GAO Reports: Issues Related to Gasoline Prices

This page lists the most recent publications related to fluctuations in gasoline prices. It includes publications issued since 2000.

http://www.gao.gov/docsearch/featured/gasprices.html Sun, 22 Nov 2009 09:59:42 -0500 GAO http://www.gao.gov/images/title_object.jpg GAO logo http://www.gao.gov/ Feed provided by GAO. Click to visit. Biofuels: Potential Effects and Challenges of Required Increases in Production and Use, August 25, 2009 http://www.gao.gov/new.items/d09446.pdf In December 2007, the Congress expanded the renewable fuel standard (RFS), which requires rising use of ethanol and other biofuels, from 9 billion gallons in 2008 to 36 billion gallons in 2022. To meet the RFS, the Departments of Agriculture (USDA) and Energy (DOE) are developing advanced biofuels that use cellulosic feedstocks, such as corn stover and switchgrass. The Environmental Protection Agency (EPA) administers the RFS. This report examines, among other things, (1) the effects of increased biofuels production on U.S. agriculture, environment, and greenhouse gas emissions; (2) federal support for domestic biofuels production; and (3) key challenges in meeting the RFS. GAO extensively reviewed scientific studies, interviewed experts and agency officials, and visited five DOE and USDA laboratories. To meet the RFS, domestic biofuels production must increase significantly, with uncertain effects for agriculture and the environment. For agriculture, many experts said that biofuels production has contributed to crop price increases as well as increases in prices of livestock and poultry feed and, to a lesser extent, food. They believe that this trend may continue as the RFS expands. For the environment, many experts believe that increased biofuels production could impair water quality--by increasing fertilizer runoff and soil erosion--and also reduce water availability, degrade air and soil quality, and adversely affect wildlife habitat; however, the extent of these effects is uncertain and could be mitigated by such factors as improved crop yields, feedstock selection, use of conservation techniques, and improvements in biorefinery processing. Except for lifecycle greenhouse gas emissions, EPA is currently not required by statute to assess environmental effects to determine what biofuels are eligible for inclusion in the RFS. Many researchers told GAO there is general agreement on the approach for measuring the direct effects of biofuels production on lifecycle greenhouse gas emissions but disagreement about how to estimate the indirect effects on global land use change, which EPA is required to assess in determining RFS compliance. In particular, researchers disagree about what nonagricultural lands will be converted to sustain world food production to replace land used to grow biofuels crops. The Volumetric Ethanol Excise Tax Credit (VEETC), a 45-cent per gallon federal tax credit, was established to support the domestic ethanol industry. Unless crude oil prices rise significantly, the VEETC is not expected to stimulate ethanol consumption beyond the level the RFS specifies this year. The VEETC also may no longer be needed to stimulate conventional corn ethanol production because the domestic industry has matured, its processing is well understood, and its capacity is already near the effective RFS limit of 15 billion gallons per year for conventional ethanol. A separate $1.01 tax credit is available for producing advanced cellulosic biofuels. The nation faces several key challenges in expanding biofuels production to achieve the RFS's 36-billion-gallon requirement in 2022. For example, farmers face risks in transitioning to cellulosic biofuels production and are uncertain whether growing switchgrass will eventually be profitable. USDA's new Biomass Crop Assistance Program may help mitigate these risks by providing payments to farmers through multi-year contracts. In addition, U.S. ethanol use is approaching the so-called blend wall--the amount of ethanol that most U.S. vehicles can use, given EPA's 10 percent limit on the ethanol content in gasoline. Research has been initiated on the long-term effects of using 15 percent or 20 percent ethanol blends, but expanding the use of 85 percent ethanol blends will require substantial new investment because ethanol is too corrosive for the petroleum distribution infrastructure and most vehicles. Alternatively, further R&D on biorefinery processing technologies might lead to price-competitive biofuels that are compatible with the existing petroleum distribution and storage infrastructure and the current fleet of U.S. vehicles. Tue, 25 Aug 2009 00:00:00 -0400 Energy Markets: Refinery Outages Can Have Varying Gasoline Price Impacts, but Gaps in Federal Data Limit Understanding of Impacts, July 30, 2009 http://www.gao.gov/new.items/d09700.pdf In 2008, GAO reported that, with the exception of the period following Hurricanes Katrina and Rita, refinery outages in the United States did not show discernible trends in reduced production capacity, frequency, and location from 2002 through 2007. Some outages are planned to perform routine maintenance or upgrades, while unplanned outages occur as a result of equipment failure or other unforeseen problems. GAO was asked to (1) evaluate the effect of refinery outages on wholesale gasoline prices and (2) identify gaps in federal data needed for this and similar analyses. GAO selected refinery outages from 2002 through September 2008 that were at least among the largest 60 percent in terms of lost production capacity in their market region and lasted at least 3 days. GAO developed an econometric model and tested a variety of assumptions using public and private data. While some unplanned refinery outages, such as those caused by accidents or weather, have had large price effects, GAO found that in general, refinery outages were associated with small increases in gasoline prices. Large price increases occurred when there were large outages; for example, in the aftermath of hurricanes Katrina and Rita. However, we found that such large price increases were rare, and on average, outages were associated with small price increases. For example, GAO found that planned outages generally did not influence prices significantly--likely reflecting refiners' build-up in inventories to meet demand needs prior to shutting down--while for unplanned outages, average price effects ranged from less than one cent to several cents-per-gallon. Key factors influenced the size of price increases associated with unplanned outages. One such factor was whether the gasoline was branded--gasoline sold at retail under a specific refiner's trademark--or unbranded--gasoline sold at retail by independent sellers. Our analysis showed that during an unplanned outage, branded wholesale gasoline prices had smaller price increases than unbranded, suggesting that refiners give preference to their own branded customers during outages, while unbranded dealers must seek out supplies in a more constrained market. Another factor that affected the size of price increases associated with outages was the type of gasoline being sold. Some special blends of gasoline developed to reduce emissions of air pollutants exhibited larger average price increases than more widely used and available conventional gasoline, suggesting that these special gasoline blends may have more constrained supply options in the event of an outage. Existing federal data contain gaps that have limited GAO's and Department of Transportation's (DOT) analyses of petroleum markets and related issues. For example: (1) Data linking refiners to the markets they serve were inadequate for GAO to fully evaluate the price effects of unplanned outages on individual cities, limiting the analysis to broader average effects. (2) Pipeline flow and petroleum product storage data were inadequate for DOT to fully address a January 2009 Congressionally mandated study to identify potential pipeline infrastructure constraints, and limited GAO's ability to identify re-supply options for cities experiencing outage disruptions. Federal agencies generally have continued to update their data collection surveys to meet their respective needs and emerging changes in the energy sector. However, in some cases the individual agency efforts have resulted in the collection of information that does not necessarily meet the data needs of other agencies or analysts who monitor petroleum product markets. Thu, 30 Jul 2009 00:00:00 -0400 Energy Markets: Estimates of the Effects of Mergers and Market Concentration on Wholesale Gasoline Prices, June 12, 2009 http://www.gao.gov/new.items/d09659.pdf In 2008, GAO reported that 1,088 oil industry mergers occurred between 2000 and 2007. Given the potential for price effects, GAO recommended that the Federal Trade Commission (FTC), the agency with the authority to maintain petroleum industry competition, undertake more regular retrospective reviews of past petroleum industry mergers, and FTC said it would consider this recommendation. GAO was asked to conduct such a review of its own to determine how mergers and market concentration--a measure of the number and market shares of firms in a market--affected wholesale gasoline prices since 2000. GAO examined the effects of mergers and market concentration using an economic model that ruled out the effects of many other factors. GAO consulted with a number of experts and used both public and private data in developing the model. GAO tested the model under a variety of assumptions to address some of its limitations. GAO also interviewed petroleum market participants. GAO examined seven mergers that occurred since 2000--ranging in value and geography and for which there was available gasoline pricing data-and found three that were associated with statistically significant increases or decreases in wholesale gasoline prices. Specifically, GAO found that the mergers of Valero Energy with Ultramar Diamond Shamrock and Valero Energy with Premcor, which both involved the acquisition of refineries, were associated with estimated average price increases of about 1 cent per gallon each. In addition, GAO found that the merger of Phillips Petroleum with Conoco, which primarily involved the acquisition of oil exploration and production assets, was associated with an estimated average decrease in wholesale gasoline prices across cities affected by the merger of nearly 2 cents per gallon. This analysis provides an indicator of the impact that petroleum industry mergers can have on wholesale gasoline prices. Additional analysis would be needed to explain the price effects that GAO estimated. GAO used two separate measures of market concentration, one which measured the number of sellers at wholesale gasoline terminals and another which measured the market share of refiners supplying gasoline to those sellers, and found that less concentrated markets were statistically significantly associated with lower gasoline prices. For example, for wholesale terminals with more sellers--i.e., terminals that were less concentrated--GAO estimated that prices were about 8 cents per gallon lower at terminals with 14 sellers than at terminals that had only 9 sellers. This result is consistent with the idea that markets with more sellers are likely to be more competitive, resulting in lower prices. Using the second measure of concentration, GAO similarly found a statistically significant association between prices and the level of refinery concentration, with less concentrated groups of refineries associated with lower prices. Fri, 12 Jun 2009 00:00:00 -0400 Federal Energy and Fleet Management: Plug-in Vehicles Offer Potential Benefits, but High Costs and Limited Information Could Hinder Integration into the Federal Fleet, June 9, 2009 http://www.gao.gov/new.items/d09493.pdf The U.S. transportation sector relies almost exclusively on oil; as a result, it causes about a third of the nation's greenhouse gas emissions. Advanced technology vehicles powered by alternative fuels, such as electricity and ethanol, are one way to reduce oil consumption. The federal government set a goal for federal agencies to use plug-in hybrid electric vehicles--vehicles that run on both gasoline and batteries charged by connecting a plug into an electric power source--as they become available at a reasonable cost. This goal is on top of other requirements agencies must meet for conserving energy. In response to a request, GAO examined the (1) potential benefits of plug-ins, (2) factors affecting the availability of plug-ins, and (3) challenges to incorporating plug-ins into the federal fleet. GAO reviewed literature on plug-ins, federal legislation, and agency policies and interviewed federal officials, experts, and industry stakeholders, including auto and battery manufacturers. Increasing the use of plug-ins could result in environmental and other benefits, but realizing these benefits depends on several factors. Because plug-ins are powered at least in part by electricity, they could significantly reduce oil consumption and associated greenhouse gas emissions. For plug-ins to realize their full potential, electricity would need to be generated from lower-emission fuels such as nuclear and renewable energy rather than the fossil fuels--coal and natural gas--used most often to generate electricity today. However, new nuclear plants and renewable energy sources can be controversial and expensive. In addition, research suggests that for plug-ins to be cost-effective relative to gasoline vehicles the price of batteries must come down significantly and gasoline prices must be high relative to electricity. Auto manufacturers plan to introduce a range of plug-in models over the next 6 years, but several factors could delay widespread availability and affect the extent to which consumers are willing to purchase plug-ins. For example, limited battery manufacturing, relatively low gasoline prices, and declining vehicle sales could delay availability and discourage consumers. Other factors may emerge over the longer term if the use of plug-ins increases, including managing the impact on the electrical grid (the network linking the generation, transmission, and distribution of electricity) and increasing consumer access to public charging infrastructure needed to charge the vehicles. The federal government has supported plug-in-related research and initiated new programs to encourage manufacturing. Experts also identified options for providing additional federal support. To incorporate plug-ins into the federal fleet, agencies will face challenges related to cost, availability, planning, and federal requirements. Plug-ins are expected to have high upfront costs when they are first introduced. However, they could become comparable to gasoline vehicles over the life of ownership if certain factors change, such as a decrease in the cost of batteries and an increase in gasoline prices. Agencies vary in the extent to which they use life-cycle costing when evaluating which vehicle to purchase. Agencies also may find that plug-ins are not available to them, especially when the vehicles are initially introduced because the number available to the government may be limited. In addition, agencies have not made plans to incorporate plug-ins due to uncertainties about vehicle cost, performance, and infrastructure