Summary

Retail gasoline prices in the United States have risen sharply since early 1999, mostly in response to soaring world crude oil prices. Moreover, during the second half of the 1990s, retail gasoline prices throughout the United States have shown a high degree of volatility and fairly frequent spikes. Particularly in California, where consumers already generally pay higher average prices than they do elsewhere in the United States, the spikes have raised questions about the behavior of gasoline prices both within the state and between California and the rest of the country. This report answers the following questions: (1) To what extent do retail gasoline prices spike more often and higher in California than they do in the rest of the country, and what factors account for any difference? (2) Do retail gasoline prices gasoline prices in California rise faster than they fall in response to increases and decreases in the wholesale prices of gasoline and, if so, why? (3) What factors account for differences in the retail prices of gasoline between San Franciso and Los Angeles?

GAO noted that: (1) according to GAO's analysis of gasoline price data, from January 1995 through December 1999, retail gasoline prices spiked no more frequently in California than they did in the rest of the United States, but the spikes that did occur were generally higher in California than elsewhere in the nation; (2) prices spiked seven times, and during six of the spikes, the price increases were between 3 cents and 31 cents per gallon higher in California than in the rest of the United States; (3) many federal, state, and oil industry officials told GAO that the higher price spikes in California were caused primarily by unplanned refinery outages that disrupted the state's tight balance between gasoline supply and demand; (4) according to the results of statistical modeling by the Energy Information Administration (EIA), retail gasoline prices in California rise faster than they fall in response to a delayed pass-through of changes in the wholesale prices of gasoline--a behavior that has been observed in other markets; (5) EIA officials believe, however, that this price behavior has little or no impact on consumers because their analysis shows that price increases and decreases at the wholesale level are generally fully passed through to the retail level, despite some delay; (6) oil industry officials and experts GAO contacted also told GAO that retail prices generally fully reflect changes in wholesale prices and that the observed price patterns may be due to the way retail sellers react to these changes; (7) retail gasoline prices are higher in San Francisco than in Los Angeles, in part because of local supply and demand conditions; (8) retail gasoline prices were, on average, about 11 cents higher in San Francisco than in Los Angeles for the period from January 1992 through December 1999; (9) among the local supply and demand conditions that are important in explaining the price difference between the two cities are: (a) the number and location of retail gasoline stations; (b) the costs of building and operating gasoline stations; and (c) consumers' incomes; (10) together, these conditions would be expected to lead to higher retail gasoline prices in San Francisco than in Los Angeles, although the exact magnitude of the effects on prices cannot be determined with the available data; (11) the local supply and demand conditions GAO identified may not entirely explain the price differences between the two cities; and (12) other factors, such as competition at the refining level, may help explain these differences, but GAO is unable to obtain proprietary data that would have allowed GAO to explore this possibility.