[Federal Register Volume 66, Number 250 (Monday, December 31, 2001)]
[Notices]
[Pages 67528-67532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32052]


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FEDERAL TRADE COMMISSION


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.

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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: [email protected]. 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; (202) 326-
2879 (telephone); [email protected]. (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

[[Page 67529]]

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

[[Page 67530]]

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 changesin 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.

[[Page 67531]]

    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

[[Page 67532]]

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.
[FR Doc. 01-32052 Filed 12-28-01; 8:45 am]
BILLING CODE 6750-01-P