Motor Fuels: Gasoline Prices in the West Coast Market (25-APR-01,
GAO-01-608T).
Gasoline prices in West Coast states are frequently among the
highest in the nation and these states tend to see longer periods
of high prices compared with other parts of the country, the West
Coast gasoline market is characterized by a tight balance between
supply and demand, and isolation from other U.S. gasoline
markets. Both of these situations cause rapid price increases in
reaction to supply disruptions. GAO's comparisons of gasoline
prices in California, Oregon, and Washington found that
individual markets in the three states are closely linked and are
essentially part of a single market for gasoline on the West
Coast. Gasoline prices for cities in these states generally
followed similar patterns with respect to price increases and
decreases. As a result, any event that a significantly changed
prices in one state could affect gasoline prices in other West
Coast states. Although California, Oregon, and Washington are
essentially part of the same West Coast market, each state has
attributes that tend to increase its respective gasoline prices.
Moreover, within any given state, local market conditions may
cause prices to vary considerably. GAO's analysis found that
lifting the export ban on Alaskan North Slope crude oil caused
the West Coast price of this oil to rise but did not
significantly affect the price of gasoline. This report
summarizes four reports: GAO-01-433R, RCED-00-100R, RCED-00-121,
and RCED-99-191.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-608T
ACCNO: A00895
TITLE: Motor Fuels: Gasoline Prices in the West Coast Market
DATE: 04/25/2001
SUBJECT: Comparative analysis
Domestic crude oil
Gasoline
Petroleum prices
Prices and pricing
Alaskan North Slope Oil
California
Oregon
Washington
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GAO-01-608T
MOTOR FUELS Gasoline Prices in the West Coast Market Statement of Jim Wells,
Director, Natural Resources and Environment
United States General Accounting Office
GAO Testimony Before the Subcommittee on Consumer Affairs, Foreign
Commerce and Tourism, United States Senate
For Release on Delivery 2: 30 p. m. Wednesday April 25, 2001
GAO- 01- 608T
GAO- 01- 608T Retail Gasoline Prices 1 Mr. Chairman and Members of the
Subcommittee:
I am pleased to participate in the Subcommittee?s hearing on the causes of
high retail gasoline prices in California, Oregon, and Washington. As you
know, prices in West Coast states are frequently among the highest in the
nation and these states tend to experience longer periods of high prices
compared with other areas in the United States. As of March 27, 2001, the
retail prices of gasoline in West Coast states were higher than the national
average- the average national price for a gallon of unleaded regular
gasoline was $1.43, compared with $1. 72 in California, $1. 57 in Oregon,
and $1.56 in Washington. Furthermore, according to the Energy Information
Administration, gasoline prices are expected to rise this summer and price
volatility remains a concern.
Over the last 3 years, GAO has issued several reports on gasoline prices and
gasoline price behavior in two West Coast states- California and Oregon. 1
Our analyses focused on observable factors that affect gasoline prices and
did not address issues concerning the competitiveness of gasoline markets,
which may also affect prices in these states. In addition, we issued a
report in response to a mandate in Public Law 104- 58 to determine the
effects of lifting the ban on Alaskan crude oil exports on crude oil prices
and production, refiners, consumers, and the oil shipping industry on the U.
S. West Coast. 2 My testimony, which is based on these reports and related
work, specifically discusses factors affecting gasoline prices in
California, Oregon, and, more generally, the West Coast. In summary, I will
make the following points:
The West Coast gasoline market is characterized by a tight balance between
supply and demand, and is isolated from other U. S. gasoline markets. For
example, in order to meet consumer demand, refineries in California operated
at about 97 percent of capacity in 1999 compared with about 93 percent
nationally. In addition to the overall tight balance between supply and
demand, the West Coast market is isolated
1 Motor Fuels: Gasoline Prices in Oregon (GAO- 01- 433R, February 23, 2001),
Motor Fuels: Gasoline Price Spikes in Oregon in 1999 (GAO/ RCED- 00- 100R,
Feb. 23, 2000) and Motor Fuels: California Gasoline Price Behavior (GAO/
RCED- 00- 121, Apr. 28, 2000). 2 Alaskan North Slope Oil: Limited Effects of
Lifting Export Ban on Oil and Shipping Industries and Consumers (GAO/ RCED-
99- 191, Jul. 1, 1999).
GAO- 01- 608T Retail Gasoline Prices 2 from out- of- state sources of
gasoline so that supply shortages cannot easily be
replaced. Both these situations cause rapid price increases in reaction to
supply disruptions.
Our comparisons of gasoline prices in cities in California, Oregon, and
Washington found that individual markets in the three states are closely
linked and are essentially part of a single market for gasoline on the West
Coast. Gasoline prices for cities in these states, while differing at any
given moment in time, generally followed similar patterns with respect to
price increases and decreases. As a result, any event that caused a
significant price change in one state could affect the gasoline prices in
other West Coast states.
While California, Oregon, and Washington are essentially part of the same
West Coast market, each state has attributes that tend to increase its
respective gasoline prices. For example, California uses a ?boutique?
gasoline designed to reduce the harmful exhaust emissions that cause smog.
