Gasoline Price Changes - Federal Trade Commission

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GASOLINE PRICE CHANGES: D. Over the Past Two Decades, the Demand for Crude Oil Has Grown Significantly. The demand for crude oil depends on the demand for refined products, such as motor gasoline, diesel fuel, jet fuel, and heating oil. Since 1982, motor gasoline has accounted for 49 to 53 percent of the daily consumption of all petroleum products. Crude oil consumption has fallen for some periods over the past 30 years, partially in reaction to higher prices. For example, following higher crude and gasoline prices due to the Iranian revolution, the Iran/Iraq war, and other factors, gasoline consumption in the U.S. fell significantly between 1978 and 1983 and remained lower during the 1980s than it had been in 1978. Overall, however, the long-run trend is toward significantly increased demand for crude oil – particularly demand from developing economies such as China and India. Between 1988 and 2004, worldwide demand for crude increased by 27 percent, from 64.9 million barrels per day (bpd) to 82.4 million bpd. E. Crude Supply from Countries Other than OPEC Members Has Increased. In 1974, during the oil embargo, OPEC’s share of world crude oil production was 52 percent. Higher world prices due to OPEC actions increased the incentives to search for oil in other areas. Although OPEC’s total crude oil production in 2003 was comparable to that in 1974 – 30.5 million bpd in 1974 and 30.8 million bpd in 2003 – OPEC’s 2003 crude oil production accounted for only 38 percent of world crude oil production compared to 52 percent in 1974. Between 1974 and 2003, crude oil production from countries that are not members of OPEC increased from 28.6 million bpd to 48.9 million bpd. By contrast, during the same time period, U.S. crude oil production has declined as U.S. crude oil reserves have been depleted. As a result, U.S. refiners now purchase more foreign crude oil than ever before, importing more than 60 percent of their input from foreign sources, up from 43 percent in 1978. F. OPEC’s Actions Have Had a Large Effect on Crude Oil <strong>Price</strong>s. OPEC is a cartel designed specifically to coordinate output decisions and to affect world crude oil prices. 3 The degree of OPEC’s success in raising crude oil prices has varied over time. In the late 1970s and early 1980s, cartel members adhered to OPEC decisions to cut crude supply, and U.S. gasoline prices increased sharply. OPEC members, however, can be tempted to “cheat” and sell more crude oil than specified by OPEC limits. In addition, new sources of crude oil supply from non-OPEC members such as Canada, the United Kingdom, and Norway, as well as new technology that enables crude production in previously inaccessible locations, have reduced the percentage of world crude oil production attributable to OPEC. Thus, OPEC’s success has been mixed over time. Nonetheless, OPEC still produces a large enough share of world crude oil to exert market power and strongly influence the price of crude oil when OPEC members adhere to their assigned production quotas. 14 FEDERAL TRADE COMMISSION, JUNE 2005
THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION G. Crude Oil <strong>Price</strong>s Skyrocketed in 2004 in Large Part Due to Unexpectedly Large Increases in Demand. Larger-than-predicted increases in world demand for crude oil caught producers off guard. OPEC, for example, had set 2004 production levels based on much lower projections for demand growth, so they were not producing enough crude oil to meet demand. Large demand increases from quickly industrializing countries, particularly China and India, made supplies much tighter than expected. In addition to increased demand, unexpected production difficulties reduced some producers’ crude output. II. CHANGES IN THE PRICE OF CRUDE OIL ARE THE PRIMARY EXPLANATION FOR CHANGES IN THE NATIONAL AVERAGE ANNUAL PRICE OF GASOLINE IN THE U.S. Variation in the price of crude oil drives most of the variation in the price of gasoline. John Cook, Director of the Energy Information Administration (EIA), has noted that “historically . . . we see fluctuations in retail prices almost entirely explained by movements in the underlying crude market.” 4 There is little doubt that changes in crude oil prices have a greater effect on retail prices than do changes in any other intermediate cost component. 5 A simple regression 6 of the monthly average national price of gasoline on the monthly average price of West Texas Intermediate (WTI) crude confirms that the variation in the price of crude explains approximately 85 percent of the variation in the price of gasoline. 7 To illustrate this relationship, Figure 2-1 compares the yearly national average price of gasoline (excluding taxes) and the yearly average price of WTI crude oil from 1984 to January 2005. 8 CHAPTER 2: WORLDWIDE SUPPLY, DEMAND, AND COMPETITION FOR CRUDE OIL 15
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THE DYNAMIC OF SUPPLY, DEMAND, AND
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CHAPTER 4. SUPPLY, DEMAND, AND COMP
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Price Difference (Cents per Gallon)
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Millions of Barrels 1,500 1,250 1,0
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Millions of Barrels per Day 9 8 7 6
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CHAPTER 5. STATE AND LOCAL POLICIES
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Percentage of Customers Lost to 1%
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Retail Price (cents per gallon) 220
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Share (Percent) 80 70 60 50 40 30 2
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Price (Cents per Gallon) 200 190 18
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6. GAO, supra note 5, at 20. 7. Id.
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Herfindahl-Hirschman Index (HHI) Th
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Gasoline Price Changes - Federal Trade Commission

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