needs. Finally, agencies must meet a number of requirements covering energy use and vehicle acquisition--such as acquiring alternative fuel vehicles and reducing facility energy and petroleum consumption--but these sometimes conflict with one another. For example, plugging vehicles into federal facilities could reduce petroleum consumption but increase facility energy use. The federal government has not yet provided information to agencies on how to set priorities for these requirements or leverage different types of vehicles to do so. Without such information, agencies face challenges in making decisions about acquiring plug-ins that will meet the requirements, as well as maximize plug-ins' potential benefits and minimize costs. Tue, 09 Jun 2009 00:00:00 -0400 Strategic Petroleum Reserve: Issues Regarding the Inclusion of Refined Petroleum Products as Part of the Strategic Petroleum Reserve, May 12, 2009 http://www.gao.gov/new.items/d09695t.pdf The possibility of storing refined petroleum products as part of the Strategic Petroleum Reserve (SPR) has been contemplated since the SPR was created in 1975. The SPR, which currently holds about 700 million barrels of crude oil, was created to help insulate the U.S. economy from oil supply disruptions. However, the SPR does not contain refined products such as gasoline, diesel fuel, or jet fuel. The Energy Policy Act of 2005 directed the Department of Energy (DOE) to increase the SPR's capacity from 727 million barrels to 1 billion barrels, which it plans to do by 2018. With the possibility of including refined products as part of the expansion of the SPR, this testimony discusses (1) some of the arguments for and against including refined products in the SPR and (2) lessons learned from the management of the existing crude oil SPR that may be applicable to refined products. To address these issues, GAO relied on its 2006 report on the SPR (GAO-06-872), 2007 report on the globalization of petroleum products (GAO-08-14), and two 2008 testimonies on the cost-effectiveness of filling the SPR (GAO-08-512T and GAO-08-726T). GAO also reviewed prior DOE and International Energy Agency studies on refined product reserves. Since the SPR, the largest emergency crude oil reserve in the world, was created in 1975 a number of arguments have been made for and against including refined petroleum products. Some of the arguments for including refined products in the SPR are: (1) the United States' increased reliance on imports and resulting exposure to supply disruptions or unexpected increases in demand elsewhere in the world, (2) possible reduced refinery capacity during weather related supply disruptions, (3) time needed for petroleum product imports to reach all regions of the United States in case of an emergency, and (4) port capacity bottlenecks in the United States, which limit the amount of petroleum products that can be imported quickly during emergencies. For example, the damage caused by Hurricane Katrina demonstrated that the concentration of refineries on the Gulf Coast and resulting damage to pipelines left the United States to rely on imports of refined product from Europe. Consequently, regions experienced a shortage of gasoline and prices rose. Conversely, some of the arguments against including refined products in the SPR are: (1) the surplus of refined products in Europe, (2) the high storage costs of refined products, (3) the use of a variety of different type of blends of refined products--"boutique" fuels--in the United States, and (4) policy alternatives that may diminish reliance on oil. For example, Europe has a surplus of gasoline products because of a shift to diesel engines, which experts say will continue for the foreseeable future. Europe's surplus of gasoline is available to the United States in emergencies and provided deliveries following Hurricanes Katrina and Rita in 2005. The following three lessons learned from the management of the existing SPR may have some applicability in dealing with refined products. (1) Select a cost-effective mix of products. In 2006, GAO recommended that DOE include at least 10 percent heavy crude oil in the SPR. If DOE bought 100 million barrels of heavy crude oil during its expansion of the SPR it could save over $1 billion in nominal terms, assuming a price differential of $12 between the price of light and heavy crude, the average differential from 2003 through 2007. Similarly, if directed to include refined products as part of the SPR, DOE will need to determine the most cost-effective mix of products. (2) Consider using a dollar-cost-averaging acquisition approach. Also in 2006, GAO recommended that DOE consider acquiring a steady dollar value--rather than a steady volume--of oil over time when filling the SPR. This would allow DOE to acquire more oil when prices are low and less when prices are high. GAO expects that a dollar-cost-averaging acquisition method would also provide benefits when acquiring refined products. (3) Maximize cost-effective storage options. According to DOE, below ground salt formations offer the lowest cost approach for storing crude oil for long periods of time--$3.50 per barrel in capital cost versus $15 to $18 per barrel for above ground storage tanks. Similarly, DOE will need to explore the most cost-effective storage options for refined products. Tue, 12 May 2009 00:00:00 -0400 Auto Industry: A Framework for Considering Federal Financial Assistance, December 5, 2008 http://www.gao.gov/new.items/d09247t.pdf The current economic downturn has brought significant financial stress to the auto manufacturing industry. Recent deteriorating financial, real estate, and labor markets have reduced consumer confidence and available credit, and automobile purchases have declined. While auto manufacturers broadly have experienced declining sales in 2008 as the economy has worsened, sales of the "Big 3" (General Motors, Chrysler, and Ford) have also declined relative to those of some other auto manufacturers in recent years because higher gasoline prices have particularly hurt sales of sport utility vehicles. In addition to causing potential job losses at auto manufacturers, failure of the domestic auto industry would likely adversely affect other sectors. Officials from the Big 3 have requested, and Congress is considering, immediate federal financial assistance. This testimony discusses principles that can serve as a framework for considering the desirability, nature, scope, and conditions of federal financial assistance. Should Congress decide to provide financial assistance, we also discuss how these principles could be applied in these circumstances. The testimony is based on GAO's extensive body of work on previous federal rescue efforts that dates back to the 1970s. From our previous work on federal financial assistance to large firms and municipalities, we have identified three fundamental principles that can serve as a framework for considering future assistance. These principles are (1) identifying and defining the problem, (2) determining the national interests and setting clear goals and objectives that address the problem, and (3) protecting the government's interests. First, problems confronting the industry must be clearly defined--separating out those that require an immediate response from those structural challenges that will take more time to resolve. Second, Congress should determine whether the national interest will be best served through a legislative solution, or whether market forces and established legal procedures, such as bankruptcy, should be allowed to take their course. Should Congress decide that federal financial assistance is warranted, it is important that Congress establish clear objectives and goals for this assistance. Third, given the significant financial risk the federal government may assume, the structure Congress sets up to administer any assistance should provide for appropriate mechanisms, such as concessions by all parties, controls over management, compensation for risk, and a strong independent board, to protect taxpayers from excessive or unnecessary risks. These principles could help the Congress in deciding whether to offer financial assistance to the domestic auto manufacturers. If Congress determines that a legislative solution is in the national interest, a two-pronged approach could be appropriate in these circumstances. Specifically, Congress could 1) authorize immediate, but temporary, financial assistance to the auto manufacturing industry and 2) concurrently establish a board to approve, disburse, and oversee the use of these initial funds and provide any additional federal funds and continued oversight. This board could also oversee any structural reforms of the companies. Among other responsibilities, Congress could give the board authority to establish and implement eligibility criteria for potential borrowers and to implement procedures and controls in order to protect the government's interests. Fri, 05 Dec 2008 00:00:00 -0500 Auto Industry: A Framework for Considering Federal Financial Assistance, December 4, 2008 http://www.gao.gov/new.items/d09242t.pdf The current economic downturn has brought significant financial stress to the auto manufacturing industry. Recent deteriorating financial, real estate, and labor markets have reduced consumer confidence and available credit, and automobile purchases have declined. While auto manufacturers broadly have experienced declining sales in 2008 as the economy has worsened, sales of the "Big 3" (General Motors, Chrysler, and Ford) have also declined relative to those of some other auto manufacturers in recent years because higher gasoline prices have particularly hurt sales of sport utility vehicles. In addition to causing potential job losses at auto manufacturers, failure of the domestic auto industry would likely adversely affect other sectors. Officials from the Big 3 have requested, and Congress is considering, immediate federal financial assistance. This testimony discusses principles that can serve as a framework for considering the desirability, nature, scope, and conditions of federal financial assistance. Should Congress decide to provide financial assistance, we also discuss how these principles could be applied in these circumstances. The testimony is based on GAO's extensive body of work on previous federal rescue efforts that dates back to the 1970s. From our previous work on federal financial assistance to large firms and municipalities, we have identified three fundamental principles that can serve as a framework for considering future assistance. These principles are (1) identifying and defining the problem, (2) determining the national interests and setting clear goals and objectives that address the problem, and (3) protecting the government's interests. First, problems confronting the industry must be clearly defined--separating out those that require an immediate response from those structural challenges that will take more time to resolve. Second, Congress should determine whether the national interest will be best served through a legislative solution, or whether market forces and established legal procedures, such as bankruptcy, should be allowed to take their course. Should Congress decide that federal financial assistance is warranted, it is important that Congress establish clear objectives and goals for this assistance. Third, given the significant financial risk the federal government may assume, the structure Congress sets up to administer any assistance should provide for appropriate mechanisms, such as concessions by all parties, controls over management, compensation for risk, and a strong independent board, to protect taxpayers from excessive or unnecessary risks. These principles could help the Congress in deciding whether to offer financial assistance to the domestic auto manufacturers. If Congress determines that a legislative solution is in the national interest, a two-pronged approach could be appropriate in these circumstances. Specifically, Congress could 1) authorize immediate, but temporary, financial assistance to the auto manufacturing industry and 2) concurrently establish a board to approve, disburse, and oversee the use of these initial funds and provide any additional federal funds and continued oversight. This board could also oversee any structural reforms of the companies. Among other responsibilities, Congress could give the board authority to establish and implement eligibility criteria for potential borrowers and to implement procedures and controls in order to protect the government's interests. Thu, 04 Dec 2008 00:00:00 -0500 Energy Efficiency: Potential Fuel Savings Generated by a National Speed Limit Would Be Influenced by Many Other Factors, November 7, 2008 http://www.gao.gov/new.items/d09153r.pdf Gasoline prices are volatile and have increased greatly over the last several years, before dropping again recently. The national average of regular grade retail gasoline prices increased from about $2.24 the week of January 2, 2006, to a peak of $4.11 the week of July 14, 2008, an increase of almost 84 percent, before dropping to about $2.40 the week of November 3, 2008. High fuel prices have focused attention on conservation. Congress previously used a national speed limit as an approach to conserve fuel when, in 1974, it provided for a national 55 mile per hour (mph) speed limit to reduce gasoline consumption in response to the 1973 Arab oil embargo. The law prohibited federal funding of certain highway projects in any state with a maximum speed limit in excess of 55 mph. In 1987, Congress allowed states to raise the maximum speed limit to 65 mph on rural interstate routes. In 1995, the 55 mph speed limit was repealed. Since then, states have been free to set speed limits without the loss of federal highway funds. Congress expressed interest in obtaining information on using a national speed limit to reduce fuel consumption. In response to the request, we reviewed existing literature and consulted knowledgeable stakeholders on the following: (1) What is the relationship between speed and the fuel economy of vehicles? (2) How might reducing the speed limit affect fuel use? For a vehicle traveling at high speed, reducing its speed increases fuel economy. In general, at speeds over approximately 35 to 45 mph, if a vehicle reduces its speed by 5 mph, its fuel economy can increase by about 5 to 10 percent, because air resistance, or drag, increases exponentially as a vehicle goes faster. Conversely, air resistance diminishes more rapidly as a vehicle slows down, thus increasing its fuel economy. According to existing literature and knowledgeable stakeholders, there is no single speed that optimizes fuel economy for all vehicles. Optimal speed for fuel economy for individual vehicles ranges widely, but is generally between 30 and 60 mph, depending on a vehicle's characteristics. However, a vehicle's fuel economy also depends on other factors besides air resistance. Factors that enhance fuel economy include engine efficiency enhancements (e.g., fuel injection), electronic and computer controls, more efficient transmissions, and hybrid technology. However, other factors decrease fuel economy. In general, over the last 2 decades, fuel economy gains resulting from advances in automotive technologies have largely been offset by increases in vehicle weight, performance, and