Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
Several U.S. refineries work most efficiently with Venezuelan crude. See Box 2-1. Due
to much reduced supplies of Venezuelan crude, those U.S. refineries bargained with other
suppliers to obtain crude that was
similar to Venezuelan crude
(“Venezuelan similar crude”). 11
Increased demand for Venezuelan
similar crude caused prices for that
crude to increase. This started a ripple
effect throughout crude oil prices. The
refiners who typically used the
“Venezuelan similar crude” found their
prices rising as competition to obtain
that crude grew fiercer. Those refiners
then tried to find other types of crude
oil they could use as a substitute for
Venezuelan similar crude. As they
increased competition for those types
of crude oil, those crude prices rose as
well. The ripple effect continued
through many different types of crude
oil. Thus, a workers’ strike in
Venezuela that significantly restricted
the availability of Venezuelan crude
had ripple effects that influenced crude
oil prices worldwide.
B. World and Domestic Crude Prices Are Linked.
Box 2-1: There Are Different Types of Crude Oil, and
Refineries Usually Are Designed to Work Most
Efficiently with Particular Types of Crude.
Crude oil is the primary input into the production of
motor gasoline and other refined petroleum products.
Crude oils from different fields usually have different
chemical properties, including differences in density and
sulfur content. Heavy crude oil (high density) generally
yields smaller amounts of high value products, such as
gasoline and jet fuel, than lighter crude oil. Sour crude
oil (high sulfur) is more difficult to process. As a result,
heavy sour crude oil (e.g., Venezuelan crude oil)
typically sells at a discount to sweeter, lighter crudes
(e.g., West Texas Intermediate).
Refineries have made investments to become better able
to process different types of crude oil. This has enabled
them more easily to substitute among different crude
oils. Nonetheless, refineries usually are designed to be
most productive using a specific range of crude oil.
When they substitute other types of crude, their
efficiency and productivity may decline.
U.S. refiners import approximately 60 percent of the crude oil they refine. When the
world price of crude oil increases, refiners that purchase imported crude will face higher costs
and may try to switch to domestic crude. Increased competition for domestic crude will raise
those prices as well. For example, prices for a barrel of WTI crude – a crude that is not similar
to Venezuelan crude – shot up by $10 during the Venezuelan crude shortage, as all refiners tried
to meet their demand for crude. 12
Domestic prices will continue to rise until world and domestic prices equalize, taking into
account the quality differences among crude types. As a result of this relationship, domestic and
world crude oil prices are strongly linked. Figure 2-2 illustrates this relationship by showing a
number of different world crude prices, as well as the price of WTI oil, from the beginning of
1997.
CHAPTER 2: WORLDWIDE SUPPLY, DEMAND, AND COMPETITION FOR CRUDE OIL 17