminal from stocks of regular and premium-grade gasolines. Previously, such gasoline was blended at the refinery and stored separately at the terminal. <strong>Changes</strong> such as these have resulted in the closing of less cost-effective terminals. CHAPTER 5: STATE & LOCAL POLICIES, & VERTICAL INTEGRATION 115
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Federal Trade Commission DEBORAH PL
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GASOLINE PRICE CHANGES: The vast ma
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GASOLINE PRICE CHANGES: $ The World
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GASOLINE PRICE CHANGES: expect incr
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GASOLINE PRICE CHANGES: Figure 3-6:
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GASOLINE PRICE CHANGES: $ Increased
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GASOLINE PRICE CHANGES: $ Since 199
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GASOLINE PRICE CHANGES: increase lo
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GASOLINE PRICE CHANGES: England and
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Table of Contents EXECUTIVE SUMMARY
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C. In 2004, the Geopolitical Outloo
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CHAPTER 4: SUPPLY, DEMAND, AND COMP
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3. Gasoline prices in the East Coas
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CHAPTER 1. SUPPLY (INFLUENCED BY OP
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To obtain the additional supply the
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THE DYNAMIC OF SUPPLY, DEMAND, AND
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Price (Cents per Gallon) 220 200 18
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words, short-run demand for gasolin
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Endnotes THE DYNAMIC OF SUPPLY, DEM
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CHAPTER 2. WORLDWIDE SUPPLY, DEMAND
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Thousand Barrels per Day 18,000 16,
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Million Barrels per Day 0.9 0.8 0.7
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such as ethane, ethylene, and propa
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CHAPTER 3. SUPPLY, DEMAND, AND COMP
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Year-over-year Percentage Change in
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Capacity (Million Barrels per Calen
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Page 99 and 100: Price Difference (Cents per Gallon)
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Page 111 and 112: Millions of Barrels per Day 9 8 7 6
Page 131 and 132: CHAPTER 5. STATE AND LOCAL POLICIES
Page 133 and 134: Percentage of Customers Lost to 1%
Page 135 and 136: Retail Price (cents per gallon) 220
Page 137 and 138: Share (Percent) 80 70 60 50 40 30 2
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Page 157 and 158: 6. GAO, supra note 5, at 20. 7. Id.
Page 165: Herfindahl-Hirschman Index (HHI) Th
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