accessory loads. Specifically, vehicles are heavier than in the past, because they are larger and include more technologies. Further, increased accessory loads, such as air conditioning and electronics, have also reduced fuel economy. According to EPA, from 1987 through 2004, on a fleetwide basis, technology innovation was utilized exclusively to support market-driven attributes other than fuel economy, such as performance. Beginning in 2005, however, according to EPA's analysis of fuel economy trends, technology has been used to increase both performance and fuel economy, while keeping vehicle weight relatively constant. Lowering speed limits can potentially reduce total fuel consumption. According to literature we reviewed examining the impact of the national speed limit enacted in 1974, the estimated fuel savings resulting from the 55 mph national speed limit ranged from 0.2 to 3 percent of annual gasoline consumption. According to DOE's 2008 estimate, a national speed limit of 55 mph could yield possible savings of 175,000 to 275,000 barrels of oil per day. This range is consistent with estimates of the impact of the past national speed limit. According to the Energy Information Administration, total U.S. consumption of petroleum for 2007 was about 21 million barrels of oil per day. However, other factors, including drivers' compliance with a reduced speed limit, would affect the actual impact of a lower speed limit on the amount of fuel savings. Reducing the speed limit does not necessarily mean that drivers will comply. Moreover, a national speed limit would not affect many of the miles driven in the United States, such as those in urban areas, where most vehicles are already traveling at lower speeds due to lower speed limits or congestion. Other external conditions also affect fuel economy, such as road conditions, including whether a road is steep or flat, and weather conditions, including wind speed and direction. Finally, other aspects of driver behavior may also affect fuel consumption. The speed limit is only one tool among many for potentially conserving fuel. Certain realities, such as congestion on our nation's roads, how people drive and maintain their vehicles, and emerging technologies, are other potential considerations as the nation looks for options to conserve fuel. Fri, 07 Nov 2008 00:00:00 -0500 Energy Markets: Refinery Outages Can Impact Petroleum Product Prices, but No Federal Requirements to Report Outages Exist, October 7, 2008 http://www.gao.gov/new.items/d0987.pdf In recent years, global demand for petroleum products such as gasoline and diesel fuel has grown more quickly than the capacity to produce them, creating a tight market. U.S. refiners have been running near capacity, particularly during peak summer demand. In such conditions, unexpected refinery outages can result in price increases that adversely affect consumers. GAO was asked to evaluate (1) the trends in U.S. refinery outages over the last 5 years, in terms of reduced production capacity, frequency, and geographic location, and (2) the federal requirements for reporting outages at U.S. refineries. To evaluate these objectives, GAO obtained and analyzed Energy Information Administration (EIA) and commercial data, and obtained and analyzed federal legislation and policies, and interviewed federal agency, academic, and industry trade group officials. With the exception of impacts beginning in 2005 related to Hurricanes Katrina and Rita, GAO's analyses of commercial data on unplanned and planned refinery outages across the United States generally do not show discernible trends in reduced production capacity or in the frequency and location of outages from 2002 through 2007. GAO's analyses of commercial data from 2002 through 2007 indicate that the hurricanes resulted in two patterns of outages for refiners, depending on whether they were directly affected, specifically: (1) certain refiners that were forced to shut down due to the hurricanes opted to upgrade equipment and perform what maintenance they could during their unplanned outages, thus extending the length of time until the next round of planned outages for maintenance at these refineries; and (2) sometimes refiners not directly effected by the hurricanes deferred planned outages to continue to supply the market, thus partially increasing the need for planned outages in subsequent years as these refiners rescheduled their deferred outages. GAO's regional analyses showed few apparent trends, but some variation in reduced production capacity due to outages across regions, with the Gulf Coast region refineries experiencing a slightly higher rate of outages and related reductions in capacity than refineries in other regions, in part as a result of recurrent extreme weather events. At present, there are no federal requirements for refiners to report planned or unplanned refinery outages, and available data may not allow EIA to adequately ascertain the effects of some outages on prices of petroleum products. EIA collects data on a monthly refinery survey and has used this data to estimate outages. However, GAO found estimating outages using this method has a number of limitations. Among other things, it does not identify whether the outage was planned or unplanned, and it is important to make this distinction because unplanned outages are likely to have a different impact on gasoline prices than planned outages. EIA is independently exploring whether to collect data directly on planned and unplanned outages from refiners, but has not established a time frame to determine if it will collect such data. In addition, in response to the Energy Independence and Security Act of 2007, EIA is preparing to enhance its monitoring of planned outages. EIA officials told GAO they plan to primarily rely on commercial data to perform the mandated semi-annual analyses. However, even if EIA collects or acquires reliable data on refinery outages, the agency lacks other data--such as data on special fuel blends--that could be important for the Department of Energy in meeting its obligations to conduct periodic analyses of the potential impacts of refinery outages on prices of petroleum products. While a full cost/benefit analysis of the merits of collecting additional data was outside the scope of this review, EIA has the authority and expertise to determine and suggest what other information for inclusion on the monthly refiner survey could be helpful in adequately evaluating the potential effects of both planned and unplanned outages on prices of petroleum products. Tue, 07 Oct 2008 00:00:00 -0400 Energy Markets: Analysis of More Past Mergers Could Enhance Federal Trade Commission's Efforts to Maintain Competition in the Petroleum Industry, September 25, 2008 http://www.gao.gov/new.items/d081082.pdf During the late 1990s, many petroleum companies merged to stay profitable while crude oil prices were low, and in recent years mergers have continued. Congress and others have concerns about the impact mergers might be having on competition in U.S. petroleum markets. The Federal Trade Commission (FTC) has the authority to maintain competition in the petroleum industry and reviews proposed mergers to determine whether they are likely to diminish competition or increase prices, among other things. GAO was asked to examine (1) mergers in the U.S. petroleum industry and changes in market concentration since 2000 and (2) the steps FTC uses to maintain competition in the U.S. petroleum industry, and the roles other federal and state agencies play in monitoring petroleum industry markets. In conducting this study, GAO worked with petroleum industry experts to delineate regional markets and to develop estimates of refinery gasoline production capacity in order to calculate market concentration. GAO used public and private data as well as interviews for its analyses. More than 1,000 U.S. mergers occurred in the petroleum industry between 2000 and 2007, mostly between firms involved in crude oil exploration and production. According to experts and industry officials, mergers in this segment were generally driven by the challenges associated with producing oil in extreme physical environments, such as deepwater, as well as increasing concerns about competition with national oil companies and access to oil reserves in regions of relative political instability. Industry officials from the segments of the petroleum industry that transport, refine, and sell petroleum products reported that mergers were generally driven by the desire for greater efficiency and cost savings. Despite these gains, mergers have the potential to enhance a firm's ability to exercise "market power," which potentially allows it to raise prices without being undercut by other firms. GAO measured market concentration with an index that FTC uses, where market regions with few, large firms are considered to be highly concentrated and have a greater potential for market power. Conversely, market regions with many smaller firms are considered to have low or moderate concentration and generally have less potential for firms to exercise market power. GAO found that market concentration changed little but varied by industry segment and market region. GAO found that market concentration among firms involved in crude oil exploration and production was low and stable between 2000 and 2006, while concentration among refiners was generally moderate across those years. Regarding wholesale gasoline suppliers on a state-by-state basis, 35 states were moderately concentrated in their number of wholesale gasoline suppliers in 2007, and this number was fairly stable from 2000. GAO found that the following 8 states had highly concentrated wholesale gasoline supplier markets in 2007: Alaska, Hawaii, Indiana, Kentucky, Michigan, North Dakota, Ohio, and Pennsylvania. While FTC reviews evidence and considers a number of competitive factors to predict a merger's potential effects on competition in its analyses of proposed mergers, it does not regularly look back at past merger decisions to assess the actual effects of the merger on competition or prices after the merger has been completed. Although these reviews can be resource intensive, experts, industry participants, and FTC agree that regular retrospective reviews would allow the agency to better inform future merger reviews and to better measure its success in maintaining competition. In addition to FTC's efforts in reviewing proposed mergers, other federal agencies, including FTC, and some states also monitor aspects of petroleum industry markets. For example, the Federal Energy Regulatory Commission monitors petroleum product pipeline markets and regulates pipeline rates accordingly. Thu, 25 Sep 2008 00:00:00 -0400 Motor Fuels: Stakeholder Views on Compensating for the Effects of Gasoline Temperature on Volume at the Pump, September 25, 2008 http://www.gao.gov/new.items/d081114.pdf The volume, but not the energy content, of hydrocarbon fuels, such as gasoline and diesel, varies in response to changes in temperature. Thus, because of expansion, the energy content per gallon of 90 degree fuel is less than that of 60 degree fuel. States and localities adopt and enforce weights and measures regulations, often using the model regulatory standards published by the National Institute of Standards and Technology (NIST). Although technology now exists to compensate for the effects of temperature on gas volume, the costs of doing so at the retail level have become the subject of much debate among weights and measures officials, consumer groups, and representatives of the petroleum and fuel marketing industries. GAO was asked to provide information on (1) the views of U.S. stakeholders on the costs to implement automatic temperature compensation, (2) the views of U.S. stakeholders on who would bear these costs, and (3) the reasons some state and national governments have adopted or rejected automatic temperature compensation. To do this work, GAO reviewed NIST and other documents and congressional testimony; interviewed stakeholders from 3 federal agencies, 17 states, and 15 groups representing a variety of interests, including consumers, truck drivers, and the oil and gas industry; and interviewed officials in 5 other nations. Various stakeholders and officials provided technical and other comments, which were incorporated in the report as appropriate The costs to implement automatic temperature compensation are unclear. Most stakeholders said that implementing automatic temperature compensation for retail sales would involve the cost to purchase, install, and inspect new equipment on pumps, as well as costs to educate consumers about the change. Some stakeholders said the costs to adopt automatic temperature compensation ranged from $1,300 to $3,000 per pump, but none had estimated the total costs nationwide, in part because complete data are not available. Estimates of the cost to inspect the new equipment varied. Officials in a small number of states said inspection times would increase by 20 to 50 percent, while officials in three other states said the costs would not be significant. No stakeholders had developed estimates of the costs to educate consumers. Stakeholders differ on whether retailers, consumers, or both would ultimately bear the costs of implementing automatic temperature compensation at the retail level. Some stakeholders, including state officials and industry representatives, said that the costs would be passed on to consumers through higher prices for fuel or other goods sold at retail stations. Others, such as consumer groups, said that retailers and consumers would share the costs and benefits. That is, some retailers could use funds they receive from major oil companies for remodeling to pay for the equipment. These stakeholders also said the benefits include consistent energy content for consumers and improved inventory management for retailers. Stakeholder views were largely based on professional judgment and general economic theory rather than on studies or other data, and most stakeholders said that a comprehensive cost-benefit analysis would provide policymakers with important information. Governments that have adopted or permitted automatic temperature compensation for retail fuel sales cited improved measurement accuracy and greater equity between retailers and consumers as reasons for making the change; those that have prohibited it largely cited concerns that the costs would outweigh the benefits. Hawaii adopted temperature compensation more than 26 years ago because it provided purchasing equity for the industry and consumers. In 2008, Belgium mandated temperature compensation to help ensure more consistent energy content for consumers. Canadian officials cited improved measurement equity and accuracy as reasons for allowing retailers to sell temperature-compensated fuel in the early 1990s. In the United States, officials from eight states that have laws or regulations that prohibit automatic temperature compensation said the decision should be based on an analysis of the costs and benefits, with some expressing concern that the costs would outweigh the benefits. None of the governments that have adopted automatic temperature compensation have studied its impact. Thu, 25 Sep 2008 00:00:00 -0400 Strategic Petroleum Reserve: Options to Improve the Cost-Effectiveness of