Motor Fuels: Gasoline Prices in Oregon (Correspondence, 02/23/2001,
GAO/GAO-01-433R).

GAO provided information on (1) factors affecting retail gasoline prices
in Oregon, including transportation costs, taxes, costs of full service,
and other supply and demand conditions and (2) how gasoline price trends
in Portland, Oregon, compare with trends in other West Coast cities. GAO
identified several factors affecting gasoline prices in Oregon,
including (1) higher-than-average costs associated with transporting
gasoline from refiners to consumers because Oregon has no refining
capability and a greater proportion of its gasoline demand comes from
rural driving, (2) higher-than-average state gasoline taxes, and (3) a
prohibition on self-service gasoline stations. GAO also determined that
although Portland's gas prices differ from those of Los Angeles, San
Francisco, and Seattle, all four cities responded similarly to rapid
price changes. Retail prices in all four cities follow similar patterns
with respect to major periods of price increases and decreases.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GAO-01-433R
     TITLE:  Motor Fuels: Gasoline Prices in Oregon
      DATE:  02/23/2001
   SUBJECT:  Petroleum refining facilities
	     Energy demand
	     Gasoline
	     Prices and pricing
	     Petroleum prices
IDENTIFIER:  Portland (OR)
	     San Francisco (CA)
	     Seattle (WA)
	     Los Angeles (CA)

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GAO-01-433R

Oregon Gasoline Prices United States General Accounting
Office

Washington, DC 20548

February 23, 2001 The Honorable Gordon H. Smith United States Senate

Subject: Motor Fuels: Gasoline Prices in Oregon Dear Senator Smith: As
requested, we are providing information on (1) factors affecting retail
gasoline prices in Oregon, including transportation costs, taxes, costs of
full service, and other supply and demand conditions, and (2) how gasoline
price trends in Portland, Oregon, compare with trends in other West Coast
cities. This letter supplements the information contained in our letter to
you of February 23, 2000, 1 and summarizes the material presented in our
briefing to your staff on January 25, 2001.

As you know, Oregon's gasoline prices, along with those of California and
Washington State, are currently among the highest in the United States. In
response to rising crude oil costs in 1999, gasoline prices rose nationwide
and have remained relatively high compared with prices in the preceding 5
years. Furthermore, Oregon, Washington and California prices remained above
the national average, due in part to higher gasoline taxes, special fuel
restrictions (in California), and a generally tight supply- and- demand
balance in the region. According to the American Automobile Association's
daily gasoline price survey for February 14, 2001, the average price for
regular unleaded gasoline in Oregon is about $1.54 per gallon, compared with
$1.66 in California, $1.54 in Washington, and a national average of $1.49.
These state averages mask a great deal of price variation within states and
average prices for particular cities will typically be substantially higher
or lower than state average prices. 2

Factors Affecting Gasoline Prices in Oregon

Among the factors affecting gasoline prices in Oregon are higher- than-
average costs associated with transporting gasoline from refiners to
consumers, higher- thanaverage state gasoline taxes, and a prohibition on
self- service gasoline stations. In

1 Motor Fuels: Gasoline Price Spikes in Oregon in 1999 (GAO/ RCED- 00- 100R,
Feb. 23, 2000). 2 For example, in the same survey, out of 15 cities in
California, Oregon, and Washington, the average retail price of unleaded
regular gasoline varied from a low of about $1. 43 per gallon in Spokane,
Washington, to a high of $1.84 in San Francisco, California. Source:
American Automobile Association, Daily Fuel Gauge Report (Feb. 14, 2001).

Page 2 GAO- 01- 433R Oregon Gasoline Prices

addition, specific local supply and demand conditions at any given time can
affect prices of gasoline in Oregon compared with other states.

