Opening Statement of Robert Pitofsky, Chairman of the Federal Trade Commission before Committees of the House of Representatives

June 28, 2000

I am very pleased to have this opportunity to discuss with members of this committee the matter of recent increases of the price of gasoline, particularly in the Midwest states.

As you know, motorists in the Midwest have been subjected to a remarkably large and abrupt price spike in gasoline prices. In Chicago, prices for regular reformulated gasoline increased from $1.85 on May 30 to $2.13 on June 20 with many stations reportedly charging as much as $2.50. In Milwaukee, prices for reformulated gasoline increased from $1.74 on May 30 to $2.02 on June 20. By the middle of June, motorists living in Midwest states including Illinois, Wisconsin and Michigan were paying the highest retail gasoline prices in the United States.

The question that many have asked is why is this happening?

Some have speculated that the price increase in the Midwest is occurring because of the decision of the OPEC countries to curtail production, the increase in demand for crude oil in Asia as those economies recover from earlier recessions, or the increase of demand in the United States as a result of the summer driving season. But all such factors should affect the East Coast, West Coast, and Midwest approximately in the same way. It is therefore unlikely that these factors would account for a prices increase for reformulated gas in the Midwest that are 30, 40 or even 50 cents higher than for reformulated gasoline in other parts of the country.

Others have suggested that the price increases relate directly or indirectly to the decision originally made by Congress and implemented by EPA, to introduce Phase II summer blend gasoline into particular parts of the Midwest, effective June 1. The Phase II gasoline mandated for parts of the Midwest involves a new ingredient not used in other parts in the United States, and may have caused adjustment difficulties in the production process and decreased refinery yields. There have also been some transportation difficulties encountered in two pipelines serving the Midwest, although one of the these pipeline difficulties occurred in March and appears to have been largely, if not completely, solved, and the other involved a rather minor spill. Still, even small disruptions in a tight market can cause severe price fluctuations.

Finally, some have suspected that the Midwestern price increase is a result of some sort of collusion or conspiracy among producers in the area, or non-collusive opportunism by refiners and other marketers taking advantage of market dislocations resulting from the introduction of a new form of gasoline.

The FTC's decision to initiate a formal investigation of gasoline prices in the Midwest in an effort to discover the reasons for these price movements has met with strong bipartisan support from members of Congress, and from the Administration. We have begun to serve subpoenas on major oil companies operating in the Midwest, will serve additional subpoenas in the near future, and will eventually take testimony under oath.

One of the virtues of an investigation of this sort is that we can come down from the mountaintop of speculation and look more closely at how these substantial price increases came about. Among the issues that we will address are the following:

• Assuming the prices increases were triggered by increases in refinery and terminal prices, which firms led off the increases, and when and why did the price movements occur?
• Which firms followed the initial price increases and in what time period?
• As to companies that led or followed, what were their levels of inventory of conventional gasoline and reformulated gasoline at the time decisions were made to increase prices? Were those levels lower than usual?
• To what extent did the introduction of reformulated gasoline increase the costs of refiners and terminal outlets?
• What were production levels in the months leading up to the introduction of reformulated gasoline and what have production levels been since?
• Assuming that demand for gasoline is relatively inelastic - that is, in the short run, almost all motorists and small businesses pay the additional money rather than discontinue driving - what were the reasons for the price increase?
• Finally, is there any direct evidence of collusion?

The good news is that prices at refineries, terminals, and at least some retail outlets in the affected areas appear to have fallen in the last week or so - reportedly in the neighborhood of 25 cents. As part of our investigation we will inquire why these price decreases have occurred.

I have committed the Federal Trade Commission to conduct a thorough, fair and objective study of gasoline price levels throughout the Midwest, and depending on what our investigation finds, to take appropriate action. Assuming the parties cooperate, I hope to have a status update on the progress of our investigation for the Congress by the end of July.

Thank you and I, of course, will be pleased to answer your questions.