This is the accessible text file for GAO report number GAO-07-902T 
entitled 'Energy Markets: Factors That Influence Gasoline Prices' which 
was released on May 23, 2007.  

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov.  

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately.  

United States Government Accountability Office: 
GAO: 

Testimony:  

Before the Subcommittee on Oversight and Investigations, Committee on 
Energy and Commerce, House of Representatives:  

For Release on Delivery: 
Expected at 1:00 p.m. EDT: 
Tuesday, May 22, 2007:  

Energy Markets:  

Factors That Influence Gasoline Prices:  

Statement of Thomas McCool: 
Director: 
Applied Research and Methods:  

GAO-07-902T:  

GAO Highlights:  

Highlights of GAO-07-902T, a report to the Subcommittee on Oversight 
and Investigations, Committee on Energy and Commerce, House of 
Representatives.  

Why GAO Did This Study:  

Few issues generate more attention and anxiety among American consumers 
than the price of gasoline. The most current upsurge in prices is no 
exception. According to data from the Energy Information Administration 
(EIA), the average retail price of regular unleaded gasoline in the 
United States has increased almost every week this year since January 
29th and reached an all-time high of $3.10 the week of May 14th. Over 
this time period, the price has increase 94 cents per gallon and added 
about $20 billion to consumers’ total gasoline bill, or about $146 for 
each passenger car in the United States.  

Given the importance of gasoline for the nation’s economy, it is 
essential to understand the market for gasoline and the factors that 
influence gasoline prices. In this context, this testimony addresses 
the following questions: (1) what key factors affect the prices of 
gasoline and (2) what effects have mergers had on market concentration 
and wholesale gasoline prices?  

To address these questions, GAO relied on previous reports, including a 
2004 GAO report on mergers in the U.S. petroleum industry, a 2005 GAO 
primer on gasoline prices and a 2006 testimony. GAO also collected 
updated data from EIA. This work was performed in accordance with 
generally accepted government auditing standards. 

What GAO Found:  

The price of crude oil is a major determinant of gasoline prices. 
However, a number of other factors also affect gasoline prices 
including (1) increasing demand for gasoline; (2) refinery capacity in 
the United States that has not expanded at the same pace as the demand 
for gasoline; (3) a declining trend in gasoline inventories and (4) 
regulatory factors, such as national air quality standards, that have 
induced some states to switch to special gasoline blends.  

Consolidation in the petroleum industry plays a role in determining 
gasoline prices as well. For example, mergers raise concerns about 
potential anticompetitive effects because mergers could result in 
greater market power for the merged companies, potentially allowing 
them to increase and sustain prices above competitive levels; on the 
other hand, these mergers could lead to efficiency effects enabling the 
merged companies to lower prices. The 1990s saw a wave of merger 
activity in which over 2600 mergers occurred in all segments of the 
U.S. petroleum industry. This wave of mergers contributed to increases 
in market concentration in the refining and marketing segments of the 
U.S. petroleum industry. Econometric modeling that GAO performed on 
eight of these mergers showed that, after controlling for other factors 
including crude oil prices, the majority resulted in wholesale gasoline 
price increases—generally between about 1 and 7 cents per gallon. While 
these price increases seem small, they are not trivial because 
according to FTC’s standards for merger review in the petroleum 
industry, a 1-cent increase is considered to be significant. Additional 
mergers occurring since 2000 are expected to increase the level of 
industry concentration further, and because GAO has not yet performed 
modeling on these mergers, we cannot comment on any potential effect on 
gasoline prices at this time. However, we are currently in the process 
of studying the effects of the mergers that have occurred since 2000 on 
gasoline prices as a follow up to our previous work on mergers in the 
1990s. Also, we are working on a separate study on issues related to 
petroleum inventories, refining, and fuel prices. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-902T].  

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Tom McCool at (202) 512-
2642 or mccoolt@gao.gov. 

