United States Senate
PERMANENT
SUBCOMMITTEE ON INVESTIGATIONS
Committee
on Governmental Affairs
199
Russell Senate Office Building, Washington, D.C. 20510
Carl Levin, Chairman
Susan Collins, Ranking Minority Member
May 2, 2002
Permanent Subcommittee on
Investigations
Hearing On
Gas Prices: How Are They
Really Set?
Good morning. Today the Permanent Subcommittee on
Investigations will hold its second of two hearings on the reasons for dramatic
fluctuations and recent increases and in the price of gasoline.
On Monday of this week the
Subcommittee released the report of the Majority Staff following their 10-month
investigation.
One of the basic conclusions of
the report deals with the effects of increased concentration in the oil
industry on the wholesale supply market.
Due to a series of refinery
closures and mergers within the oil industry, the wholesale supply market is
now more concentrated than ever.
According to information provided by the Department of Energy’s Energy
Information Administration, the wholesale supply market is moderately to highly
concentrated in a total of 37 states.
By another accepted measure, 28 states are considered tight
oligopolies.
In general, more competition
means lower prices for consumers and lack of competition leads to higher
prices. The oil industry is no
exception to those general rules.
In areas of high concentration
where a few refiners control most of the retail sales by keeping supplies
tight, refiners can raise the price of gasoline without great fear of
competition. One way to maintain a
tight supply is keeping only a minimal amount of gasoline in inventory. One effect of doing that is that any
supply disruption will cause a shortage of gasoline because there is no reserve
capacity to bring to market. This
invariably leads to price increases, and, because gasoline is such an essential
commodity in our lives today, most Americans have no choice but to pay more and
more when prices rise.
Keeping supplies tight and
inventories low in highly concentrated areas, makes it possible for companies
to spike prices without great fear of competition. Since all the companies maintain minimal inventories, no company
need fear a competitor will gain market share by keeping their prices low,
because they would quickly run out of gas.
Mr. James Carter, Regional Director for ExxonMobil for the United States
testified to that on Tuesday. He said:
“If our price is extraordinarily low, we are going
to run out before the next amount of gasoline gets here. “
So, the few companies in these
areas raise and lower prices together and in the same price relationship to
each other, a practice called parallel pricing.
One of the key findings in the
staff report is that in a number of highly concentrated markets oil companies
are not just passive actors who respond to whatever the supply and demand
situation is at a given moment, but rather they are active players seeking to
shape and structure the market in such a way so as to make the refining
business more profitable for them.
The investigation found a number
of documents – which we discussed Tuesday – indicating that oil companies seek
to tighten supply in highly concentrated markets to increase prices.
While the oil company executives
who testified on Tuesday said either that their companies didn’t adopt the
options set forth in their memo to limit supply or didn’t have any knowledge of
the activities discussed in another memo, or that actions described in a memo
were against current corporate policy, the evidence presented in the Majority
Staff Report demonstrated times when refiners acted to limit supply to raise
prices.
Most of the oil companies that
testified on Tuesday do not believe we need additional refineries in the United
States. These companies believe that
the lack of any new refineries has not been a cause of any of the recent price
spikes. What this means is that the problem is not how to build more
refineries, but how to expand or better use the refining, storage, and other
resources we already have in this country.
Although the price of crude and
government regulatory actions obviously
have a large effect upon wholesale and retail prices in this country the staff
investigation looked at actions taken by the oil companies that were within
their control, and actions downstream from the crude oil production
process.
Today we will hear from a number
of distinguished public officials and economists about this subject.
First, we will hear testimony
from Senator Ron Wyden. Senator Wyden
has been working on the issue of gasoline prices and industry concentration for
a number of years.
Following Senator Wyden, we will
hear from a panel of Attorneys General.
Attorney General Jennifer Granholm is here today from my home state of
Michigan. Attorney General Granholm has
been very active on a number of consumer issues, including gasoline pricing in
Michigan. She successfully forced gasoline stations that gouged the public
after the tragic events of September 11 of last year to return their ill-gotten
gains.
Attorney General Richard
Blumenthal from Connecticut is on our panel today, too. Attorney General Blumenthal has also been
active in gasoline pricing issues. Over
a number of years he has aggressively advocated for a competitive gasoline
marketplace on behalf of Connecticut motorists.
I am also pleased that Mr.
Thomas Greene, Assistant Attorney General from California, will be here to
represent the California Attorney General’s views. As our Majority Staff Report shows, the effects of high
concentration and vertical integration in the refining and marketing industries
are acutely seen and felt by consumers in the State of California. A few years ago the California Attorney
General issued a report on gasoline pricing in that state. That report addressed many of the issues we
have been looking at. So we look
forward to your testimony here today, Mr. Greene.
On today’s second panel we will
hear from four economists. All four of
these panelists have studied one aspect or another of the petroleum industry,
and we look forward to hearing from them.