Filling the Reserve, February 26, 2008 http://www.gao.gov/new.items/d08521t.pdf The Strategic Petroleum Reserve (SPR) was created in 1975 to help insulate the U.S. economy from oil supply disruptions and currently holds about 700 million barrels of crude oil. The Energy Policy Act of 2005 directed the Department of Energy (DOE) to increase the SPR storage capacity from 727 million barrels to 1 billion barrels, which it plans to accomplish by 2018. Since 1999, oil for the SPR has generally been obtained through the royalty-in-kind program, whereby the government receives oil instead of cash for payment of royalties on leases of federal property. The Department of Interior's Minerals Management Service (MMS) collects the royalty oil and transfers it to DOE, which then trades it for oil suitable for the SPR. As DOE begins to expand the SPR, past experiences can help inform future efforts to fill the reserve in the most cost-effective manner. In that context, GAO's testimony today will focus on: (1) factors GAO recommends DOE consider when filling the SPR, and (2) the cost-effectiveness of using oil received through the royalty-in-kind program to fill the SPR. To address these issues, GAO relied on its 2006 report on the SPR, as well as its ongoing review of the royalty-in-kind program, where GAO interviewed officials at both DOE and MMS, and reviewed DOE's SPR policies and procedures. DOE provided comments on a draft of this testimony, which were incorporated where appropriate. To decrease the cost of filling the SPR and improve its efficiency, GAO recommended in previous work that DOE should include at least 10 percent heavy crude oils in the SPR. If DOE bought 100 million barrels of heavy crude oil during its expansion of the SPR it could save over $1 billion in nominal terms, assuming a price differential of $12 between the price of light crude oil and the lower price of heavy crude oil, the average differential over the last five years. Having heavy crude oil in the SPR would also make the SPR more compatible with many U.S. refineries, helping these refineries run more efficiently in the event that a supply disruption triggers use of the SPR. DOE indicated that, due to the planned SPR expansion, determinations of the amount of heavy oil to include in the SPR should wait until it prepares a new study of U.S. Gulf Coast refining requirements. In addition, we recommended that DOE consider acquiring a steady dollar value--rather than a steady volume--of oil over time when filling the SPR. This "dollar-cost-averaging" approach would allow DOE to acquire more oil when prices are low and less when prices are high. GAO found that if DOE had used this purchasing approach from October 2001 through August 2005, it would have saved approximately $590 million, or over 10 percent, in fill costs. GAO's simulations indicate that DOE could save money using this approach for future SPR fills, regardless of whether oil prices are trending up or down as long as there is price volatility. GAO also recommended that DOE consider giving companies participating in the royalty-in-kind program additional flexibility to defer oil deliveries in exchange for providing additional barrels of oil. DOE has granted limited deferrals in the past, and expanding their use could further decrease SPR fill costs. While DOE indicated that its November 2006 rule on SPR acquisition procedures addressed our recommendations, this rule does not specifically address how to implement a dollar-cost-averaging strategy. Purchasing oil to fill the SPR--as DOE did until 1994--is likely to be more cost-effective than exchanging oil from the royalty-in-kind program for other oil to fill the SPR. The latter method adds administrative complexity to the task of filling the SPR, increasing the potential for waste and inefficiency. A January 2008 DOE Inspector General report found that DOE is unable to ensure that it receives all of the royalty oil that MMS provides. In addition, we found that DOE's method for evaluating bids has been more robust for cash purchases than royalty-in-kind exchanges, increasing the likelihood that cash purchases are more cost-effective. For example, in April 2007, DOE solicited two different types of bids--one to purchase oil for the SPR in cash and one to exchange royalty oil for other oil to fill the SPR. DOE rejected offers to purchase oil when the spot price was about $69 per barrel, yet in the same month, DOE exchanged royalty-in-kind oil for other oil to put in the SPR at about the same price. Because the government would have otherwise sold this royalty-in-kind oil, DOE committed the government to pay, through foregone revenues to the U.S. Treasury, roughly the same price per barrel that DOE concluded was too high to purchase directly. Tue, 26 Feb 2008 00:00:00 -0500 Hydrogen Fuel Initiative: DOE Has Made Important Progress and Involved Stakeholders but Needs to Update What It Expects to Achieve by Its 2015 Target, January 11, 2008 http://www.gao.gov/new.items/d08305.pdf The United States consumes more than 20 million barrels of oil each day, two-thirds of which is imported, leaving the nation vulnerable to rising prices. Oil combustion produces emissions linked to health problems and global warming. In January 2003, the administration announced a 5-year, $1.2 billion Hydrogen Fuel Initiative to perform research, development, and demonstration (R&D) for developing hydrogen fuel cells for use as a substitute for gasoline engines. Led by the Department of Energy (DOE), the initiative's goal is to develop the technologies by 2015 that will enable U.S. industry to make hydrogen-powered cars available to consumers by 2020. GAO examined the extent to which DOE has (1) made progress in meeting the initiative's targets, (2) worked with industry to set and meet targets, and (3) worked with other federal agencies to develop and demonstrate hydrogen technologies. GAO reviewed DOE's hydrogen R&D plans, attended DOE's annual review of each R&D project, and interviewed DOE managers, industry executives, and independent experts. DOE's hydrogen program has made important progress in all R&D areas, including both fundamental and applied science. Specifically, DOE has reduced the cost of producing hydrogen from natural gas, an important source of hydrogen through the next 20 years; developed a sophisticated model to identify and optimize major elements of a projected hydrogen delivery infrastructure; increased by 50 percent the storage capacity of hydrogen, a key element for increasing the driving range of vehicles; and reduced the cost and improved the durability of fuel cells. However, some of the most difficult technical challenges lie ahead, including finding a technology that can store enough hydrogen on board a vehicle to achieve a 300-mile driving range, reducing the cost of delivering hydrogen to consumers, and further reducing the cost and improving the durability of fuel cells. The difficulty of overcoming these technical challenges, as well as hydrogen R&D budget constraints, has led DOE to push back some of its interim target dates. However, DOE has not updated its 2006 Hydrogen Posture Plan's overall assessment of what the department reasonably expects to achieve by its technology readiness date in 2015 and how this may differ from previous posture plans. In addition, deploying the support infrastructure needed to commercialize hydrogen fuel-cell vehicles across the nation will require an investment of tens of billions of dollars over several decades after 2015. DOE has effectively involved industry in designing and reviewing its hydrogen R&D program and has worked to align its priorities with those of industry. Industry continues to review R&D progress through DOE's annual peer review of each project, technical teams co-chaired by DOE and industry, and R&D workshops. Industry representatives are satisfied with DOE's efforts, stating that DOE generally has managed its hydrogen R&D resources well. However, the industry representatives noted that DOE's emphasis on vehicle fuel cell technologies has left little funding for stationary or portable technologies that potentially could be commercialized before vehicles. In response, DOE recently increased its funding for stationary and portable R&D. DOE has worked effectively with hydrogen R&D managers and scientists in other federal agencies, but it is too early to evaluate collaboration among senior officials at the policy level. Agency managers are generally satisfied with the efforts of several interagency working groups to coordinate activities and facilitate scientific exchanges. At the policy level, in August 2007, DOE convened the inaugural meeting of an interagency task force, composed primarily of deputy assistant secretaries and program directors. The task force is developing plans to demonstrate and promote hydrogen technologies. Fri, 11 Jan 2008 00:00:00 -0500 Energy Markets: Increasing Globalization of Petroleum Products Markets, Tightening Refining Demand and Supply Balance, and Other Trends Have Implications for U.S. Energy Supply, Prices, and Price Volatility, December 20, 2007 http://www.gao.gov/new.items/d0814.pdf To better understand how changes in domestic and international petroleum products markets have affected prices, GAO was asked to evaluate trends in (1) the international trade of petroleum products, (2) refining capacity and intensity of refining capacity use internationally and in the United States, (3) international and domestic crude oil and petroleum product inventories, and (4) domestic petroleum supply infrastructure. To address these objectives, we reviewed numerous studies, evaluated data, and spoke to many industry officials and experts and agency officials. International trade in petroleum products has expanded over the past two decades, making markets for gasoline and other petroleum products increasingly global in nature. Recent plans and mandates in the United States and other countries to greatly expand the use of biofuels blended with petroleum products--for example, ethanol blended with gasoline and biodiesel blended with petroleum diesel--may have the unintended effect of reducing opportunities for trade because blending different levels of biofuels with petroleum blending stocks will require changes to these blending stocks and thereby reduce their fungibility. For most of the past 25 years, there has been excess refining capacity globally, but this excess has shrunk considerably in recent years as demand has increased faster than capacity growth, causing refineries to run closer to their production capacity, and contributing to recent increases in petroleum product prices, price volatility, and refining profits. However, experts say it is unclear whether or for how long the current market tightness will continue, in part because of uncertainties about how much additional refining capacity will actually be built in the face of rising construction costs and initiatives that may reduce future demand for petroleum products such as through the blending of large volumes of biofuels into the transportation fuels markets. When measured as average days of consumption, inventories of petroleum products and crude oil in the United States indicate a general decline over the past 20 years. A number of factors have contributed to this decrease in the United States, including reductions in crude oil production and the number of refineries as well as efforts to reduce inventory holding costs by applying advances in technology. Lower operating costs associated with lower inventories may have translated into lower consumer prices during normal periods. However, lower than normal inventories can lead to higher or more volatile prices in the event of supply disruptions or surges in demand. The nation's petroleum product supply infrastructure is constrained in key areas and is likely to become increasingly constrained, unless timely investments are made. A constrained supply infrastructure can exacerbate price effects and price volatility due to a supply disruption. However, no central source of data tracks system bottlenecks. While there is widespread recognition that a study is needed to fully identify the extent of infrastructure inadequacy and the impact on prices, to date, no such analysis has been undertaken, though such a study was mandated by Congress in 2006 with a June 2008 deadline. Significant infrastructure expansion plans in the private sector could alleviate the stresses. However, a complex permitting and siting process involving as many as 11 federal agencies and numerous state and local stakeholders has slowed or impeded the expansion and construction of new pipelines. Unlike in the case of natural gas pipelines, no central federal agency acts to coordinate this permitting process. Thu, 20 Dec 2007 00:00:00 -0500 Commodity Futures Trading Commission: Trends in Energy Derivatives Markets Raise Questions about CFTC's Oversight, October 24, 2007 http://www.gao.gov/new.items/d08174t.pdf Energy prices for crude oil, heating oil, unleaded gasoline, and natural gas have risen substantially since 2002, generating questions about the role derivatives markets have played and the scope of the Commodity Futures Trading Commission's (CFTC) authority. This testimony focuses on (1) trends and patterns in the futures and physical energy markets and their effects on energy prices, (2) the scope of CFTC's regulatory authority, and (3) the effectiveness of CFTC's monitoring and detection of abuses in energy markets. The testimony is based on the GAO report, Commodity Futures Trading Commission: Trends in Energy Derivatives Markets Raise Questions about CFTC's Oversight (GAO-08-25, October 19, 2007). For this work, GAO analyzed futures and large trader data and interviewed market participants, experts, and officials at six federal agencies. Various trends in both the physical and futures markets have affected energy prices. Specifically, tight supply and rising demand in the physical markets contributed to higher prices as global demand for oil has risen rapidly while spare production capacity has fallen since 2002. Moreover, increased political instability in some of the major oil-producing countries has threatened the supply of oil. During this period, increasing numbers of noncommercial participants became active in the futures markets (including hedge funds) and the volume of energy futures contracts traded also increased. Simultaneously, the volume of energy derivatives traded outside of traditional futures exchanges increased significantly. Because these developments took place concurrently, the effect of any individual trend or factor on energy prices is unclear. Under the authority granted by the Commodity Exchange Act (CEA), CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, Inc. (NYMEX), where energy futures are traded. Increasing amounts of energy derivatives trading also occur on markets that are largely exempt from CFTC oversight. For example, exempt commercial markets conduct trading on electronic facilities between large, sophisticated participants. In addition, considerable trading occurs in over-the-counter (OTC) markets in which eligible parties enter into contracts directly, without using an exchange. While CFTC can act to enforce the CEA's antimanipulation and antifraud provisions for activities that occur in exempt commercial and OTC markets, some market