[End of section]  

Mr. Chairman and Members of the Committee:  

We are pleased to participate in the Energy and Commerce Committee’s 
hearing to discuss the factors that influence the price of gasoline. 
Few issues generate more attention and anxiety among American consumers 
than the price of gasoline. Periods of price increases are accompanied 
by high levels of media attention and consumers questioning the causes 
of higher prices. The most current upsurge in prices is no exception. 
Anybody who has filled up lately has felt the pinch of rising gasoline 
prices. Over the last few years, our nation has seen a significant run 
up in the prices that consumers pay for gasoline. According to data 
from the Energy Information Administration (EIA), the average retail 
price of regular unleaded gasoline in the United States reached $3.10 
per gallon the week of May 14, 2007, breaking the previous record of 
$3.06 in September of 2005 following Hurricane Katrina. This year, from 
January 29th to the present, gasoline prices have increased almost 
every week, and during this time the average U.S. price for regular 
unleaded gasoline jumped 94 cents per gallon, adding about $20 billion 
to consumers’ total gasoline bill, or about $146 for each passenger car 
in the United States. Spending billions more on gasoline constrains 
consumers’ budgets, leaving less money available for other purchases.  

However, for the average person understanding the complex interactions 
of the oil industry, consumers and the government can be daunting. For 
example, gasoline prices are affected by the decisions of the industry 
regarding refining capacity and utilization, gasoline inventories, as 
well as changes in industry structure such as consolidations; by 
consumers’ decisions regarding the kinds of automobiles they purchase; 
and by government’s regulatory standards. These are some of the key 
factors affecting gasoline prices that we will discuss today.  

Given the importance of gasoline for our economy, it is essential to 
understand the market for gasoline and what factors influence the 
prices that consumers pay. You expressed particular interest in the 
role consolidation in the U.S. petroleum industry may have played. In 
this context, this testimony addresses the following questions: (1) 
what key factors affect the prices of gasoline? (2) What effects have 
mergers had on market concentration and wholesale gasoline prices? 

To address these questions, we relied on information developed for a 
previous GAO report on mergers in the U.S. petroleum industry, the GAO 
primer on gasoline markets, and a previous testimony on gasoline prices 
and other aspects of the petroleum industry. [Footnote 1] We also 
reviewed reports and other documents by the Federal Trade Commission 
(FTC) on the U.S. petroleum industry. [Footnote 2] In addition, we 
obtained updated data from EIA. This work was performed in accordance 
with generally accepted government auditing standards.  

In summary, we make the following observations:  

* The price of crude oil is a major determinant of gasoline prices. A 
number of other factors also affect gasoline prices including (1) 
increasing demand for gasoline; (2) refinery capacity in the United 
States that has not expanded at the same pace as demand for gasoline in 
recent years, which coupled with high refinery capacity utilization 
rates, reduces refiners’ ability to sufficiently respond to supply 
disruptions; (3) gasoline inventories maintained by refiners or 
marketers of gasoline that have seen a general downward trend in recent 
years; and (4) regulatory factors, such as national air quality 
standards, that have induced some states to switch to special gasoline 
blends that have been linked to higher gasoline prices. Finally, 
consolidation in the petroleum industry plays a role in determining 
gasoline prices. For example, mergers raise concerns about potential 
anticompetitive effects because mergers could result in greater market 
power for the merged companies, potentially allowing them to increase 
and sustain prices above competitive levels; on the other hand, these 
mergers could lead to efficiency effects enabling the merged companies 
to lower prices.  

* The 1990s saw a wave of merger activity in which over 2,600 mergers 
occurred in all segments of the U.S. petroleum industry. Almost 85 
percent of the mergers occurred in the upstream segment (exploration 
and production), while the downstream segment (refining and marketing 
of petroleum) accounted for 13 percent, and the midstream 
(transportation) accounted for about 2 percent. This wave of mergers 
contributed to increases in market concentration in the refining and 
marketing segments of the U.S. petroleum industry. Anecdotal evidence 
suggests that mergers may also have affected other factors that impact 
competition, such as vertical integration and barriers to entry. 
Econometric modeling we performed of eight mergers involving major 
integrated oil companies that occurred in the 1990s showed that, after 
controlling for other factors including crude oil prices, the majority 
resulted in wholesale gasoline price increases—generally between about 
1 and 7 cents per gallon. While these price increases seem small, they 
are not trivial because according to FTC’s standards for merger review 
in the petroleum industry, a 1-cent increase is considered to be 
significant. Additional mergers since 2000 are expected to increase the 
level of industry concentration. However, because we have not performed 
modeling on these mergers, we cannot comment on any potential effect on 
gasoline prices at this time. 

Crude Oil Prices and Other Factors Affect Gasoline Prices:  

Crude oil prices are a major determinant of gasoline prices. As figure 
1 shows, crude oil and gasoline prices have generally followed a 
similar path over the past three decades and have risen considerably 
over the past few years.  

