Energy Security and Policy:

Analysis of the Pricing of Crude Oil and Petroleum Products

RCED-93-17: Published: Mar 19, 1993. Publicly Released: Mar 29, 1993.

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Pursuant to congressional requests, GAO analyzed the pricing of crude oil and petroleum products under normal market conditions and during market shocks.

GAO found that: (1) although the Organization of Petroleum Exporting Countries (OPEC) no longer sets prices for crude oil, members' decisions about the supply of oil can still have a significant impact on world oil prices; (2) crude oil is a scarce and valuable resource that can only be replaced at a higher cost once current reserves are depleted; (3) there are few substitutes for petroleum products, and crude oil prices reflect the lack of substitutes; (4) the demand and prices for crude oil may increase in the winter because of the high demand for heating oil; (5) the wholesale prices of gasoline, home heating oil, and jet fuel are largely based on crude oil prices; (6) retail prices for petroleum products do not necessarily react to the daily fluctuations that are common in crude oil and wholesale prices; (7) prices for crude oil and petroleum products in inventories during a market shock will rapidly adjust to reflect their current market value, even if those products are produced or acquired at a lower or higher cost; (8) during market shocks, differences in the demand for petroleum products can lead to differences in how wholesale prices increase and decrease; (9) retail gasoline prices decrease more slowly during market shocks compared to crude oil prices; (10) the Strategic Petroleum Reserve released oil during the Persian Gulf crisis to relieve severe economic problems directly related to the increase in crude oil prices; and (11) the decline in crude oil prices cannot be solely attributed to the drawdown of the reserve, since the drawdown coincided with the early success of the allied air force against Iraq and expectation that the Persian Gulf crisis would soon end.

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