observers question whether CFTC needs broader authority to more routinely oversee these markets. CFTC is currently examining the effects of trading in the regulated and exempt energy markets on price discovery and the scope of its authority over these markets--an issue that will warrant further examination as part of the CFTC reauthorization process. CFTC conducts daily surveillance of trading on NYMEX that is designed to detect and deter fraudulent or abusive trading practices involving energy futures contracts. To detect abusive practices, such as potential manipulation, CFTC uses various information sources and relies heavily on trading activity data for large market participants. Using this information, CFTC staff may pursue alleged abuse or manipulation. However, because the agency does not maintain complete records of all such allegations, determining the usefulness and extent of these activities is difficult. In addition, CFTC's performance measures for its enforcement program do not fully reflect the program's goals and purposes, which could be addressed by developing additional outcome-based performance measures that more fully reflect progress in meeting the program's overall goals. Because of changes and innovations in the market, the reports that CFTC receives on market activities may no longer be accurate because they use categories that do not adequately separate trading being done for different reasons by various market participants. Wed, 24 Oct 2007 00:00:00 -0400 Commodity Futures Trading Commission: Trends in Energy Derivatives Markets Raise Questions about CFTC's Oversight, October 19, 2007 http://www.gao.gov/new.items/d0825.pdf Prices for four energy commodities--crude oil, heating oil, unleaded gasoline, and natural gas--have risen substantially since 2002. Some observers believe that higher energy prices are the result of changes in supply and demand. Others believe that increased futures trading activity has also contributed to higher prices. This report, conducted under the Comptroller General of the United States' authority, examines (1) trends and patterns in the physical and energy derivatives markets, (2) the scope of the Commodity Futures Trading Commission's (CFTC) regulatory authority over these markets, and (3) the effectiveness of CFTC's monitoring and detection of market abuses and enforcement. For this work, GAO analyzed futures and large trader data and interviewed market participants, experts, and officials at six federal agencies. Rising energy prices have been attributed to a variety of factors, among them recent trends (2002-2006) in the physical and futures markets. These trends include (1) factors in the physical markets, such as tight supply, rising demand, and a lack of spare production capacity; (2) higher than average, but declining, volatility (a measure of the degree to which prices fluctuate over time) in energy futures prices for crude oil, heating oil, and unleaded gasoline; and (3) growth in several key areas, including the number of noncommercial participants in the futures markets (including hedge funds), the volume of energy futures contracts traded, and the volume of energy derivatives traded outside of traditional futures exchanges. Because these changes took place concurrently, the effect of any individual trend or factor is unclear. On the basis of its authority under the Commodity Exchange Act (CEA), CFTC focuses its oversight primarily on the operations of traditional futures exchanges, such as the New York Mercantile Exchange, Inc. (NYMEX), where energy futures are traded. Energy derivatives are also traded on other markets, namely, exempt commercial and over-the-counter (OTC) markets, that are exempt from CFTC oversight. Both types of markets have seen their volumes climb in recent years. Exempt commercial markets are electronic trading facilities where certain commodities, such as energy, are traded between large, sophisticated participants. OTC markets allow eligible parties to enter into contracts directly, without using an exchange. While the exempt commercial and OTC markets are subject to the CEA's antimanipulation and antifraud provisions and CFTC enforcement of those provisions, some market observers question whether CFTC needs broader authority to oversee these markets. CFTC is currently examining the effects of trading in the regulated and exempt energy markets on price discovery and the scope of its authority over these markets--an issue that will warrant further examination as part of the CFTC reauthorization process. Moreover, because of changes and innovations in the market, the methods used to categorize these data can distort the information reported to the public, which may not be completely accurate or relevant. CFTC conducts daily surveillance of trading on NYMEX that is designed to detect and deter fraudulent or abusive trading practices involving energy futures contracts. To detect abusive practices, such as potential manipulation, CFTC uses various information sources and relies heavily on trading activity data for large market participants. Using this information, CFTC staff may pursue alleged abuse or manipulation. However, because the agency does not maintain complete records of all such allegations, this lack of information makes it difficult to determine the usefulness and extent of these activities. In addition, CFTC's performance measures for enforcement do not fully reflect the program's goals and purposes, which could be addressed by developing additional outcome-based performance measures that more fully reflect progress in meeting the program's overall goals. Fri, 19 Oct 2007 00:00:00 -0400 Energy Derivatives: Preliminary Views on Energy Derivatives Trading and CFTC Oversight, July 12, 2007 http://www.gao.gov/new.items/d071095t.pdf Energy prices for crude oil, heating oil, unleaded gasoline, and natural gas have risen substantially since 2002, generating questions about the reasons for the increase. Some observers believe that the higher energy prices were solely due to supply and demand fundamentals while others believe that increased futures trading activity may also have contributed to higher prices. This testimony highlights GAO's preliminary findings related to (1) trends and patterns in the futures and physical energy markets and the effect of these trends on energy prices and (2) the Commodity Futures Trading Commission's (CFTC) regulatory and enforcement authority over derivatives markets. GAO analyzed futures and large trader reporting data; trading data obtained from the New York Mercantile Exchange (NYMEX) for crude oil, heating oil, unleaded gasoline, and natural gas; and various other sources of energy-related data. GAO also analyzed relevant academic and other studies on the subject and interviewed market participants, experts, and officials at relevant federal agencies. Rising energy prices have been attributed to a variety of factors, and recent trends in the futures and physical markets highlight the changes that have occurred in both markets from 2002 through 2006. Specifically: (1) inflation-adjusted energy prices in both the futures and physical markets increased by over 200 percent during this period for three of the four commodities we reviewed; (2) volatility (a measurement of the degree to which prices fluctuate over time) in energy futures prices generally remained above historic averages during the beginning of the time period but declined through 2006 for three of the four commodities we reviewed; and (3) the number of noncommercial participants in the futures markets including hedge funds, has grown; along with the volume of energy futures contracts traded; and the volume of energy derivatives traded outside traditional futures exchanges. At the same time these changes were occurring in the futures markets for energy commodities, tight supply and rising demand in the physical markets pushed prices higher. For example, while global demand for oil has risen at high rates, spare oil production capacity has fallen since 2002, and increased political instability in some of the major oil-producing countries has threatened the supply of oil. Refining capacity also has not expanded at the same pace as the demand for gasoline. The individual effect of these collective changes on energy prices is unclear, as many factors have combined to affect energy prices. Monitoring these changes will be important to protect the public and ensure market integrity. Based on its authority under the Commodity Exchange Act (CEA), CFTC primarily focuses its oversight on the operations of traditional futures exchanges, such as NYMEX, where energy futures are traded. However, energy derivatives are also traded on other markets, namely exempt commercial markets and over-the-counter (OTC) markets--both of which have experienced increased volumes in recent years. Exempt commercial markets are electronic trading facilities that trade exempt commodities between eligible participants, and OTC markets involve eligible parties that can enter into contracts directly off-exchange. Both of these markets are exempt from general CFTC oversight, but they are subject to the CEA's antimanipulation and antifraud provisions and CFTC enforcement of those provisions. Because of these varying levels of CFTC oversight, some market observers question whether CFTC needs broader authority over all derivative markets. CFTC generally believes that the commission has sufficient authority over OTC derivatives and exempt energy markets. However, CFTC has recently taken additional actions to clarify its authority to obtain information about pertinent off-exchange transactions. Thu, 12 Jul 2007 00:00:00 -0400 Energy Markets: Mergers and Other Factors That Influence Gasoline Prices, May 23, 2007 http://www.gao.gov/new.items/d07894t.pdf Few issues generate more attention and anxiety among American consumers than the price of gasoline. The most current upsurge in prices is no exception. According to data from the Energy Information Administration (EIA), the average retail price of regular unleaded gasoline in the United States has increased almost every week this year since January 29th and reached an all-time high of $3.21 the week of May 21st. Over this time period, the price has increase $1.05 per gallon and added about $23 billion to consumers' total gasoline bill, or about $167 for each passenger car in the United States. Given the importance of gasoline for the nation's economy, it is essential to understand the market for gasoline and the factors that influence gasoline prices. In this context, this testimony addresses the following questions: (1) what key factors affect the prices of gasoline and (2) what effects have mergers had on market concentration and wholesale gasoline prices? The price of crude oil is a major determinant of gasoline prices. However, a number of other factors also affect gasoline prices including (1) increasing demand for gasoline; (2) refinery capacity in the United States that has not expanded at the same pace as the demand for gasoline; (3) a declining trend in gasoline inventories and (4) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends. Petroleum industry consolidation plays a role in determining gasoline prices too. The 1990s saw a wave of merger activity in which over 2600 mergers occurred in all segments of the U.S. petroleum industry. This wave of mergers contributed to increased market concentration in U.S. refining and marketing segments. Econometric modeling GAO performed on eight of these mergers showed that, after controlling for other factors including crude oil prices, the majority resulted in higher wholesale gasoline prices--generally between 1 and 7 cents per gallon. While these price increases seem small, they are not trivial--according to FTC's standards for merger review in the petroleum industry, a 1-cent increase is considered to be significant. Additional mergers occurring since 2000 are expected to increase the level of industry concentration further, and because GAO has not yet performed modeling on these mergers, we cannot comment on any potential price effects at this time. We are currently studying the effects of the mergers that have occurred since 2000 as a follow up to our previous work on mergers in the 1990s. Also, we are working on a separate study on issues related to petroleum inventories, refining, and fuel prices. Wed, 23 May 2007 00:00:00 -0400 Energy Markets: Factors That Influence Gasoline Prices, May 22, 2007 http://www.gao.gov/new.items/d07902t.pdf Few issues generate more attention and anxiety among American consumers than the price of gasoline. The most current upsurge in prices is no exception. According to data from the Energy Information Administration (EIA), the average retail price of regular unleaded gasoline in the United States has increased almost every week this year since January 29th and reached an all-time high of $3.10 the week of May 14th. Over this time period, the price has increase 94 cents per gallon and added about $20 billion to consumers' total gasoline bill, or about $146 for each passenger car in the United States. Given the importance of gasoline for the nation's economy, it is essential to understand the market for gasoline and the factors that influence gasoline prices. In this context, this testimony addresses the following questions: (1) what key factors affect the prices of gasoline and (2) what effects have mergers had on market concentration and wholesale gasoline prices? To address these questions, GAO relied on previous reports, including a 2004 GAO report on mergers in the U.S. petroleum industry, a 2005 GAO primer on gasoline prices and a 2006 testimony. GAO also collected updated data from EIA. This work was performed in accordance with generally accepted government auditing standards. The price of crude oil is a major determinant of gasoline prices. However, a number of other factors also affect gasoline prices including (1) increasing demand for gasoline; (2) refinery capacity in the United States that has not expanded at the same pace as the demand for gasoline; (3) a declining trend in gasoline inventories and (4) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends. Consolidation in the petroleum industry plays a role in determining gasoline prices as well. