Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
D. In Response to Increased Demand and Higher Prices in 2004, Crude
Suppliers Increased Output, Which Lowered Prices Somewhat, at Least
Temporarily.
1. OPEC increased production.
For the most part, global oil production trended upward to meet the rising demand for
crude. Throughout much of 2004, OPEC members continued to raise their production. In the
beginning of 2004, OPEC had set its production ceiling at 23 million bpd. By November, OPEC
had raised its production ceiling to an all-time high of 28 million bpd. When demand rises, as it
did in 2004, OPEC decisions to raise or lower its production ceiling can significantly impact
world crude oil prices. According to analysts, most of the production increases came from Saudi
Arabia, because other OPEC countries already were producing at near-maximum capacity. 72
Indeed, although OPEC set the November production ceiling at 28 million bpd, OPEC members
were producing approximately 33.5 million bpd of crude by the third quarter of 2004. 73 Unrest
in Iraq in November, however, forced OPEC’s production levels lower. 74
2. Crude oil prices continued to escalate in 2005, but recently have
become somewhat more variable.
In response to increased production, crude oil prices began trending downward by
November and December. On November 1, the spot price for a barrel of WTI crude oil was
$50.10. By December 30, the spot price had fallen to $43.36. 75 Nonetheless, a great deal of
volatility remained. Between November 1 and December 30, the spot price WTI rose as high as
$50.90 and fell as low as $40.71. At the turn of the year, crude oil prices were volatile.
Continued high worldwide demand kept pressure on prices through the early part of 2005. 76
Endnotes
1. BUREAU OF ECON., FED. TRADE COMM’N (FTC), THE PETROLEUM INDUSTRY: MERGERS, STRUCTURAL CHANGE,
AND ANTITRUST ENFORCEMENT 1 n.1 (2004) [hereinafter PETROLEUM MERGER REPORT], available at
http://www.ftc.gov/os/2004/08/040813mergersinpetrolberpt.pdf. A simple regression of the monthly average
national price of gasoline on the monthly average price of West Texas Intermediate (WTI) crude oil explains
approximately 85 percent of the variation in the price of gasoline. This percentage may vary across states or
regions. Data for the period January 1984 to October 2003 were used for this regression. This is similar to the
range of effects given in ENERGY INFO. ADMIN. (EIA), U.S. DEP’T OF ENERGY, DOE/EIA-0626, PRICE CHANGES IN
THE GASOLINE MARKET: ARE MIDWESTERN GASOLINE PRICES DOWNWARD STICKY? (1999), at
http://tonto.eia.doe.gov/FTPROOT/petroleum/0626.pdf. More complex regression analysis and more disaggregated
data may give somewhat different estimates, but they are likely to be of the same general magnitude.
2. The prices reported in this chapter are nominal – that is, they are not adjusted for inflation. Rather, they are the
prices that consumers or producers actually paid at the time of purchase. Of course, since the U.S. has experienced
price inflation in every year since the 1940s, unadjusted prices in different years are not strictly comparable.
CHAPTER 2: WORLDWIDE SUPPLY, DEMAND, AND COMPETITION FOR CRUDE OIL 31