Gasoline Price Changes - Federal Trade Commission

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GASOLINE PRICE CHANGES: 2004 as in 2003. Some consumers face difficult choices when budgeting for these higher gasoline expenditures. Profits, however, play necessary and important roles in a well-functioning market economy. Moreover, profit levels in the oil industry – as in other industries – have been variable over time and among firms. This section reviews the roles that profits play in a healthy market economy and gives a historical perspective on profitability in the oil industry. A. Profits Play Necessary and Important Roles in a Market Economy. Profits play two necessary and important roles in a market economy. First, profits compensate owners of capital for the use of the funds they have invested in a firm. The level of profits for a firm, as well as the rate of return on those investments in that firm, will be influenced by supply and demand, in addition to regulatory conditions. Second, profits are a reward for an investor’s willingness to bear the risk that an enterprise will not be successful and the investment will be lost. If the enterprise instead is successful, an investor may receive a high rate of return. High rates of return signal possible profit opportunities and thus encourage investors to reallocate resources across the economy, investing new capital in areas of high rates of return. Profits play the same roles in the oil industry. The oil industry, which produces more than 80 million barrels per day of petroleum products, is one of the largest in the world. A great deal of investment must support the enormous infrastructure required to find and produce crude oil, transport it to refineries, produce finished petroleum products, and distribute these products throughout the world. Investors expect compensation for the use of their funds in supporting this business. Profits also compensate firms for taking risks. The oil industry faces many types of risks. Potential changes in the macroeconomic climate, at either the national or the global level, and general uncertainty about future prices pose investment risk for all industries, including oil. Other risks are more specific to the oil industry. For example, production levels may be lower than expected at an oil field, or war or terrorism, in some areas, may destroy crude production assets or reduce their values. At downstream levels, refinery margins may fall if the price of gasoline falls relative to the price of crude oil. New environmental requirements may increase operating costs or require substantial new capital investments. Over the longer run, energysaving innovations at the consumer level may reduce the demand for refined petroleum products. That these risks did not come to pass in any particular year may make investments look very profitable in hindsight. That does not necessarily mean, however, that firms should have invested more based on the information about risks that firms had at the time. 60 B. Profits in the Oil Industry Have Varied Over Time, Over Industry Segments, and Among Firms. EIA’s Financial Reporting System (FRS) tracks the financial performance of the major FEDERAL TRADE COMMISSION, JUNE 2005
THE DYNAMIC OF SUPPLY, DEMAND, AND COMPETITION energy producers operating in the United States; currently, there are 28 such firms. In 2003, these FRS firms had an operating income of $82 billion, but total capital employed by these firms was much larger – $638 billion. 62 This translates to a return on capital employed of 12.8 percent, as compared to the return on capital employed for the overall S&P Industrials, which was 10.0 percent. In other recent years, FRS companies’ rate of return on employed capital has been below that of the overall S&P Industrials. Over the long run in the oil industry, the return on equity averaged less than for a broader group of industrial firms, before moving ahead of other firms in recent years. 63 The average annual return on equity between 1973 and 2003 was 12.6 percent for FRS companies, but 13.1 percent for the S&P Industrials. Figure 3-12 shows annual return on equity for FRS firms and the S&P Industrials. These rates of return on equity vary widely over time, with FRS return on equity ranging from 1.1 to 21.1 percent between 1973 and 2003. Return on equity varies across firms as well. In 2003, return on equity for Tesoro was 8 percent, while it was 23 percent for ExxonMobil. EIA data are not yet available for 2004, but return on equity for FRS firms will likely increase due to continued strong demand for petroleum products. More recent financial data available from annual reports and SEC filings for individual FRS firms confirm this. According to these data, net income for six selected large petroleum firms increased from $34 billion in 2003 to $50 billion in 2004, with their weighted average return on equity increasing from 20 to 25 percent. 64 Return on Equity (Percent) 25 20 15 10 5 0 Source: EIA 1973 1974 Figure 3-12: Return on Equity for FRS Companies and S&P Industrials (1973-2003) S&P Industrials FRS Companies 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 CHAPTER 3: THE NATIONAL LEVEL 61
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Federal Trade Commission DEBORAH PL
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GASOLINE PRICE CHANGES: The vast ma
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GASOLINE PRICE CHANGES: $ The World
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GASOLINE PRICE CHANGES: expect incr
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GASOLINE PRICE CHANGES: Figure 3-6:
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GASOLINE PRICE CHANGES: $ Increased
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GASOLINE PRICE CHANGES: $ Since 199
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GASOLINE PRICE CHANGES: increase lo
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GASOLINE PRICE CHANGES: England and
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Table of Contents EXECUTIVE SUMMARY
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C. In 2004, the Geopolitical Outloo
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CHAPTER 4: SUPPLY, DEMAND, AND COMP
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3. Gasoline prices in the East Coas
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CHAPTER 1. SUPPLY (INFLUENCED BY OP
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To obtain the additional supply the
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THE DYNAMIC OF SUPPLY, DEMAND, AND
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Price (Cents per Gallon) 220 200 18
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Page 41 and 42: CHAPTER 2. WORLDWIDE SUPPLY, DEMAND
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Page 49 and 50: Thousand Barrels per Day 18,000 16,
Page 55 and 56: Million Barrels per Day 0.9 0.8 0.7
Page 61 and 62: such as ethane, ethylene, and propa
Page 65 and 66: CHAPTER 3. SUPPLY, DEMAND, AND COMP
Page 75 and 76: Year-over-year Percentage Change in
Page 79 and 80: Capacity (Million Barrels per Calen
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Page 111 and 112: Millions of Barrels per Day 9 8 7 6
Page 131 and 132: CHAPTER 5. STATE AND LOCAL POLICIES
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Page 137 and 138: 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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