Gasoline Price Changes - Federal Trade Commission

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THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION $ Since 1973, Production Decisions by OPEC Have Been a Very Significant Factor in the Prices That Refiners Pay for Crude Oil. The Organization of Petroleum Exporting Countries (OPEC) is a cartel designed specifically to coordinate output decisions and to affect world crude oil prices. 5 Beginning with OPEC’s first successful assertion of market power in 1973-1974, market forces no longer were the sole determinant of the world price of crude oil. At that time, OPEC members agreed to limit how much crude oil they would produce and to embargo the sale of crude oil to the U.S. OPEC members adhered to the production limits and, when OPEC lifted the embargo six months later, crude oil prices had tripled from $4 to $12 per barrel. The degree of OPEC’s success in raising crude oil prices has varied over time. OPEC members can be tempted to “cheat” and sometimes sell more crude oil than specified by OPEC limits. Higher world crude prices due to OPEC’s actions increased the incentives to search for oil in other areas, and crude supplies from non-OPEC members such as Canada, the United Kingdom, and Norway have increased significantly. In 2003, almost 30 years after the first oil embargo, OPEC’s total crude production was about the same as in 1974, but accounted for only 38 percent of world crude production, as compared to 52 percent of world crude oil production in 1974. Another countervailing force against higher crude prices has been new technologies that aid in finding new oil fields and lowering extraction costs. 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. Especially when demand surges unexpectedly, as in 2004, OPEC decisions on whether to increase supply to meet demand can have a significant impact on world crude oil prices. $ 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 gasoline, diesel fuel, jet fuel, and heating oil. Since 1982, gasoline has accounted for 49 to 53 percent of the daily consumption of all petroleum products. Crude oil consumption has fallen during some periods over the past 30 years, partially in reaction to higher prices and federal laws such as requirements to increase the fuel efficiency of cars. Gasoline consumption in the U.S. fell significantly between 1978 and 1982, and remained lower during the 1980s than it had been at the beginning of 1978. See Figure 3-6, supra. Overall, however, the long-run trend is toward significantly increased demand for crude oil. Over the last 20 years, average daily U.S. consumption of all refined petroleum products increased on average by 1.5 percent per year, leading to a total increase of 30 percent. As a result, worldwide demand for crude increased by 27 percent between 1988 and 2004. One would EXECUTIVE SUMMARY v
GASOLINE PRICE CHANGES: expect increased demand for crude oil at current prices to produce crude oil price increases. Throughout most of the 1990s, however, crude prices remained relatively stable, suggesting that crude producers increased production to meet increased demand. See Figure 3-6, supra. $ In 2004, Crude Producers Were Unprepared to Produce Enough Crude Oil to Meet Larger-than-Predicted Increases in World Demand. Crude Oil Prices Increased Because There Was Not Enough Crude Supply to Meet Increasing Demand at Previous Price Levels. Steep Increases in World Prices for Crude Oil Caused Steep Increases in Gasoline Prices. Crude oil producers had set 2004 production levels based on much lower projections for demand growth than actually occurred. Projections had placed likely growth in world demand for crude oil at 1.5 percent. In fact, the 2004 rate of growth in crude demand was more than double the projections: 3.3 percent. See Figure 2-6. Large demand increases from rapidly industrializing countries, particularly China and India, made supplies much tighter than expected. This phenomenon was not limited to crude oil. Other commodities that form the basis for expanded growth in developing economies, such as steel and lumber, also saw unexpectedly rapid growth in demand, along with higher prices. Million Barrels per Day 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 -0.1 Source: IEA Figure 2-6: 2004 Predicted vs. Actual Crude Oil Demand Increase, Million Barrels per Day Predicted Demand Increase Actual Demand Increase US Other North America Europe China Other Asia (inc. India) Country or Region Middle East Latin America Rest of World In addition, unexpected production difficulties reduced some producers’ crude output, putting upward pressure on prices. Finally, the 2004 political outlook in certain regions, including prospects for terrorist incidents or civil unrest, appeared to threaten the production capacity of vi FEDERAL TRADE COMMISSION, JUNE 2005
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THE DYNAMIC OF SUPPLY, DEMAND, AND
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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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Endnotes THE DYNAMIC OF SUPPLY, DEM
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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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