01-32052. Second Public Conference: Factors That Affect Prices of Refined Petroleum Products

AGENCY:

Federal Trade Commission.

ACTION:

Notice announcing public conference and requesting analytical and empirical papers and public comment.

SUMMARY:

The Federal Trade Commission (“FTC” or “Commission”) will hold a second public conference on May 6-9, 2002, to examine issues concerning prices of refined petroleum products in the United States. The Commission held its first conference on August 2, 2001, where it heard from numerous interested parties about issues in this area that merit further examination. The further conference announced in this notice will enable the Commission to study in greater depth issues identified in the first public conference. The Commission also seeks analytical and empirical papers and public comment to inform this examination. The Commission invites experts from market participants, trade associations, consumer groups, academia, and other organizations to submit analysis and empirical research on the topics discussed in this notice. For any submitted empirical analysis or quantitative research, papers should include, if possible, the underlying data and reference or include any software programs used to generate results.

DATES:

The public conference will be held on May 6-9, 2002. Sessions will be open to the public, without fee, and advance registration is not required. Seats in the conference room will be available on a first-come, first-served basis; limited overflow seating will be available to view the conference via closed-circuit television. Speakers will be by invitation only. Due to the expected high level of interest in this inquiry, speakers will be limited to brief presentations, with extensive questions and discussion with Commissioners and staff to follow. Further information regarding the agenda for the public conference will be posted on the FTC website.

Interested parties must submit analytical and empirical papers and comments by April 19, 2002.

ADDRESSES:

The public conference will be held in Room 432 of the Federal Trade Commission Headquarters Building, 600 Pennsylvania Avenue, NW., Washington, DC 20580. All interested parties are invited to attend.

Any interested party may submit an analytical or empirical paper or comment relevant to the Commission's inquiry on or before April 19, 2002. To facilitate efficient review, each paper or comment should, if possible, be filed in electronic form (as a WordPerfect, Word, or ASCII text file), by attaching it to an e-mail message sent to the following e-mail box: [e-mail]. The email message to which the paper or comment is attached should include the caption “Presentation on Factors that Affect Prices of Refined Petroleum Products;” the name of the presenter; and the name and version of the word processing program used to create the comment. Papers or comments which are instead filed in paper form should include the same caption and the name of the presenter, and should be addressed to Donald S. Clark, Office of the Secretary, Federal Trade Commission, 600 Pennsylvania Avenue, NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

James Mongoven, Office of Policy and Evaluation, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Avenue, NW., Room 390, Washington, DC 20580; [phone] (telephone); [e-mail]. (email). A detailed agenda and additional information relating to the public conference will be posted on the Commission's website, http://www.ftc.gov/​bc/​gasconf/​index.htm, in advance of the conference.

SUPPLEMENTARY INFORMATION:

Both crude oil and refined petroleum products prices have been volatile in recent years. The level and volatility of prices of refined petroleum products have resulted in increased public concern. In addition, the oil industry has experienced a number of significant changes in the 1990s, including substantial restructuring through mergers and joint ventures, changes in business practices, increased dependency on foreign crude sources, and new governmental regulations.

The Commission has extensive law enforcement authority with respect to the oil and refined petroleum products industries. Within the past year, the Commission has concluded two investigations into gasoline prices on the West Coast and in a number of Midwestern states. The Commission has also conducted antitrust investigations of a number of recent oil industry mergers, and, where appropriate, has issued orders requiring substantial divestitures to preserve competition.

Because of the importance to the American economy of issues raised in these investigations, the Commission has broadened its focus beyond law enforcement to study in more detail the central factors that can affect the level and volatility of refined petroleum products prices in the United States. The purpose of the two public conferences on this topic is to increase the transparency of competitive and other factors affecting the prices of refined petroleum products industries. Increased transparency will better inform consumers and policy-makers in the executive and legislative branches about factors affecting the level and volatility of prices for refined petroleum products. The Commission's efforts in this area will complement those of other government agencies, such as the U.S. Environmental Protection Agency (“EPA”), which recently released a report and a white paper studying the relationship of boutique fuel requirements to gasoline prices.