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase and sustain prices above competitive levels; on the other hand, these mergers could lead to efficiency effects enabling the merged companies to lower prices. The 1990s saw a wave of merger activity in which over 2600 mergers occurred in all segments of the U.S. petroleum industry. This wave of mergers contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry. Econometric modeling that GAO performed on eight of these mergers showed that, after controlling for other factors including crude oil prices, the majority resulted in wholesale gasoline price increases--generally between about 1 and 7 cents per gallon. While these price increases seem small, they are not trivial because according to the Federal Trade Commission's (FTC) standards for merger review in the petroleum industry, a 1-cent increase is considered to be significant. Additional mergers occurring since 2000 are expected to increase the level of industry concentration further, and because GAO has not yet performed modeling on these mergers, we cannot comment on any potential effect on gasoline prices at this time. However, we are currently in the process of studying the effects of the mergers that have occurred since 2000 on gasoline prices as a follow up to our previous work on mergers in the 1990s. Also, we are working on a separate study on issues related to petroleum inventories, refining, and fuel prices. Tue, 22 May 2007 00:00:00 -0400 Crude Oil: Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production, February 28, 2007 http://www.gao.gov/new.items/d07283.pdf The U.S. economy depends heavily on oil, particularly in the transportation sector. World oil production has been running at near capacity to meet demand, pushing prices upward. Concerns about meeting increasing demand with finite resources have renewed interest in an old question: How long can the oil supply expand before reaching a maximum level of production--a peak--from which it can only decline? GAO (1) examined when oil production could peak, (2) assessed the potential for transportation technologies to mitigate the consequences of a peak in oil production, and (3) examined federal agency efforts that could reduce uncertainty about the timing of a peak or mitigate the consequences. To address these objectives, GAO reviewed studies, convened an expert panel, and consulted agency officials. Most studies estimate that oil production will peak sometime between now and 2040. This range of estimates is wide because the timing of the peak depends on multiple, uncertain factors that will help determine how quickly the oil remaining in the ground is used, including the amount of oil still in the ground; how much of that oil can ultimately be produced given technological, cost, and environmental challenges as well as potentially unfavorable political and investment conditions in some countries where oil is located; and future global demand for oil. Demand for oil will, in turn, be influenced by global economic growth and may be affected by government policies on the environment and climate change and consumer choices about conservation. In the United States, alternative fuels and transportation technologies face challenges that could impede their ability to mitigate the consequences of a peak and decline in oil production, unless sufficient time and effort are brought to bear. For example, although corn ethanol production is technically feasible, it is more expensive to produce than gasoline and will require costly investments in infrastructure, such as pipelines and storage tanks, before it can become widely available as a primary fuel. Key alternative technologies currently supply the equivalent of only about 1 percent of U.S. consumption of petroleum products, and the Department of Energy (DOE) projects that even by 2015, they could displace only the equivalent of 4 percent of projected U.S. annual consumption. In such circumstances, an imminent peak and sharp decline in oil production could cause a worldwide recession. If the peak is delayed, however, these technologies have a greater potential to mitigate the consequences. DOE projects that the technologies could displace up to 34 percent of U.S. consumption in the 2025 through 2030 time frame, if the challenges are met. The level of effort dedicated to overcoming challenges will depend in part on sustained high oil prices to encourage sufficient investment in and demand for alternatives. Federal agency efforts that could reduce uncertainty about the timing of peak oil production or mitigate its consequences are spread across multiple agencies and are generally not focused explicitly on peak oil. Federally sponsored studies have expressed concern over the potential for a peak, and agency officials have identified actions that could be taken to address this issue. For example, DOE and United States Geological Survey officials said uncertainty about the peak's timing could be reduced through better information about worldwide demand and supply, and agency officials said they could step up efforts to promote alternative fuels and transportation technologies. However, there is no coordinated federal strategy for reducing uncertainty about the peak's timing or mitigating its consequences. Wed, 28 Feb 2007 00:00:00 -0500 U.S. Postal Service: Vulnerability to Fluctuating Fuel Prices Requires Improved Tracking and Monitoring of Consumption Information, February 16, 2007 http://www.gao.gov/new.items/d07244.pdf The U.S. Postal Service (the Service) is dependent on fuel to support its mail delivery and transportation networks, as well as to heat and operate the over 34,000 postal facilities it occupies. The Service has been challenged by recent fuel price fluctuations, and the Postmaster General stated that gas prices were a primary reason for the proposed 2007 postal rate adjustment. Based on this challenge, Congress asked GAO to review (1) how the Service's fuel costs changed recently and the impact of these cost changes on the Service's financial and operating conditions, and (2) how the Service's actions to control fuel costs and mitigate risk compare to leading practices and federal requirements. GAO collected fuel cost and price information; interviewed Service fuel officials; and compared the Service's actions against leading practices and federal requirements. The Service's transportation and facility fuel costs have grown in recent years as fuel prices, particularly for gasoline, diesel, and jet fuel have increased. For example, fuel cost growth for its vehicle fleet was due to rising prices rather than consumption. While fuel costs have directly pressured its financial condition, increasing compensation and benefits were the primary driver of the $3.4 billion operating expense increase in fiscal year 2006. The Service absorbed fuel cost increases through costcontainment efforts and increased revenues from the January 2006 rate increase, allowing it to achieve net income for the year. Nevertheless, the Service remains vulnerable to fuel price fluctuations, due in part to its purchasing process, which involves buying fuel as needed, often at retail locations. The Service is challenged to control fuel costs due to its expanding delivery network and inability to use surcharges. GAO found some of the Service's actions to control fuel costs to be generally consistent with procurement and consumption practices advocated by leading organizations and federal requirements for purchasing alternative fuel vehicles. However, GAO also identified areas where more actions could be taken. Taking actions to address data inconsistencies will be important, even as the Service develops a new energy strategy. These inconsistencies will limit the Service's ability to understand consumption changes and impacts and where to target potential cost-saving opportunities. Furthermore, additional progress is needed in reducing reliance on petroleum-based fuels because of the more stringent federal fuel consumption requirements that were recently passed. Fri, 16 Feb 2007 00:00:00 -0500 Crude Oil: California Crude Oil Price Fluctuations Are Consistent with Broader Market Trends, January 19, 2007 http://www.gao.gov/new.items/d07315.pdf California is the nation's fourth largest producer of crude oil and has the third largest oil refining industry (behind Texas and Louisiana). Because crude oil is a globally traded commodity, natural and geopolitical events can affect its price. These fluctuations affect state revenues because a share of the royalty payments from companies that lease state or federal lands to produce crude oil are distributed to the states. Because there are many varieties and grades of crude oil, buyers and sellers often price their oil relative to another abundant, highly traded, and high quality crude oil called a benchmark. West Texas Intermediate (WTI), a light crude oil, is the most commonly used benchmark in the United States. The price difference between a crude oil and its benchmark is commonly expressed as a price differential. In fall 2004, crude oil price differentials between WTI and California's heavier, and generally lower valued, crude oil rose sharply. GAO was asked to examine (1) the extent to which crude oil price differentials in California have fluctuated over the past 20 years and (2) the factors that may explain the recent changes in the price differential between California's crude oil and others. GAO analyzed historical data on California and benchmark crude oil prices and discussed market trends with state and federal government officials and crude oil experts. California crude oil price differentials have experienced numerous and large fluctuations over the past 20 years. The largest spike in the price differential began in mid-2004 and continued into 2005, during which the price differential between WTI and a California crude oil called Kern River rose from about $6 to about $15 per barrel. This increase in the price differential between WTI and California crude oils occurred in a period of generally increasing world oil prices during which prices for both WTI and California crude oils rose. Differentials between WTI and other oils also expanded in the same time period. The differentials have since fallen somewhat but remain relatively high by historical standards. Recent trends in California crude oil price differentials are consistent with a number of changing market conditions. First, beginning in mid-2004, Middle East producers began to increase the supply of heavy crude oils in the world marketplace, which helped depress prices for heavy crude oils, including those produced in California, and contributed to the expanding price differential between California crude oils and WTI. Second, the price differential of California crude oils to WTI increased when the rise in global crude oil prices caused prices of light crude oils to increase faster than the prices of heavier crude oils. This occurred because the petroleum products from heavy crude oils compete against other fuels, such as coal. Third, events that only impact regional crude oil markets or individual crude oils can also affect price differentials. For example, in September 2004, Hurricane Ivan disrupted crude oil production in the U.S. Gulf Coast region, resulting in decreases in the region's crude oil supply. The resulting scarcity of crude oil in the Gulf Coast region caused the prices of WTI and other regional oils to increase relative to crude oils produced outside the region. This also would have increased the price differentials between WTI and California crude oils. Finally, manipulation of crude oil prices could also affect price differentials, but experts and officials GAO interviewed generally believed that this was not a factor during this recent period. Fri, 19 Jan 2007 00:00:00 -0500 Futures Markets: Approach for Examining Oversight of Energy Futures, May 4, 2006 http://www.gao.gov/new.items/d06742t.pdf Record high crude oil and natural gas prices have generated significant concerns by the public and members of Congress that the high and relatively volatile prices may be the result of factors other than market forces. Several members of the House and the Senate have expressed concerns over the upward trending prices and factors that may be causing the perceived increases in volatility of several energy commodities, including crude oil, gasoline, natural gas, and heating oil. As a result, we initiated this study under the authority of the Comptroller General. This testimony focuses on our ongoing study of (1) changes in energy futures markets and volatility since 2000 and (2) Commodity Futures Trading Commission (CFTC) surveillance and enforcement activities in the oversight of energy futures trading. Our ongoing study explores how energy futures markets and market participants with different investment objectives affect futures and commodity prices in a complex and rapidly evolving marketplace. Some of these participants include producers and refiners, who use futures contracts as a key tool to manage risk they face due to changes in prices. Since 2000, there has also been an increase in the number of new participants, such as hedge funds and investment banks. Our ongoing study will evaluate what market studies and other market data indicate as to whether energy futures prices have become more volatile. Specifically, we are looking at different ways of measuring volatility and reviewing recent studies on volatility by the New York Mercantile Exchange (NYMEX), CFTC, Consumer Federation of America, and others. We are also using NYMEX trading data to document trends in volatility. Our ongoing study also explores how CFTC's market surveillance program is used to monitor and detect market abuses in the trading of energy futures. We are also determining what fraudulent, manipulative, and abusive practices have been identified by CFTC and others in the trading of energy futures and how CFTC is positioned to protect market users from these practices. CFTC's surveillance program is one tool used to oversee the integrity of the futures market. CFTC uses its large trader reporting system and other sources such as relevant self-regulatory organizations (SRO) and other federal agencies to monitor for attempted manipulation in the futures markets. In cases of suspected fraud, manipulation or abuse, CFTC will undertake enforcement actions. As part of this study, we are looking at CFTC's authority and its resources to protect market users. Thu, 04 May 2006 00:00:00 -0400 Energy Markets: Factors Contributing to Higher Gasoline Prices, February 1, 2006 http://www.gao.gov/new.items/d06412t.pdf Soaring retail gasoline prices, increased oil company profits, and mergers of large oil companies have garnered extensive media attention and generated considerable public concern. Gasoline prices impact the economy because of our heavy reliance on motor vehicles. According to the Department of Energy's Energy Information Administration (EIA), each additional ten cents per gallon of gasoline adds about $14 billion to America's annual gasoline bill. Given the importance of gasoline for the nation's economy, it is essential to understand the market for gasoline and how prices are determined. In this context, this testimony addresses the following questions: (1) What factors affect gasoline prices? (2) What has been the pattern of oil company mergers in the United States in recent years? (3) What effects have mergers had on market concentration and wholesale gasoline prices? To address these questions, GAO relied on previous reports, including (1) a 2005 GAO primer on gasoline prices, (2) a 2005 GAO report on the proliferation of special gasoline blends, and (3) a 2004 GAO report on mergers in the U.S. petroleum industry. GAO also collected updated data from a number of sources that we deemed reliable. This work was performed in accordance with generally accepted government auditing standards. Crude oil prices are the major determinant of gasoline prices. A number of other factors also affect gasoline prices including (1) refinery capacity in the United States, which has not expanded at the same pace as demand for gasoline and other petroleum products in recent years; (2) gasoline inventories maintained by refiners or marketers of gasoline, which as with trends in a number of other industries, have seen a general downward trend in recent years; and (3) regulatory factors, such as national air