Figure 1: Gasoline and Crude Oil Prices—1976-2006 (Not adjusted for 
inflation):  

This figure is a line graph with two lines: Unleaded regular gasoline, 
U.S. city average retail price; Refiner acquisition cost of crude oil, 
composite. The vertical axis represents dollars per gallon including 
taxes, from 0.0 to 3.5. The horizontal axis represents calendar years 
from 1976 through 2006. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure]  

Also, as is the case for most goods and services, changes in the demand 
for gasoline relative to changes in supply affect the price that 
consumers pay. In other words, if the demand for gasoline increases 
faster than the ability to supply it, the price of gasoline will most 
likely increase. In 2006, the United States consumed an average of 387 
million gallons of gasoline per day. This consumption is 59 percent 
more than the 1970 average per day consumption of 243 million 
gallons—an average increase of about 1.6 percent per year for the last 
36 years. As we have shown in a previous GAO report, most of the 
increased U.S. gasoline consumption over the last two decades has been 
due to consumer preference for larger, less-fuel efficient vehicles 
such as vans, pickups, and SUVs, which have become a growing part of 
the automotive fleet. [Footnote 3]  

Refining capacity and utilization rates also play a role in determining 
gasoline prices. Refinery capacity in the United States has not 
expanded at the same pace as demand for gasoline and other petroleum 
products in recent years. According to FTC, no new refinery still in 
operation has been built in the U.S. since 1976. As a result, existing 
U.S. refineries have been running at very high rates of utilization 
averaging 92 percent since the 1990s, compared to about an average of 
78 percent in the 1980s. [Footnote 4] Figure 2 shows that since 1970 
utilization has been approaching the limits of U.S. refining capacity. 
Although the average capacity of existing refineries has increased, 
refiners have limited ability to increase production as demand 
increases. While the lack of spare refinery capacity may contribute to 
higher refinery margins, it also increases the vulnerability of 
gasoline markets to short-term supply disruptions that could result in 
price spikes for consumers at the pump. Although imported gasoline 
could mitigate short-term disruptions in domestic supply, the fact that 
imported gasoline comes from farther away than domestic supply means 
that when supply disruptions occur in the United States it might take 
longer to get replacement gasoline than if we had spare refining 
capacity in the United States. This could mean that gasoline prices 
remain high until the imported supplies can reach the market. 

Figure 2: U.S. Refinery Capacity and Capacity Utilization, 1970 to 
2005:  

This figure is a line graph with two lines: Operable refineries 
capacity; Gross input to distillation units. The vertical axis 
represents thousand barrels per day, from 0 through 20,000. The 
horizontal axis represents calendar years from 1970 through 2005. 

[See PDF for image] 

Source: GAO analysis of EIA data. 

[End of figure]  

Further, gasoline inventories maintained by refiners or marketers of 
gasoline can also have an impact on prices. As have a number of other 
industries, the petroleum industry has adopted so-called “just-in-time” 
delivery processes to reduce costs leading to a downward trend in the 
level of gasoline inventories in the United States. For example, in the 
early 1980s U.S. oil companies held stocks of gasoline of about 40 days 
of average U.S. consumption, while in 2006 these stocks had decreased 
to 23 days of consumption. While lower costs of holding inventories may 
reduce gasoline prices, lower levels of inventories may also cause 
prices to be more volatile because when a supply disruption occurs, 
there are fewer stocks of readily available gasoline to draw from, 
putting upward pressure on prices.  

Regulatory factors play a role as well. For example, in order to meet 
national air quality standards under the Clean Air Act, as amended, 
many states have adopted the use of special gasoline blends—so-called 
“boutique fuels.” As we reported in a recent study, there is a general 
consensus that higher costs associated with supplying special gasoline 
blends contribute to higher gasoline prices, either because of more 
frequent or more severe supply disruptions, or because higher costs are 
likely passed on, at least in part, to consumers. Furthermore, changes 
in regulatory standards generally make it difficult for firms to 
arbitrage across markets because gasoline produced according to one set 
of specifications may not meet another area’s specifications.  

Finally, market consolidation in the U.S. petroleum industry through 
mergers can influence the prices of gasoline. Mergers raise concerns 
about potential anticompetitive effects because mergers could result in 
greater market power for the merged companies, either through 
unilateral actions of the merged companies or coordinated interaction 
with other companies, potentially allowing them to increase and 
maintain prices above competitive levels. [Footnote 5] On the other 
hand, mergers could also yield cost savings and efficiency gains, which 
could be passed on to consumers through lower prices. Ultimately, the 
impact depends on whether the market power or the efficiency effects 
dominate. 