The Commission's public conference on August 2, 2001 served as a valuable first step. During the initial conference, participants identified the issues that they found to be the most significant and that merit further study by the FTC. A transcript of and presentations to the initial conference are available on the Commission's website, http://www.ftc.gov/​bc/​gasconf/​index.htm. This information has assisted the Commission in structuring the second public conference to focus in a comprehensive manner on the most relevant and important issues.

The Commission anticipates that the information gathered through these public conferences, analytical and empirical papers and comments received, and additional research, will lead to insights of importance to public policy concerning the level and volatility of prices of refined petroleum products. The Commission expects to summarize and discuss these insights in a public report.

Specific Questions To Be Addressed

Listed below is a series of questions about which the Commission seeks public comment. The list is not exhaustive, and it is not necessary to respond to each question.

Supply and Transportation of Crude Oil

1. How has the crude oil supply market changed since 1985?^[1] How has the demand for crude oil changed since 1985? What is the level of proven reserves? Has the growth of proven reserves kept pace with increased demand? What has been the trend in domestic production? What are the pricing trends for domestic oil sources? To what extent do changes in domestic crude production contribute to changes in levels and volatility of refined product prices?

2. How has OPEC managed its supply? How do domestic oil companies and state-owned companies in OPEC countries interact? To what extent have the output policies of OPEC affected refined product prices in recent years? Has there been increased dependence on foreign sources of crude oil since 1985? To what extent, if any, has increased dependence on foreign crude sources by U.S. refineries contributed to increased levels and volatility of refined product prices? Have regulatory or other factors affected the costs or ability to import crude oil?

3. What is the relationship between crude oil prices (cost of feedstock) and prices for refined products at the wholesale and retail levels? Does this relationship vary by region of particular refineries? What happens to refined petroleum product prices when crude oil prices/inventories increase or decrease? How do inventories of crude oil affect the prices of refined petroleum products?

4. What is the empirical evidence since 1985 on the trends in the inflation-adjusted levels and volatility of crude oil prices?

5. What have been the trends in the costs and risks of developing new crude sources, either domestically or abroad? To what extent have changes in the costs and risks affected refined product prices? Has there been an increase in the absolute or relative difficulty of obtaining financing to support the development of new crude sources? Has there been a change in the relative risk/cost relationship of developing new crude sources? How has this affected the ability to obtain financing?

6. Have different types of crudes become more or less substitutable by U.S. refineries over time, and if so, has this affected refined product prices? Have crude oil markets become more or less regionalized over time, and have any such changes had an impact on refined product prices?

7. Are recent proposed/final environmental regulations (e.g., TIER II gasoline, low sulfur diesel) likely to affect the types of crude used by refiners and reduce refiner flexibility on the types of crude processed? If so, are existing refineries able to achieve compliance with these regulations? If not, what kind of capital investment will be needed to achieve compliance?

8. In any stage of crude oil supply, either domestically or abroad, is there any exercise of significant market power (other than the OPEC cartel) currently being observed? To what extent has any such exercise of significant market power affected refined product prices?

9. What is the effect of the Jones Act on transportation of crude oil? Does the Jones Act affect the price of crude oil to refiners? If so, what is the effect?

10. Have infrastructure investments in crude pipelines or marine transport of crude by either barge or ship kept pace with growth in demand? If not, why not? Are there policies that can be implemented that will create or reinforce incentives for efficient investment in pipeline or marine transport infrastructure to maintain adequate capacity, including reserve capacity in the event of a supply disruption?

11. What is the empirical evidence since 1985 on the trends of the inflation-adjusted levels and volatility in the prices of pipeline or marine transport of crude oil? Are these trends similar or dissimilar in various parts of the nation?

12. To what extent have changes in the cost or prices of pipeline or marine transport services of crude oil affected the prices of refined petroleum products at the wholesale or retail level?

13. Do we observe the exercise of significant market power in either the pipeline or marine transport of crude oil in any geographic area? To what extent has the exercise of significant market power affected the prices of refined products?

Refining

1. What factors have had the greatest effect on refining production costs and the price of refined petroleum products since 1985? Which such factors have been most responsible for any increase in the level or volatility of refined product prices?