Gasoline transportation costs are higher in Oregon than in California or in
Washington because (1) Oregon has no refining capacity and (2) a greater
proportion of its gasoline demand comes from rural driving. Without the
capacity to refine its own gasoline, Oregon must acquire gas from refineries
in northern Washington, and- to a lesser extent- in California. The bulk of
Oregon's gasoline has typically come through a pipeline connection between
refineries in Washington and the cities of Portland and Eugene, while the
remainder comes largely by tanker or barge from Washington or northern
California or is trucked in from other locations. As a result,
transportation costs tend to be higher in Oregon than in areas closer to the
refining centers of northern California, southern California, or northern
Washington. The pipeline tariff between the refineries in Washington and
Portland adds slightly more than one cent to the cost of a gallon of
gasoline. Furthermore, of the West Coast states, Oregon has the highest
proportion of miles driven in rural areas- about 53 percent- compared with
19 percent for California and 32 percent for Washington. This means that
gasoline must be trucked from areas served by the pipeline to rural
consumers, increasing transportation costs further. 3

Oregon has the highest state gasoline tax among the West Coast states. For
example, Oregon's state gasoline tax in 2000 was 24 cents per gallon- the
eighth highest in the country and about 4 cents per gallon more than the
national average. In contrast, California's gasoline tax was 18 cents per
gallon and Washington's was 23 cents per gallon. 4

Oregon also differs from California and Washington in that it does not allow
selfservice lanes at gasoline stations. Industry sources have told us that
the prohibition on self- service gasoline stations may add as much as 5
cents to the cost of a gallon of gasoline in Oregon.

Finally, local supply and demand conditions have an impact on Oregon's
gasoline prices. For example, an explosion in the Olympic Pipeline between
refineries in Anacortez and Cherry Point in Washington caused an immediate
reduction in the supply of gasoline to Portland and Eugene. Specifically,
the volume of gasoline arriving in Portland through the pipeline was cut by
almost half. To compensate for this shortfall, additional gasoline had to be
shipped in by barge or tanker from Washington and California or by truck
from other locations. As a result, transportation costs for gasoline coming
to Portland increased and prices rose

3 Of the three principal means of shipping gasoline- pipeline, tanker or
barge, and trucking- per gallon costs are typically lowest for pipelines and
highest for trucking. 4 While not included above, state excise taxes or
other local charges may apply in each of the states and these would also be
expected to have an upward impact on gasoline prices. For example,
California's state sales tax of 7.25 percent at current gasoline prices
would add about 12 cents to the price of a gallon of gasoline.

Page 3 GAO- 01- 433R Oregon Gasoline Prices

compared to Seattle and Los Angeles. This supply disruption also coincided
with a period of unplanned refinery outages in northern California that
added to the region's supply shortfall and made it more costly for Oregon to
replace the gasoline supply lost when the pipeline was damaged. The pipeline
remained closed for repairs and safety inspections until late January 2001.
5

Analysis of Gasoline Price Trends in Key West Coast Cities

Our comparison of gasoline prices in Portland Oregon to prices in Los
Angeles, San Francisco and Seattle found that average prices in the four
cities differ. These price differences were fairly stable over time and were
due in part to differences in transportation costs, taxes, and other local
regulations and conditions. Moreover, we found that the markets for gasoline
in the four cities are closely linked and are essentially part of a single
market for gasoline on the West Coast.

Figure 1 shows a comparison between retail prices of regular unleaded
gasoline in Portland with those in Los Angeles, San Francisco, and Seattle
for the period January 5, 1994 through October 18, 2000. 6

Figure 1: Retail Gasoline Prices in Selected West Coast Cities

Source: GAO analysis of Oil & Gas Journal data.

5 Although the damaged section of the pipeline has now been repaired and is
being returned to service, heightened security precautions have led to
another section being closed for checking and possible repairs. As a result,
the capacity of the pipeline is still well below pre- explosion levels.

6 The data come from survey results published weekly in the Oil & Gas
Journal. We chose the period from January 5, 1994, through October 18, 2000,
in order to cover sufficient periods of time prior to and after the pipeline
disruption of June 10, 1999.

0 2 0

4 0 6 0

8 0 1 0 0

1 2 0 1 4 0

1 6 0 1 8 0

2 0 0 2 2 0

01/05/94 06/05/94

11/05/94 04/05/95

09/05/95 02/05/96

07/05/96 12/05/96

05/05/97 10/05/97

03/05/98 08/05/98

01/05/99 06/05/99

11/05/99 04/05/00

09/05/00

Cents per Gallon

Portla n d San Fra n cisco Seat t le L o s A n g e les

Page 4 GAO- 01- 433R Oregon Gasoline Prices

Figure 1 shows prices in the four cities, while differing at any moment in
time, generally follow similar patterns with respect to increases and
decreases in price. Over the entire period, retail regular gasoline prices
in Portland averaged about 4 cents higher than in Los Angeles, about 1.4
cents higher than in Seattle, and about 10 cents lower than in San
Francisco.

