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Friday, August 31, 2007

FTC report on gas price spikes of 2006

There might be a conspiracy to increase gasoline prices in the short-run, but this FTC report suggests that it isn't likely.

Market factors explain increases in the national average retail price for gasoline during the spring and summer of 2006, according to a report sent to the President today by the Federal Trade Commission and the U.S. Department of Justice’s Antitrust Division.

In April 2006, while the FTC was completing its intensive investigation of petroleum industry conduct and gasoline pricing following Hurricane Katrina, President Bush directed DOJ to work with the FTC and the Department of Energy to conduct inquiries into rising gasoline prices. Today's "Report on Spring/Summer 2006 Nationwide Gasoline Price Increases," which builds on the investigative work done in connection with the post-Katrina report, describes staff’s factual findings and economic analysis that price increases during the spring and summer of 2006 were attributable to six factors: (1) seasonal effects of the summer driving season; (2) increases in the price of crude oil; (3) increases in the price of ethanol; (4) capacity reductions stemming from refiners' transition from the fuel additive methyl tertiary-butyl ether to ethanol; (5) refinery outages resulting from hurricane damage, other unexpected problems or external events, and required maintenance; and (6) increased consumer demand for gasoline beyond the seasonal effects of the summer driving season. The determination that the price increases were attributable to these six factors also supports the conclusion that the increases did not stem from violations of the antitrust laws.

Admittedly, record profits did not help quell the suspicions of many that there must have been a conspiracy afoot. In the end, it looks like there was a perfect storm of changes in regulation (MTBE to ethanol, Clean Air Act of 1990, etc.), demand increases, post-Katrina/Rita delayed maintenance and the transition to ultra low-sulfur diesel.

The upshot is that clean air mandates, which aim to provide a public good called "clean air," are not free. Either we have cheap fuel and we get potentially contaminated ground water (via MTBE leakages) and less clean air, or we get cleaner air and water but pay more at the pump, at least in the short run.

I recently heard some petroleum expert on the radio suggest that we likely would not see $3.00 per gallon gasoline in perhaps five years. Given what the FTC reports, I might be more prone to believe that prediction, assuming no further shocks to the U.S. or world economies.

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