2. How has the structure of the refining industry changed since 1985? Why did these changes occur? How have these changes affected capacity, utilization, production costs, prices for refined petroleum products, and overall competition in the industry? How has the role and quantity of imported refined petroleum products changed during this time? What has contributed to any such change?

3. What is the empirical evidence on the trends of the inflation-adjusted levels and volatility of refined product prices (for example, spot prices) at the bulk supply level? Are these trends similar or dissimilar in various parts of the nation? Are the trends similar for different refined products (e.g. diesel, gasoline, heating oil, jet fuel)?

4. Have infrastructure investments kept pace with growth in demand? If not, why not? Are there policies that can be implemented that will create or reinforce incentives for refiners to make efficient investments in infrastructure to maintain adequate capacity, including reserve capacity in the event of a supply disruption? Would such incentives vary as a function of size, capitalization, or debt level? How has the age of the industry infrastructure contributed to the need for and cost of the capital improvements?

5. In light of EPA's report and white paper, how have changes in environmental regulations affected refinery production in ways that have potential impacts on the prices of refined products? What has been the actual and historical effect of such regulations? Have changes in fuel specifications, both past and prospective, affected the competitiveness, fungibility, cost, and price stability of the gasoline and distillate fuel pools?

6. What capital investments have been needed to produce refined petroleum products (e.g., reformulated gasoline) in compliance with federal and state environmental and other regulations implemented since 1985? Have any refineries shut down because they found the needed capital improvements would be uneconomical? What capital investments will be needed to comply with federal and state regulations scheduled to take effect in the future?

7. How have environmental regulations affected refinery capacity for motor gasoline and other refined products? What effect have these regulations had on refinery utilization and the product slate, including the types and quantities of motor gasoline produced? How have these regulations affected production schedules, lead time, and the ability to respond to supply disruptions (e.g., alter product slates)?

8. What new motor gasoline transportation and storage issues have arisen due to new environmental regulations since 1985?

9. What effect has the increase in the number of different grades of motor gasoline (with varying emissions specifications and oxygenates) had on product markets and geographic markets for refined petroleum products? Are there specific grades of gasoline that are produced by just a few refiners? How has this affected the industry's ability to respond to supply disruptions? How rapidly do refined product prices typically react to changes in supply? Are there implications that one can draw from the response speed regarding the nature of competition in the market? What are the consequences and associated costs of producing an off-specification motor gasoline?

10. Are current environmental regulations, or those that are scheduled to take effect in the future, affecting refinery ownership? That is, are companies that own refineries making decisions to divest because of the regulations and the cost to comply? Is there a pattern of such sales and are the purchasers comparable to the sellers in terms of ability to raise capital to comply with environmental requirements and to expand capacity?

11. What factors explain the closure of several smaller refineries in the United States over the past decade? Why have some major oil firms sold refining capacity? Has the closure of smaller refineries changed the regional composition of refining capacity? If so, has this created infrastructure bottlenecks and affected price volatility?

12. Is there any exercise of significant market power currently being observed in particular aspects or geographic areas of the domestic refining industry? If so, to what extent has such exercise of significant market power affected prices of refined products?

13. Why is refinery capacity utilization at such high rates and are these rates likely to continue for a number of years into the future? What are the primary causes?

14. To what extent have refiners instituted just-in-time inventory of crude oil and/or refined products? What are the likely price effects of any changes in inventory behavior?

Pipelines and Marine Bulk Transport

1. How has the structure of the refined products pipeline industry changed since 1985? Why did these changes occur? How have these changes affected capacity, utilization, costs, and tariffs? What new geographic markets are being served?

2. Have infrastructure investments in product pipelines or marine bulk transport of refined product kept pace with growth in demand? If not, why not? Are there policies that can be implemented that will create or reinforce incentives for efficient investment in pipeline or marine transport infrastructure to maintain adequate capacity, including reserve capacity in the event of a supply disruption?

3. What is the empirical evidence since 1985 on the trends of the inflation-adjusted levels and volatility in the prices of pipeline or marine transport of refined petroleum product? Are these trends similar or dissimilar in various parts of the nation?