Mergers in the 1990s Increased Market Concentration and Led to Small 
But Significant Increases in Wholesale Gasoline Prices; However the 
Impact of More Recent Mergers is Unknown:  

During the 1990s, the U.S. petroleum industry experienced a wave of 
mergers, acquisitions, and joint ventures, several of them between 
large oil companies that had previously competed with each other for 
the sale of petroleum products. [Footnote 6] More than 2,600 merger 
transactions occurred from 1991 to 2000 involving all segments of the 
U.S. petroleum industry. These mergers contributed to increases in 
market concentration in the refining and marketing segments of the U.S. 
petroleum industry. Econometric modeling we performed of eight mergers 
involving major integrated oil companies that occurred in the 1990s 
showed that the majority resulted in small but significant increases in 
wholesale gasoline prices. The effects of some of the mergers were 
inconclusive, especially for boutique fuels sold in the East Coast and 
Gulf Coast regions and in California. While we have not performed 
modeling on mergers that occurred since 2000, and thus cannot comment 
on any potential effect on wholesale gasoline prices at this time, 
these mergers would further increase market concentration nationwide 
since there are now fewer oil companies.  

Some of the mergers involved large partially or fully vertically 
integrated companies that previously competed with each other. For 
example, in 1998 British Petroleum (BP) and Amoco merged to form 
BPAmoco, which later merged with ARCO, and in 1999 Exxon, the largest 
U.S. oil company merged with Mobil, the second largest. Since 2000, we 
found that at least 8 large mergers have occurred. Some of these 
mergers have involved major integrated oil companies, such as the 
Chevron-Texaco merger, announced in 2000, to form ChevronTexaco, which 
went on to acquire Unocal in 2005. In addition, Phillips and Tosco 
announced a merger in 2001 and the resulting company, Phillips, then 
merged with Conoco to become ConocoPhillips.  

Independent oil companies have also been involved in mergers. For 
example, Devon Energy and Ocean Energy, two independent oil producers, 
announced a merger in 2003 to become the largest independent oil and 
gas producer in the United States at that time. Petroleum industry 
officials and experts we contacted cited several reasons for the 
industry’s wave of mergers since the 1990s, including increasing 
growth, diversifying assets, and reducing costs. Economic literature 
indicates that enhancing market power is also sometimes a motive for 
mergers, which could reduce competition and lead to higher prices. 
Ultimately, these reasons mostly relate to companies’ desire to 
maximize profits or stock values.  

Proposed mergers in all industries are generally reviewed by federal 
antitrust authorities—including the Federal Trade Commission (FTC) and 
the Department of Justice (DOJ)—to assess the potential impact on 
market competition and consumer prices. According to FTC officials, FTC 
generally reviews proposed mergers involving the petroleum industry 
because of the agency’s expertise in that industry. To help determine 
the potential effect of a merger on market competition, FTC evaluates, 
among other factors, how the merger would change the level of market 
concentration. Conceptually, when market concentration is higher, the 
market is less competitive and it is more likely that firms can exert 
control over prices.  

DOJ and FTC have jointly issued guidelines to measure market 
concentration. The scale is divided into three separate categories: 
unconcentrated, moderately concentrated, and highly concentrated. The 
index of market concentration in refining increased all over the 
country during the 1990s, and changed from moderately to highly 
concentrated on the East Coast. In wholesale gasoline markets, market 
concentration increased throughout the United States between 1994 and 
2002. Specifically, 46 states and the District of Columbia had 
moderately or highly concentrated markets by 2002, compared to 27 in 
1994. 

To estimate the effect of mergers on wholesale gasoline prices, we 
performed econometric modeling on eight mergers that occurred during 
the 1990s: Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, 
Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), 
BP-Amoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS.  

* For the seven mergers that we modeled for conventional gasoline, five 
led to increased prices, especially the MAP-UDS and Exxon-Mobil 
mergers, where the increases generally exceeded 2 cents per gallon, on 
average.  

* For the four mergers that we modeled for reformulated gasoline, 
two—Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1 
cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) 
merger led to price decreases of less than one-half cent per gallon, on 
average, for branded gasoline only. [Footnote 7]  

* For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that we 
modeled for gasoline used in California, known as California Air 
Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to 
price increases. The increases were for branded gasoline only and were 
about 7 cents per gallon, on average.  