Despite these average price differences, all four cities responded similarly
to rapid price changes due to supply disruptions or other causes. Retail
prices in all four cities follow similar patterns with respect to major
periods of price increases and decreases. In addition to examining the price
trends, we conducted a statistical analysis of retail gasoline prices in the
four cities and found that an increase in price in one city quickly leads to
price increases in the other cities. The following example demonstrates how
this process might work. An increase in gasoline prices in San Francisco
caused by a supply disruption, creates an incentive for gasoline dealers in
the entire West Coast region to bring more gasoline into the San Francisco
market in order to earn more money per gallon sold. This supply increase in
San Francisco, which causes the price there to fall, simultaneously reduces
the supply in the rest of the region, causing prices in the other cities to
rise. We found that prices fully adjust to the change within about 5 to 6
weeks. 7 It is this process that causes average price differences between
cities to be stable over time. The one notable exception occurred in the
period between June 1999 and April 2000, when prices in Portland rose and
stayed higher for an extended period of time than did prices in Los Angeles
and- to a lesser degree- in Seattle. 8 As mentioned above, this period
coincided with the Olympic Pipeline explosion of June 10 in Washington and
the continued unscheduled refinery shutdowns in northern California that had
begun earlier in the spring of 1999. These higher price differences
persisted for almost 10 months.

Scope and Methodology

To prepare the information in this report, we reviewed and analyzed data on
gasoline prices in four major West Coast cities from January 5, 1994,
through October 18, 2000, as well as information on factors affecting prices
in Oregon during this period. We examined data from the Energy Information
Administration and the Federal Highway Administration, and interviewed oil
industry officials, representatives of a pipeline company, and an expert in
academia. We also used retail gasoline price data from the Oil & Gas Journal
and from the American Automobile Association.

While we did not attempt to fully assess the reliability of the data used in
this report, we discussed the source of the data with officials from the Oil
& Gas Journal and the American Automobile Association, who told us they
believe that their average prices

7 A similar process of supply adjustments would occur for an initial drop in
price. 8 Gasoline prices in San Francisco also rose relative to Los Angeles,
Portland, and Seattle due to the refinery outages. These higher relative
prices began around April 1999 and continued into the summer of 2000.

Page 5 GAO- 01- 433R Oregon Gasoline Prices

are accurate. Moreover, they said that their data are widely used by
academic and industry analysts and are the best available. We also examined
the data series to check for obvious discrepancies and found none. Our
analysis focused on observable factors that affect gasoline prices and we
did not attempt to address issues of the competitiveness of gasoline
markets, which may also affect prices in the four cities. 9 We conducted our
work from November 2000 through January 2001 in accordance with generally
accepted government auditing standards.

We provided a draft of this report to the Energy Information
Administration's Petroleum Division for review and comment. We discussed the
report with officials from that division, who advised us that they agree
with the overall findings of this report. Specifically, they agree that the
apparently high gasoline prices in Oregon are largely a function of
conditions in the entire West Coast gasoline market, and are also influenced
by state- specific factors such as relatively high gasoline tax rates, a ban
on self- service, and dependence on other states for supply. However,
without further information, they were unable to evaluate the statistical
methodology we used to compare retail prices in the four cities or the data
sources we used. For purposes of brevity and clarity, we did not discuss our
methodology in this report, but we used standard statistical methods to
evaluate relative prices between the cities. Further, as mentioned in the
previous paragraph, we took steps to evaluate the reliability of the data
used. The officials also provided specific comments, which we incorporated
where appropriate.

9 We discuss these and other factors that influence local prices of gasoline
in the report, Motor Fuels: California Gasoline Price Behavior (GAO/ RCED-
00- 121, Feb. 23, 2000).

Page 6 GAO- 01- 433R Oregon Gasoline Prices

- - - - Unless you publicly announce its contents earlier, we plan no
further distribution of this letter until 14 days after the date of this
letter. At that time, we will send copies of this letter to interested
Members of Congress and make copies available to others upon request. The
letter will also be available on GAO's home page at http:// www. gao. gov.

If you have any questions about this report or need additional information,
please call me at (202) 512- 6877. Major contributors to this report include
Daniel Haas and Frank Rusco.

Sincerely yours, Jim Wells Director, Natural Resources

and Environment (360027)
*** End of document. ***