4. To what extent have changes in the cost or prices of pipeline or marine transport services affected the prices of refined petroleum products at the wholesale or retail level?

5. Is there any exercise of significant market power currently being observed in particular aspects of the domestic pipeline or marine transport industry? If so, to what extent has such distortion affected the prices of refined products at the wholesale or retail level?

6. What capital investments has the industry made in response to the 1990 Clean Air Act amendments for motor gasoline? What changes have been made to the infrastructure, including the pipelines and terminal/storage units? Why were these changes made and at what cost?

7. What are the impacts of the proliferation of different types of gasoline required by the EPA and the states on pipelines and bulk transport? Has competition been impacted in certain areas or regions and, if so, how? How have environmental regulations for motor gasoline during the last several years affected pipeline nomination procedures, lead time, batch configuration, batch sizes, and the number of products that must be shipped on a segregated basis? What effect have these changes had on the number, frequency, and length of shipment cycles? What effect have these changes had on a shipper's ability to substitute different products (e.g., conventional gasoline for diesel fuel) or different grades of the same product (e.g., 7.8 RVP conventional gasoline for 9.0 RVP conventional gasoline) for its nomination cycle? How (and why) do these effects differ for proprietary versus common carrier pipelines?

8. Has the pipeline industry experienced other problems or difficulties in connection with the 1990 Clean Air Act amendments for motor gasoline? How were these resolved and at what cost?

9. What regulations, other than environmental, have affected pipelines over the last decade?

10. Do any answers with respect to pipelines change depending on whether the pipeline is proprietary or a common carrier?

Distribution and Marketing

1. To what extent, and if so, why do variations in each of the following dimensions explain differences in wholesale or retail prices of gasoline or other refined petroleum products among different geographic markets?

a. market concentration;

b. share of market held by independent/unbranded marketers;

c. ownership/contractual arrangements (e.g., refiner-owned and-operated stations versus lessee-dealers or jobber-controlled outlets);

d. penetration of non-traditional gasoline retail outlets (e.g., gasoline sales at fast-food outlets and hypermarkets or “super jobbers”);

e. consumer demographics;

f. perceptions of brand quality or other factors, such as ease of credit card use, amenities or the sales of products or services other than fuel at gasoline stations;

g. proximity to refining centers and sources of bulk supply;

h. labor, real estate or other local costs;

i. regulatory requirements, including local zoning ordinances, state or local laws affecting retail sales of gasoline, or environmental regulations affecting grades of gasoline offered.

2. What is the empirical evidence since 1985 on the trends of the inflation-adjusted levels and volatility in wholesale and retail prices for refined petroleum product? Are these trends similar or dissimilar in various parts of the nation? Are the trends similar for different refined products (e.g. diesel, gasoline, heating oil, jet fuel)?

3. Have infrastructure investments in terminals, wholesaling and retailing kept pace with growth in demand? If not, why not? Are there policies that can be implemented that create or reinforce the incentive for efficient investment in terminals, wholesaling and retailing infrastructure to maintain adequate capacity, including reserve capacity in the event of a supply shock?

4. To what extent have changes in the costs of providing terminaling, wholesaling, or retailing services affected the prices of refined petroleum products at the wholesale or retail level?

5. Have EPA regulations had any impact on refiners' inventory practices-for example, EPA fuel changeover policies? If so, have there been effects on retail prices?

6. To what degree do regulations-for example, environmental or zoning-affect the costs of providing wholesaling, terminaling or retailing services? What are the costs and difficulties of complying with regulations?

7. Have major distributors changed their geographic coverage significantly over the past two decades? Is there a trend toward greater or lesser regionalization of brands and, if so, what are the competitive implications of the trend?

8. Is there any exercise of significant market power currently being observed at either the terminal, wholesale or retail level in any geographic market? Are there significant impediments to terminal access and, if so, why? To what extent has the exercise of significant market power affected the prices of refined products at the wholesale or retail level?

9. Has the volatility and local dispersion (i.e. station-to-station or neighborhood-to-neighborhood) of gasoline prices increased in recent years, and if so, what are the causes, competitive and consumer implications of such increased volatility? Have premiums attributed to brands changed over time?

