	Crude Oil Prices and Other Factors Affect Gasoline Prices

Crude oil prices are a major determinant of gasoline prices. In other words, if the demand for gasoline increases faster than the ability  to supply it, the price of gasoline will most likely increase. 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. This could mean that  gasoline prices remain high until the imported supplies can reach the  market. 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. 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. These  mergers contributed to increases in market concentration in the refining  and marketing segments of the U.S. petroleum industry. 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. The increases were for branded gasoline only and were  about 7 cents per gallon, on average. 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. In addition, merger activity can influence gasoline prices. 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. This is a work of the U.S. government and is not subject to copyright protection in the  United States.
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 $3.21 the week of May 21st. Over this time period, the price has increase $1.05 per gallon and added about $23 billion to consumers' total gasoline bill, or about $167 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?

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. Petroleum industry consolidation plays a role in determining gasoline prices too. 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 increased market concentration in U.S. refining and marketing segments. Econometric modeling GAO performed on eight of these mergers showed that, after controlling for other factors including crude oil prices, the majority resulted in higher wholesale gasoline prices--generally between 1 and 7 cents per gallon. While these price increases seem small, they are not trivial--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 price effects at this time. We are currently studying the effects of the mergers that have occurred since 2000 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.