quality standards, that have induced some states to switch to special gasoline blends that have been linked to higher gasoline prices. Finally, the structure of the gasoline market can play a role in determining prices. For example, mergers raise concerns about potential anticompetitive effects because mergers could result in greater market power for the merged companies, potentially allowing them to increase prices above competitive levels. During the 1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other for the sale of petroleum products. During this period, more than 2,600 merger transactions occurred--almost 85 percent of the mergers occurred in the upstream segment (exploration and production), while the downstream segment (refining and marketing of petroleum) accounted for about 13 percent, and the midstream segment (transportation) accounted for about 2 percent. Since 2000, we found that at least 8 additional mergers have occurred, involving different segments of the industry. Petroleum industry officials and experts we contacted cited several reasons for the industry?s wave of mergers since the 1990s, including increasing growth, diversifying assets, and reducing costs. Mergers in the 1990s contributed to increases in market concentration in the refining and marketing segments of the U.S. petroleum industry, while the exploration and production segment experienced little change in concentration. GAO evaluated eight mergers that occurred in the 1990s after they had been reviewed by the FTC--the FTC generally reviews proposed mergers involving the petroleum industry and only approves such mergers if they are deemed not to have anticompetitive effects. GAO's econometric modeling of these mergers showed that the majority resulted in small wholesale gasoline price increases. While mergers since 2000 also increased market concentration, we have not performed modeling on more recent mergers and thus cannot comment on any potential additional effect on wholesale gasoline prices. Wed, 01 Feb 2006 00:00:00 -0500 Energy Markets: Gasoline Price Trends, September 21, 2005 http://www.gao.gov/new.items/d051047t.pdf Soaring retail gasoline prices have garnered extensive media attention and generated considerable public anxiety in recent months, particularly in the aftermath of Hurricane Katrina. Prices in many areas hit by the hurricane saw retail gasoline prices increase to over $3.00 per gallon, and in one reported case to almost $6.00 per gallon, with some gasoline stations running out of gasoline entirely. The availability of relatively inexpensive gasoline over past decades has helped foster economic growth and prosperity in the United States, so large price increases, especially if sustained over a long period, pose long-term challenges to the economy and consumers. This testimony, as requested, addresses factors that help explain how gasoline prices are determined and what key factors will likely influence trends in future gasoline prices. Crude oil prices and gasoline prices are inherently linked, because crude oil is the primary raw material from which gasoline and other petroleum products are produced. In the past year, crude oil prices have risen significantly--from August 31, 2004 to August 31, 2005, the price of West Texas Intermediate crude oil, a benchmark for international oil prices, rose by almost $27 per barrel, an increase of almost 64 percent. Over about the same period, average retail prices for regular gasoline rose nationally from $1.87 to $2.61 per gallon, an increase of about 40 percent. Major upward and downward movements of crude oil prices are generally mirrored by movements in the same direction by gasoline prices. However, based on recent events, at least in the short term, this historical trend has not held, and retail prices have risen faster than crude oil prices. While crude oil is a fundamental determinant of gasoline prices, a number of other factors also play a role in determining how gasoline prices vary across different locations and over time. For example, refinery capacity in the United States has, in recent years, not expanded at the same pace as demand for gasoline and other petroleum products. During the same period we have imported larger and larger volumes of gasoline from Europe, Canada, and other countries. Further, the American Petroleum Institute has recently reported that U.S. average refinery capacity utilization has increased to 92 percent. As a result, domestic refineries have little room to expand production in the event of a temporary supply shortfall. Gasoline prices may also be affected by unexpected refinery outages or accidents that significantly disrupt the delivery of gasoline supply. Most recently, Hurricane Katrina hit the Gulf Coast, doing tremendous damage to homes, businesses, and physical infrastructure, including roads; electricity transmission lines; and oil producing, refining, and pipeline facilities. Because the Gulf Coast refining region is a net exporter of petroleum products to all other regions of the country, retail gasoline prices in many parts of the nation rose dramatically. Average retail gasoline prices increased 45 cents per gallon between August 29 and September 5. The average price for a gallon of regular gasoline on September 5 was $3.07, the highest nominal price ever. Future gasoline prices will reflect the world supply and demand balance. Globally, if demand for oil and petroleum products continues to rise, supply will need to keep pace. The challenge is to boost supply and reduce demand. We need to choose wisely and we need to act soon. Wed, 21 Sep 2005 00:00:00 -0400 Gasoline Markets: Special Gasoline Blends Reduce Emissions and Improve Air Quality, but Complicate Supply and Contribute to Higher Prices, June 17, 2005 http://www.gao.gov/new.items/d05421.pdf The Clean Air Act, as amended, requires some areas with especially poor air quality to use a "special gasoline blend" designed to reduce emissions of volatile organic compounds (VOC) and nitrogen oxides (NOx) and requiring the use of an oxygenate such as ethanol. In less severely polluted areas, the Act allows states, with EPA approval, to require the use of other special blends as part of their effort to meet air quality standards. GAO agreed to answer the following: (1) To what extent are special gasoline blends used in the United States and how, if at all, is this use expected to change in the future? (2) What effect has the use of these blends had on reducing vehicle emissions and improving overall air quality? (3) What is the effect of these blends on the gasoline supply? (4) How do these blends affect gasoline prices? Although there is no consensus on the total number of gasoline blends used in the United States, GAO found 11 distinct special blends in use during the summer of 2004. Further, when different octane grades and other factors are considered, there were at least 45 different kinds of gasoline produced in the United States during all of 2004. The 11 special blends GAO found are often used in isolated pockets in metropolitan areas, while surrounding areas use conventional gasoline. The use of special blends may expand because a new federal standard for ozone may induce more states to apply to use them. To date, the Environmental Protection Agency (EPA) has generally approved such applications and does not have authority to deny an application to use a specific special blend as long as that blend meets criteria established in the Clean Air Act. EPA staff told us that there had been recent congressional debate regarding EPA's authority with regard to approving special gasoline blends but that the bills had not passed. EPA models show that use of special gasoline blends reduces vehicle emissions by varying degrees. California's special blend reduces emissions the most--VOCs by 25-29 percent, NOx by 6 percent compared with conventional gasoline, while also reducing emissions of toxic chemicals. In contrast, the most common special gasoline blend (used largely in the Gulf Coast region) reduces VOCs by 12-16 percent and NOx by less than 1 percent compared with conventional gasoline. The extent of reductions remains uncertain, because they rely, at least in part, on data regarding how special blends affect emissions from older vehicles, and these estimates have not been comprehensively validated for newer vehicles and emissions controls. Regarding air quality, EPA and others have concluded that improvements are, in part, attributable to the use of special blends. The proliferation of special gasoline blends has put stress on the gasoline supply system and raised costs, affecting operations at refineries, pipelines, and storage terminals. Once produced, different blends must be kept separate throughout shipping and delivery, reducing the capacity of pipelines and storage terminal facilities, which were originally designed to handle fewer products. This reduces efficiency and raises costs. In the past, local supply disruptions could be addressed quickly by bringing fuel from nearby locations; now however, because the use of these fuels are isolated, additional supplies of special blends may be hundreds of miles away. GAO evaluated pretax wholesale gasoline price data for 100 cities and generally observed that the highest prices tended to be found in cities that use a special gasoline blend that is not widely available in the region, or that is significantly more costly to make than other blends. There is general consensus that increased complexity, and higher costs associated with supplying special blends, contribute to higher gasoline prices either because of more frequent or severe supply disruptions or because higher costs are likely passed on at least in part to consumers. Fri, 17 Jun 2005 00:00:00 -0400 National Energy Policy: Inventory of Major Federal Energy Programs and Status of Policy Recommendations, June 10, 2005 http://www.gao.gov/new.items/d05379.pdf The lives of most Americans are affected by energy. Increased energy demand and higher energy prices has led to concerns about dependable, affordable, and environmentally sound energy. The federal government has adopted energy policies and implemented programs over the years that have focused on the appropriate role of the federal government in energy, attempting to achieve balance between supply and conservation. The May 2001 National Energy Policy (NEP) report contained over 100 recommendations that it stated, taken together, provide a national energy plan that addresses the energy challenges facing the nation. As Congress considers existing federal energy programs and proposed energy legislation in support of the May 2001 report, GAO was asked to (1) identify major federal energy-related efforts, (2) review the status of efforts to implement the recommendations in the May 2001 NEP report, and (3) determine the extent to which resources associated with federal energy-related efforts have changed since the release of the NEP report. Over 150 energy-related program activities and 11 tax preferences address eight major energy activity areas: (1) energy supply, (2) energy's impact on the environment and health, (3) low-income energy consumer assistance, (4) basic energy science research, (5) energy delivery infrastructure, (6) energy conservation, (7) energy assurance and physical security, and (8) energy market competition and education. At least 18 federal agencies, from the Department of Energy (DOE) to the Department of Health and Human Services, have energy-related activities. Based on fiscal year 2003 data (the most complete data available), the federal government provided a minimum of $9.8 billion in estimated budget authority for the energy-related programs we identified. In addition, various federal energy-related income tax preferences provided another estimated $4.4 billion in outlay equivalent value, primarily for energy supply objectives. On the revenue side, the federal government collected about $10.1 billion in fiscal year 2003 through various energy-related programs and about $34.6 billion in energy-related excise taxes. Significant collections involve royalties from the sale of oil and gas resources on federal lands, while taxes on gasoline and other fuels account for most of the excise taxes. While DOE reports that most of the 2001 NEP report recommendations are implemented, it is difficult to independently assess the status of efforts made to implement these recommendations because of limited information and the open-ended nature of some of the recommendations themselves. For example, the NEP report recommended the development of energy educational programs, including possible legislation to create education programs funded by the energy industry. However, DOE's January 2005 status report on NEP implementation provided only an overview of federal energy education efforts and made no mention of possible legislation to create such programs. In addition, some of the recommendations are open-ended and lack a specific, measurable goal, which makes it difficult to assess progress. Without a specific, measurable goal, it can be difficult to understand how and to what extent activities are helping to fulfill a recommendation. While this report does not make recommendations, it provides observations on the lack of information on the status of the NEP recommendations, which may hinder policy makers in assessing progress and determining future energy policies. Resources devoted to energy-related programs have grown since the release of the NEP report. For example, compared with fiscal year 2000, just prior to the 2001 NEP report, fiscal year 2003 estimated budget authority for energy-related programs grew by about 30 percent, from $7.3 billion to $9.6 billion. In addition, over the same period, estimated outlay equivalents for energy-related income tax preferences grew by over 60 percent, from $2.7 billion to $4.4 billion. Federal efforts have continued to address the eight major energy activities. Energy supply continues to be a major emphasis of the federal efforts, accounting for a majority of the growth. Fri, 10 Jun 2005 00:00:00 -0400 Energy Markets: Understanding Current Gasoline Prices and Potential Future Trends, May 9, 2005 http://www.gao.gov/new.items/d05675t.pdf Gasoline prices have increased dramatically in recent weeks and currently, California has the highest gasoline prices in the nation. Consequently, consumers are expected to spend significantly more on gasoline this year than last. Specifically, EIA recently projected that, because of higher expected gasoline prices, the average American household will spend about $350 more on gasoline in 2005 than they did in 2004. Understandably, the public and the press have focused on these higher gasoline prices and some have questioned why this is happening. Moreover, people are concerned about the future, with some analysts projecting prices of crude oil--the primary raw material from which gasoline is produced--to remain at current high levels or even increase. Other analysts expect prices to fall as new oil supplies are developed and as consumers adjust to the current high prices and adopt more energy-efficient practices. This testimony, as requested, address factors that help explain today's high gasoline prices in the nation as a whole and specifically in California. In addition, potential trends that may impact future prices of crude oil and