Our analysis shows that wholesale gasoline prices were also affected by 
other factors included in the econometric models, including gasoline 
inventories relative to demand, supply disruptions in some parts of the 
Midwest and the West Coast, and refinery capacity utilization rates. 

Concluding Observations:  

Our past work has shown that, the price of crude oil is a major 
determinant of gasoline prices along with changes in demand for 
gasoline. Limited refinery capacity and the lack of spare capacity due 
to high refinery capacity utilization rates, decreasing gasoline 
inventory levels and the high cost and changes in regulatory standards 
also play important roles. In addition, merger activity can influence 
gasoline prices. During the 1990s, mergers decreased the number of oil 
companies and refiners and our findings suggest that these changes in 
the state of competition in the industry caused wholesale prices to 
rise. The impact of more recent mergers is unknown. While we have not 
performed modeling on mergers that occurred since 2000, and thus cannot 
comment on any potential effect on wholesale gasoline prices at this 
time, these mergers would further increase market concentration 
nationwide since there are now fewer oil companies.  

We are currently in the process of studying the effects of the mergers 
that have occurred since 2000 on gasoline prices as a follow up to our 
previous report on mergers in the 1990s. Also, we are working on a 
separate study on issues related to petroleum inventories, refining, 
and fuel prices. With these and other related work, we will continue to 
provide Congress the information needed to make informed decisions on 
gasoline prices that will have far-reaching effects on our economy and 
our way of life.  

Mr. Chairman, this completes my prepared statement. I would be happy to 
respond to any questions you or the other Members of the Committee may 
have at this time. 

GAO Contacts and Staff Acknowledgments:  

For further information about this testimony, please contact me at 
(202) 512-2642 (mccoolt@gao.gov) or Mark Gaffigan at (202) 512-3841 
(gaffiganm@gao.gov). Godwin Agbara, John Karikari, Robert Marek, and 
Mark Metcalfe made key contributions to this testimony.  

[End of section]  

Footnotes:  

[1] GAO, Energy Markets: Effects of Mergers and Market Concentration in 
the U.S. Petroleum Industry, GAO-04-96 (Washington, D.C.: May 17, 
2004); GAO, Motor Fuels: Understanding the Factors That Influence the 
Retail Price of Gasoline, GAO-05-525SP (Washington, D.C.: May 2005); 
GAO, Energy Markets: Factors Contributing to Higher Gasoline Prices, 
GAO-06-412T (Washington D.C.: February 1, 2006).  

[2] See, for example, FTC, The Petroleum Industry: Mergers, Structural 
Change, and Antitrust Enforcement, An FTC Staff Study, August 2004. 

[3] GAO, Motor Fuels: Understanding the Factors That Influence the 
Retail Price of Gasoline, GAO-05-525SP, (Washington, D.C.: May 2005). 

[4] The ratio of input to capacity measures the rate of utilization.  

[5] Federal Trade Commission and Department of Justice have defined 
market power for a seller as the ability profitably to maintain prices 
above competitive levels for a significant period of time.  

[6] We refer to all of these transactions as mergers.  

[7] Unbranded (generic) gasoline is generally priced lower than branded 
gasoline, which is marketed under the refiner’s trademark.  

[End of section]  

GAO's Mission:  

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability.  

Obtaining Copies of GAO Reports and Testimony:  

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each 
weekday, GAO posts newly released reports, testimony, and 
correspondence on its Web site. To have GAO e-mail you a list of newly 
posted products every afternoon, go to [hyperlink, http://www.gao.gov] 
and select "Subscribe to Updates."  

Order by Mail or Phone:  

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to:  

U.S. Government Accountability Office: 
441 G Street NW, Room LM: 
Washington, D.C. 20548:  

To order by Phone: 
Voice: (202) 512-6000: 
TDD: (202) 512-2537: 
Fax: (202) 512-6061:  

To Report Fraud, Waste, and Abuse in Federal Programs:  

Contact:  

Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]: 
E-mail: fraudnet@gao.gov: 
Automated answering system: (800) 424-5454 or (202) 512-7470:  

Congressional Relations:  

Gloria Jarmon, Managing Director, JarmonG@gao.gov: 
(202) 512-4400: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7125: 
Washington, D.C. 20548:  

Public Affairs:  

Paul Anderson, Managing Director, AndersonP1@gao.gov: 
(202) 512-4800: 
U.S. Government Accountability Office: 
441 G Street NW, Room 7149: 
Washington, D.C. 20548: