Gasoline Price Changes - Federal Trade Commission

THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION
Box 3-6: The Role of Inventories
Crude oil and gasoline inventories play important roles in energy markets. First, refineries and
distribution systems need inventories to run smoothly. For example, if a refinery receives crude oil by
tanker, it must store enough crude oil in inventory to run the refinery until the next tanker arrives.
Second, refineries and distribution systems must store inventories to meet peak demand. For example,
refineries and distribution systems usually build gasoline inventories in the spring to meet increased
demand during the summer driving season. If refineries did not build these inventories, they would
need much larger refineries to meet peak demand. Conversely, crude inventories often fall in the
winter, when refineries reduce operations to perform maintenance. Finally, inventories can help a
refiner hedge against future price changes. For example, if a firm believes that crude oil prices will
increase in the future, it may build greater inventories of crude oil, rather than pay higher prices for the
crude in the future.
Figure 3-9 shows that the amount of crude oil and gasoline held in private inventories has
been trending lower since 1981. In part, this is an artifact of how crude oil inventories are
measured. Crude produced in the U.S. becomes a part of inventory as soon as it is extracted,
while crude produced outside the U.S. does not appear in inventory figures until it is imported.
As U.S. crude production has decreased, reported crude inventories similarly have decreased.
Nonetheless, the trend toward holding smaller inventories of crude oil and gasoline is real.
During the 1980s, refinery closures reduced the amount of inventory required to keep all
refineries operating smoothly. During the 1990s, firms used new technologies to improve their
inventory management techniques. By lowering inventory costs, improved inventory
management may lower the average cost of gasoline.
CHAPTER 3: THE NATIONAL LEVEL 55