In contrast, Oregon depends completely on outof- state supplies for its
gasoline, much of which comes through a single pipeline from the state of
Washington. These attributes, among others, lead to higher gasoline prices
in these states. Moreover, within any given state, local market conditions
may cause prices to vary considerably.
Our analysis found that lifting the export ban on Alaska North Slope (ANS)
crude oil caused the West Coast price of this oil to rise but it did not
significantly affect the price of gasoline.
West Coast Market Is Tight and Isolated
The West Coast gasoline market is characterized by an especially tight
balance between supply and demand, and is isolated from other U. S. gasoline
markets. In general, California?s gasoline demand dominates the West Coast
market. Based on 1997 data, the last year data on international gasoline
consumption were available to us, California is
GAO- 01- 608T Retail Gasoline Prices 3 the third largest gasoline consumer
in the world- behind only the rest of the United
States and Japan- and its consumption is being met almost entirely by supply
from refinery production within the state. In addition to making
California?s boutique CARB gasoline, some of California?s refineries produce
conventional and other reformulated gasoline to supply to western markets,
such as Oregon, Arizona, and Nevada. 3 To meet this high demand for
gasoline, California?s refineries produce at almost full capacity. For
example, in 1999, California?s refineries operated at about 97 percent of
capacity compared with a national average of about 93 percent. Because the
existing refineries in California have virtually no spare capacity,
unanticipated refinery outages, such as those caused by mechanical problems,
can cause supply disruptions and rapid price increases not only within the
state but also in other western states that it supplies. California
refineries experienced unanticipated outages every year from 1995 through
1999.
When unanticipated refinery outages occur, other out- of market sources have
to supply gasoline to make up for the lost production. However, the West
Coast market is isolated from other major refining centers because it has
few, if any, pipelines that can bring gasoline to the West Coast states.
Therefore, tankers and other means must be used. The process is slow and
costly compared with pipelines. Gasoline shipped into California (and other
West Coast states) by tanker from such places as the U. S. Gulf Coast, the
U. S. Virgin Islands, Europe, and Asia, can take between 11 and 40 days and
add 3 to 12 cents per gallon to the retail price. In addition, the
uniqueness of California?s CARB gasoline further isolates the state?s
gasoline market, because only a few refineries outside California can
produce CARB gasoline. Moreover, these few refineries are not designed to
make CARB gasoline routinely and the refining operations have to be
reconfigured to produce it. This reconfiguration process, some oil industry
officials told us, can take up to a week and adds to the cost of production.
3 CARB stands for California Air Resources Board, the state agency that
administers California?s emissionsreducing gasoline program. CARB gasoline
is designed to reduce harmful exhaust emissions that cause smog.
GAO- 01- 608T Retail Gasoline Prices 4
West Coast States Are Essentially Part of a Single Market
Our comparisons of gasoline prices in cities in California, Oregon, and
Washington found that individual markets in the three states are closely
linked and that they are essentially part of a single gasoline market on the
West Coast. When we compared gasoline prices in Portland, with prices in Los
Angeles, San Francisco, and Seattle, we found that although average prices
in the four cities differed, they generally moved in the same direction
simultaneously and hence, the price differences remained fairly stable over
time. Variations in price levels could be attributed in part to differences
in transportation costs, taxes, and other local regulations and conditions.
Figure 1 shows a comparison between retail prices of regular unleaded
gasoline in Portland and those in Los Angeles, San Francisco, and Seattle
for January 5, 1994, through October 18, 2000. 4
4 The data come from survey results published weekly in the Oil & Gas
Journal. We chose this time frame in order to cover sufficient periods of
time before and after the Olympic pipeline disruption of June 10, 1999.
GAO- 01- 608T Retail Gasoline Prices 5
Figure 1: Retail Gasoline Prices in Selected West Coast Cities
Source: GAO?s analysis of Oil & Gas Journal data.
Gasoline prices in the four cities, while differing at any given moment in
time, generally followed similar price fluctuation patterns. For 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, the gasoline markets in all four
cities responded similarly to rapid price fluctuations caused by supply
disruptions or other factors. In addition to examining 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 was quickly followed
by price increases in the other cities. We found that prices fully adjust to
the change within about 5 to 6 weeks. 5
5 A similar process of supply adjustments would occur for an initial drop in
price.
0 20
40 60
80 100
120 140
160 180
200 220
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
Portland San Francisco Seattle Los Angeles
GAO- 01- 608T Retail Gasoline Prices 6
State- Specific Attributes Affect Gasoline Prices
While California, Oregon, and Washington are essentially part of the same
West Coast market, each state has specific attributes that tend to increase
its respective gasoline prices. Moreover, within any given state, local
market conditions may cause prices to vary considerably, as illustrated by
our analyses of California and Oregon markets.
For California, we identified the following specific attribute:
CARB gasoline requirements. In 1996, California introduced reformulated
gasoline standards that were more stringent than the federal standards and
different from those of any other state. The additional refining cost for
CARB gasoline has contributed to the higher retail price of gasoline in
California relative to the rest of the United States. Also, California?s
gasoline market has become more sensitive to supply disruptions because, as
mentioned above, outside sources of CARB gasoline are not readily available
to make up for disrupted supplies in a timely and costeffective manner.
