GASOLINE PRICE INVESTIGATION

Following unusually large and sudden increases in the price of gasoline throughout Michigan and other Midwestern states in the spring of 2000 and again in 2001, in May, 2001, Senator Levin directed the Senate Permanent Subcommittee on Investigations to determine the causes of these spikes in gasoline prices, and what actions could be taken to stabilize gasoline prices.

In April 2002, Senator Levin issued a report entitled Gas Prices: How Are They Really Set? (Link is to GPO website. See S. Hrg. 107-509, "Gas Prices: How Are They Really Set?" Report appears on p. 322 of hearing record.) One of the major findings of this report is that the decline in the number of refineries and increasing concentration within the refining industry are major reasons prices have become so volatile.

On April 30 and May 2, 2002, Senator Levin held hearings on this subject (Link is to GPO website. See S. Hrg. 107-509, "Gas Prices: How Are They Really Set?"), with testimony from oil industry executives, economists, and state officials, including then-Attorney General of Michigan, Jennifer Granholm. At this hearing Senator Levin expressed his concern to the oil companies that some refiners have limited the supply of gasoline in order to boost prices. He has also urged the Federal Trade Commission to more closely review proposed mergers to ensure that mergers do not reduce supplies or increase prices.

The April 2002 report Gas Prices: How Are They Really Set? (Link is to GPO website. See S. Hrg. 107-509, "Gas Prices: How Are They Really Set?" Report appears on p. 322 of hearing record.) contained the following findings regarding the price increases in the spring of 2000 and 2001:

• Major prices spikes occurred. There were extraordinary spikes in the price of gasoline and the price of gasoline increased significantly from 2000-2002.
• Price spikes hurt the economy and consumers. Gasoline price spikes can affect the entire economy, since the price of gasoline affects the price of transportation of so many goods and services.
• Concentration in the oil industry is increasing. Recent mergers in the oil industry and the closing of many refineries over the past twenty years have increased the concentration in the refining industry. In some states, the refining and marketing industry is highly concentrated; in many states it is at least moderately concentrated.
• Gasoline markets are tight. Over this same period, the balance between supply and demand has become "tight," meaning there is no excess supply in case of a disruption.
• High concentration contributes to price spikes. In a tight market, high concentration exacerbates the factors that contribute to price spikes.
• Refiners have market power in concentrated markets. In concentrated markets, refiners can affect the price of gasoline by their decisions on the amount of supply. In a number of instances, refiners have sought to increase prices by reducing supplies.
• High concentration increases prices.
• Vertical integration increases prices. Markets in which there is a high degree of vertical integration between refiners and marketers have higher wholesale and retail prices.
• Gasoline prices are not based on cost. Oil companies do not set wholesale prices or retail prices based solely on the cost to manufacture and sell gasoline; rather wholesale and retail prices are set on the basis of market conditions, including the prices of competitors.
• Gasoline prices go up and down together. Most oil companies and gasoline stations try to keep their prices at a constant price difference with respect to one or more competitors. As a result of these interdependent practices, gasoline prices tend to go up and down together.
• Retail price increases in Michigan and Ohio. In Michigan and Ohio, these interdependent and parallel retail pricing practices have led to sharp daily increases in retail prices across the states.
• Zone pricing. Oil companies use zone pricing to charge different prices for gasoline to different station operators, some of which are in nearby geographic areas, in order to confine price competition to the smallest area possible and to maximize their prices and revenues at each retail outlet.
• Oil companies rather than service station operators set retail prices. For many service stations owned or leased by the major oil companies, it is the major oil company rather than the local dealer that determines the competitive price position of the local station and that benefits from higher prices and profit margins.
• Increases in hypermarkets. The "hypermarket" is rapidly expanding as a highly competitive format for selling gasoline. In the gasoline industry, a hypermarket is a large retailer, such as Walmart or Costco, or even a large grocery chain, like Safeway, that sells gasoline.
• Wolverine Pipeline case. The Wolverine Pipeline case in Michigan illustrates how control over storage facilities and pipelines can be used to limit gasoline supplies and competition in a market.
• Higher future prices possible. If concentration in the oil industry continues to increase, higher prices can be expected.

As a result of rising oil prices in early 2006, Senator Levin directed the Senate Permanent Subcommittee on Investigations to look into the role that market speculation was playing in the rapid rise in energy prices. In June 2006, the Subcommittee released a report, "The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put a Cop on the Beat," that found that the traditional forces of supply and demand no longer fully account for sustained increases and price volatility in the oil and gasoline markets. The report determined that market speculation contributed to rising oil and gasoline prices, perhaps accounting for $20 out of a $70 barrel of oil, and that too many energy trades occurred without regulatory oversight. The report recommended new laws to increase market oversight and stop market manipulation.

PSI Reports on Gasoline Prices:

• The Role of Market Speculation in Rising Oil and Gas Prices: A Need to Put a Cop on the Beat - June 27, 2006. [PDF]
• Gas Prices: How Are They Really Set? (Link is to GPO website. See S. Hrg. 107-509, "Gas Prices: How Are They Really Set?" Report appears on p. 322 of hearing record.) - April 30 and May 2, 2002.

Legislation supported by Senator Levin to address these problems:

• S. 2642, Oil and Gas Traders Oversight Act of 2006
• 2005 Levin-Collins amendment requiring market principles to be used in buying oil for the Strategic Petroleum Reserve, in Public Law 109-58, Energy Policy Act of 2005 [PDF]