10. What are the competitive implications of the increasing scope, timeliness, and detail of micro data on retail prices and demand sensitivities (elasticities) that are available to gasoline wholesalers or retailers?

11. What is the competitive significance of refiners preventing jobbers to whom they sell from competing with the refiners to supply branded gasoline to independent dealers in localized geographic areas, a practice sometimes known as redlining? What is the competitive significance of refiners setting uniform wholesale prices for branded gasoline to company-operated and leased stations and independent open dealer stations in localized geographic areas, (a practice sometimes known as zone-pricing)? How, if at all, do these practices enhance efficiency? What is their effect, if any, on competition?

12. Do gasoline retailers engage in price discrimination? If so, how, and what is the overall effect of this practice? Do retailer margins vary among products (e.g., premium versus regular gasoline) or class of service (full-serve versus self-serve)? If so, why does this occur? To what extent (if any) does the ability of retailers or wholesalers to engage in price discrimination affect overall prices?

13. Have changes in retail formats produced important implications for the level or volatility of retail gasoline prices? For example, have the trends towards fewer, but larger service stations or the entry by non-traditional outlets such as those associated with mass merchandisers or grocery or convenience stores affected the degree of competition in retail gasoline markets? Have these format changes significantly affected the extent to which upstream price changes at the refinery level are translated into retail prices? Have these format trends and possible effects on retail prices been more pronounced in some geographic areas than others, and if so, what accounts for these differences? Has the increasing importance of convenience store and other non-fuel items typically sold by gasoline retailers affected pricing or other marketing decisions relating to gasoline sales? Have the changes in format and product mix at retail affected consumer loyalty to individual gasoline brands to any significant degree?

14. To what extent do wholesalers' inventory management practices affect gasoline price changes, especially in a volatile market? To what extent are inventory management practices themselves a reaction to market volatility?

15. What is the effect of each of the following categories of gasoline marketing regulation, and to what extent does each explain observed differences in gasoline prices among different markets?

a. retail divorcement;

b. self-service bans;

c. minimum markup requirements;

d. location/zoning restrictions;

e. Petroleum Marketing Practices Act; and

f. environmental requirements.

Vertical Integration, Demand Side, Joint Arrangements and Other

1. What is the degree of vertical integration across the various functional levels of the industry? For example, how extensively are refiners of crude integrated into the production or transport of crude, or how extensive is the integration of wholesaling and retailing of gasoline? What are quantitative measures of the degree of vertical integration in this industry?

2. Has the degree of vertical integration in the industry changed since 1985? If so, which functional levels are more likely or less likely to be combined under common ownership? Has the degree of vertical integration varied in different parts of the country or for different refined products?

3. To what extent does a desire to minimize costs explain integration or changes in the degree of integration? To what extent does vertical integration have an anticompetitive motivation, implementing, for example, strategies to foreclose competitors or to raise rivals' costs?

4. How can the effects of vertical integration upon unintegrated competitors be clearly distinguished from the effects upon ultimate consumers?

5. To what extent have changes in the degree of vertical integration since 1985 affected the level or volatility of refined product prices, particularly prices paid by ultimate consumers? In what ways do vertically-integrated firms have different incentives in responding to changes in input cost or demand, and to what extent do these different incentives manifest themselves to produce observable effects on gasoline prices?

6. Can the direction of causation between price and vertical integration be clearly distinguished? For example, if greater vertical integration is correlated with higher prices, is vertical integration one response to tight input supply and higher prices or, alternatively, are higher prices a result of integration?

7. To what extent can price spikes or price discontinuities be predicted? What are their costs to consumers? Are buffer stocks or maximum price movement rules needed? What are appropriate policy responses?

8. What factors characterize gasoline demand and demand elasticity? In what ways, if any, do gasoline demand and demand elasticity vary among markets? How do short-run and long-run gasoline demand differ?

9. What is the role of joint ventures, or other cooperative arrangements such as product exchanges, at different functional levels? Has their use been associated with any significant market distortions at any functional level?

By direction of the Commission.

Donald S. Clark,

Secretary.

Footnotes

1.  The Commission has chosen the 1985 date so it can update data received/obtained in conjunction with earlier Commission reports in this industry.