For Oregon, we identified the following specific attributes:
Higher transportation costs for gasoline. Oregon depends completely on out-
of- state supplies for its gasoline because it has no refineries and, thus,
must acquire gasoline via pipeline from refineries located in northern
Washington, and- to a lesser extent- in California via tanker and/ or truck.
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. 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. To
meet
GAO- 01- 608T Retail Gasoline Prices 7 rural demand in areas that are
generally not served by pipelines, gasoline must be
trucked in from the nearest pipeline, increasing transportation costs
further. 6
A gasoline tax higher than the national average. At 24 cents per gallon, in
2000, Oregon had the highest state gasoline tax among the West Coast states
and the eighth highest in the country. 7 The average state tax on gasoline
at the retail level in the United States is about 20 cents per gallon.
No self- service lanes at gasoline stations. According to industry sources,
Oregon?s prohibition on self- service gasoline stations may add as much as 5
cents to the cost of a gallon of gasoline.
Finally, local supply and demand conditions affect both California?s and
Oregon?s gasoline prices. For example, our analysis of California gasoline
prices showed that when CARB gasoline was introduced in 1996, the difference
in gasoline prices between San Francisco and Los Angeles changed. Both
wholesale and retail gasoline prices increased more in San Francisco than in
Los Angeles- wholesale prices increased by about 2 cents a gallon and retail
prices increased about 11 cents. There was no consensus among experts and
industry officials as to why prices increased more in San Francisco. One
explanation offered was that higher refining costs are easier to pass on to
consumers in San Francisco because of its local supply and demand
conditions. Another was that the new fuel requirements might have tightened
the gasoline supply and demand balance more in the northern part of the
state than in the southern part.
Similarly, local conditions have affected Oregon gasoline prices. For
example, in June 1999, an explosion in the pipeline connecting Washington
refineries with Oregon consumers caused an immediate reduction in the supply
of gasoline to Portland and
6 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. 7 While not included above, state excise taxes and/ or
other local charges may apply and these would also
be expected to have an upward impact on gasoline prices. For example, in
addition to California?s state gasoline tax of 18 cents per gallon, the
state?s sales tax of 7.25 percent would, at current gasoline prices, also
add about 12 cents to the price of a gallon of gasoline.
GAO- 01- 608T Retail Gasoline Prices 8 Eugene. 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 compared with Seattle and Los Angeles. This supply
disruption coincided with a period of unanticipated refinery outages in
northern California, which exacerbated the region?s supply shortfall, making
it more costly for Oregon to replace the gasoline supply lost by the damaged
pipeline.
Lifting Export Ban Increased Crude Oil Prices, but Had No Observable Effect
on Gasoline Prices
We found that lifting the export ban on ANS crude oil in 1995 increased the
price of crude oil on the West Coast. 8 However, our analysis found no
evidence that lifting the export ban caused increases in the prices of three
petroleum products used by consumers- gasoline, diesel, and jet fuel.
Lifting the export ban raised the relative prices of Alaskan North Slope
(ANS) and comparable California crude oils between $0.98 and $1. 30 higher
per barrel than they would have been had the ban not been lifted. The higher
ANS price provided North Slope producers an incentive to produce more oil
and therefore should lead to greater total oil production in Alaska than
would have occurred had the export ban remained in place. Lifting the ban
also increased the efficiency of the West Coast crude oil market by lowering
the total shipping costs associated with transporting ANS to its final
destination. The magnitude of reduced shipping costs was at least $65
million in the first 2- 1/ 2 years after the removal of the export ban.
These impacts measured by GAO were consistent with predictions of prior
studies by the Department of Energy and private sector analysts. 9
8 See Alaskan Crude Oil Exports (GAO/ T- RCED- 90- 59, Apr. 5, 1990) 9
Exporting Alaskan North Slope Crude Oil: Benefits and Costs, U. S.
Department of Energy (June 1994), and Samuel Van Vactor, ?Time to End the
Alaskan Oil Export Ban,? Policy Analysis 227 (May 18, 1995).
GAO- 01- 608T Retail Gasoline Prices 9 Aside from higher crude oil costs for
refiners buying ANS oil, we observed no increases
in consumer prices on the West Coast during the period that we analyzed.
According to GAO?s statistical and economic analyses, the prices of
gasoline, diesel, and jet fuel on the West Coast did not significantly
change as a result of lifting the export ban. Moreover, the consumer groups
and industry experts GAO contacted were unaware of any adverse effects on
consumers from lifting the ban. GAO?s findings were consistent with the
expectations of some industry analysts. Several industry analysts believed
that consumer prices would be unaffected because these prices were
determined by the costs of foreign imported crude oil and final products and
imported products were already selling at their world prices on the West
Coast, rather than the artificially low ANS price.
- - - Mr. Chairman, this concludes my prepared remarks. We would be pleased
to answer any questions you or any Member of the Subcommittee may have.
(360069)
*** End of document. ***