gasoline are addressed. Crude oil prices and gasoline prices are linked, because gasoline is derived from the refining of crude oil. As a result, crude oil prices and gasoline prices generally follow a similar, albeit not identical, pattern over time. For example, from January 2004 to the present (April 25, 2005), the price of West Texas Intermediate crude oil rose by almost $20 per barrel, an increase of almost 60 percent, while over the same period, average gasoline prices rose nationally from $1.49 to $2.20 per gallon, an increase of 48 percent. Explanations for this large increase in crude oil and gasoline prices include rapid growth of world demand for crude oil and petroleum products, instability in the Persian Gulf region, and actions by the Organization of Petroleum Exporting Countries (OPEC) to restrict the production of crude oil and thereby increase its price on the world market. In addition to the cost of crude oil, gasoline prices are influenced by a variety of other factors, including refining capacity constraints, low inventories, unexpected refinery or pipeline outages, environmental and other regulations, and mergers and market power in the oil industry. Gasoline prices in California, and in other West Coast states, have consistently been among the highest in the nation and recent experience is no different. For the last week in April, the price of regular grade gasoline in California was $2.63 per gallon, about 43 cents above the national average. Explanations for California's higher than average gasoline prices include (1) California's unique gasoline blend, which is cleaner burning and more expensive to produce than any of the other commonly used gasoline blends; (2) a tight balance between supply and demand in the West Coast, and the long distance to any viable sources of replacement gasoline in the event of local supply disruptions; and (3) California's higher level of gasoline taxes--California currently taxes a gallon of gasoline at 30 cents per gallon more than the state with the lowest taxes, Alaska. Some sources have also attributed high gasoline prices, in part, to the fact that California's refining sector is more concentrated in the hands of fewer companies than in other refining areas, such as the Gulf Coast. Future gasoline prices will, in large part, be determined by the supply and demand for crude oil and its price on the world market. World crude oil demand is projected to rise, so new sources will have to be developed or prices will rise. Technological innovations that reduce the cost of finding or extracting crude oil could reduce prices, other things remaining constant. Greater conservation, or improvements in energy efficient technologies could also mitigate rising demand and reduce upward pressure on prices. In addition, alternative fuel sources may become more economical, thereby supplanting some of the demand for crude oil and gasoline in the future. America faces daunting challenges in meeting future energy demands, and policy makers must choose wisely to ensure that the country can meet these demands, while balancing environmental and quality of life concerns. Mon, 09 May 2005 00:00:00 -0400 Motor Fuels: Understanding the Factors That Influence the Retail Price of Gasoline, May 2, 2005 http://www.gao.gov/new.items/d05525sp.pdf Few things generate more attention and anxiety among American consumers than the price of gasoline. Periods of price increases are accompanied by high levels of media attention and consumer questioning about the causes and impacts of the price changes. The most recent upsurge in prices is no exception. Between January 3 and April 11, 2005, gasoline prices increased nearly every week, and during this time the average U.S. price for regular unleaded gasoline jumped 50 cents per gallon, adding about $7.8 billion to consumers' total gasoline bill, or about $58 for each passenger car in the United States. Spending billions more on gasoline pinched consumer budgets, leaving less money available for other purchases. Beyond having concerns over price increases, consumers find it difficult to understand how prices can vary so much across the country or even from neighborhood to neighborhood. For example, consumers in San Francisco paid an average of $2.63 per gallon during the week of April 11, 2005, while consumers in Chicago paid $2.33 per gallon; in Denver, $2.25; in New York, $2.19; and in Houston, $2.12. Within the city of Washington, D.C., pump prices for regular gasoline varied by as much as 22 cents per gallon among the stations that we visited. Over the years, these issues have been the subject of numerous investigations and reports. We at GAO have testified multiple times on related issues in congressional hearings. Often reports on gasoline prices have been technical, leaving basic questions unanswered. We prepared this primer to help improve public understanding of the major factors that influence the U.S. price of gasoline and the challenges facing the United States on issues related to gasoline supply, demand, and prices. In the primer, we present information on the factors that influence the price of gasoline and, to the extent possible, why those factors have developed. Specifically, we explain how gasoline is made and distributed, what consumers pay for in a gallon of gasoline, why gasoline prices change over time, and why gasoline prices vary from place to place. The information is presented in a question-and-answer format and is written for a nontechnical audience. Mon, 02 May 2005 00:00:00 -0400 Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions, March 16, 2005 http://www.gao.gov/new.items/d05414t.pdf Plentiful, relatively inexpensive energy has been the backbone of much of modern America's economic prosperity and the activities that essentially define our way of life. The energy systems that have made this possible, however, are showing increasing signs of strain and instability, and the consequences of our energy choices on the natural environment are becoming more apparent. The reliable energy mainstay of the 20th century seems less guaranteed in the 21st century. As a nation, we have witnessed profound growth in the use of energy over the past 50 years--nearly tripling our energy use in that time. Although the United States accounts for only 5 percent of the world's population, we now consume about 25 percent of the energy used each year worldwide. Looking into the future, the Energy Information Administration (EIA) estimates that U.S. energy demand could increase by about another 30 percent over the next 20 years. To aid the subcommittee as it evaluates U.S. energy policies, GAO agreed to provide its views on energy supplies and energy demand as well as observations that have emerged from its energy work. This testimony is based on GAO's published work in this area, conducted in accordance with generally accepted government auditing standards, and on EIA's Annual Energy Review, 2003 and its Annual Energy Outlook, 2005. America's demand for energy has, in recent decades, outpaced its ability to supply energy. As a result, the country has witnessed rapid price increases and volatility in some markets, such as gasoline, and reliability problems in others, such as electricity, where the blackout in 2003 left millions in the dark. Given these recent and sometimes persistent problems, as well as concerns about the impacts of energy consumption on air, water, and other natural resources, there is a growing sense that action is needed. Today, fossil fuels (coal, oil, and natural gas) provide about 86 percent of our total energy consumption, with the rest coming from nonfossil sources such as nuclear (8 percent) and renewables, such as hydroelectric energy and wind power (6 percent). Overall, the majority of the nation's energy consumption is met by domestic production. However, imports of some fuels have risen. For example, over the past 20 years, imports--primarily oil and natural gas--have doubled, and in 2003 these imports comprised about one-third of total domestic energy consumption. Imports are expected to increase still further in order to meet future domestic consumption. In light of the current and expected levels of imports, the United States is, and will increasingly be, subject to global market conditions, with the transportation sector especially affected. Global markets may face future difficulties in meeting the growing energy demands of developed nations while also meeting the demands of the developing world, particularly considering the explosive growth in some economies, such as China's and India's. If world supplies for some fuels do not keep pace with world demand, energy prices could rise sharply. GAO believes that a fundamental reexamination of the nation's energy base and related policies is needed and that federal leadership will be important in this effort. To help frame such a reexamination, we offer three broad crosscutting observations. First, regarding demand, the amount of energy that needs to be supplied is not fate, but our choice. Consumers, whether businesses or individuals, choose to use energy because they want the services that energy provides, such as automated manufacturing and advanced computer technologies. Accordingly, consumers can play an important role in using energy wisely, if encouraged to adjust their usage in response to changes in prices or other factors. Second, all of the major fuel sources--traditional and renewable--face environmental, economic, or other constraints or trade-offs in meeting projected demand. Consequently, all energy sources will be important in meeting expected consumer demand in the next 20 years and beyond. Third, whatever federal policies are chosen, providing clear and consistent signals to energy markets, including consumers, suppliers, and the investment community, will help them succeed. Such signals help consumers to make reasoned choices about energy purchases and give energy suppliers and the investment community confidence that policies will be sustained, reducing investment risk. Wed, 16 Mar 2005 00:00:00 -0500 Energy Markets: Mergers and Other Factors that Affect the U.S. Refining Industry, July 15, 2004 http://www.gao.gov/new.items/d04982t.pdf Gasoline is subject to dramatic price swings. A multitude of factors affect U.S. gasoline markets, including world crude oil costs and limited refining capacity. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry (GAO-04-96, May 17, 2004). This report examined mergers in the industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis. Mergers have altered the structure of the U.S. petroleum industry, including the refining market. Over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s, mostly later in the period. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated in the East Coast and from unconcentrated to moderately concentrated in the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as the ability of new firms to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 1 cent to 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For example, wholesale prices for boutique fuels sold in the East and Gulf Coasts--fuels supplied by fewer refiners than conventional gasoline--increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models, particularly low gasoline inventories relative to demand, supply disruptions in some regions, and high refinery capacity utilization rates. For example, we found that a 1 percent increase in refinery capacity utilization rates resulted in price increases of one-tenth to two-tenths of a cent per gallon. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound. Thu, 15 Jul 2004 00:00:00 -0400 Energy Markets: Mergers and Many Other Factors Affect U.S. Gasoline Markets, July 7, 2004 http://www.gao.gov/new.items/d04951t.pdf Gasoline is subject to dramatic price swings. A multitude of factors cause volatility in U.S. gasoline markets, including world crude oil costs, limited refining capacity, and low inventories relative to demand. Since the 1990s, another factor affecting U.S. gasoline markets has been a wave of mergers in the petroleum industry, several of them between large oil companies that had previously competed with each other. For example, in 1999, Exxon, the largest U.S. oil company, merged with Mobil, the second largest. This testimony is based primarily on Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry (GAO-04-96, May 17, 2004). This report examined mergers in the U.S. petroleum industry from the 1990s through 2000, the changes in market concentration (the distribution of market shares among competing firms) and other factors affecting competition in the U.S. petroleum industry, how U.S. gasoline marketing has changed since the 1990s, and how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. To address these issues, GAO purchased and analyzed a large body of data and developed state-of-the art econometric models for isolating the effects of eight specific mergers and increased market concentration on wholesale gasoline prices. Experts peer-reviewed GAO's analysis. One of the many factors that can impact gasoline prices is mergers within the U.S. petroleum industry. Over 2,600 such mergers have occurred since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Partly because of the mergers, market concentration has increased in the industry, mostly in the downstream (refining and marketing) segment. For example, market concentration in refining increased from moderately to highly concentrated on the East Coast and from unconcentrated to moderately concentrated on the West Coast. Concentration in the wholesale gasoline market increased substantially from the mid-1990s so that by 2002, most states had either moderately or highly concentrated wholesale gasoline markets. On the other hand, market concentration in the upstream (exploration and production) segment remained unconcentrated by the end of the 1990s. Anecdotal evidence suggests that mergers also have changed other factors affecting competition, such as firms' ability to enter the market. Two major changes have occurred in U.S. gasoline marketing related to mergers, according to industry officials. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. Based on data from the mid-1990s through 2000, GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States. Six of the eight mergers GAO modeled led to price increases, averaging about 2 cents per gallon. Increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices in most cases. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. GAO also identified price increases of one-tenth of a cent to 7 cents that were caused by other factors included in the models--particularly low gasoline inventories relative to demand, high refinery capacity utilization rates, and supply disruptions in some regions. FTC disagreed with GAO's methodology and findings. However, GAO believes its analyses are sound. Wed, 07 Jul 2004 00:00:00 -0400 Energy Markets: Effects of Mergers and Market Concentration in the U.S. Petroleum Industry, May 17, 2004 http://www.gao.gov/new.items/d0496.pdf Starting in the mid-1990s, the U.S. petroleum industry experienced a wave of mergers, acquisitions, and joint ventures, several of them between large oil companies that had previously competed with each other. For example, Exxon, the largest U.S. oil company, acquired Mobil, the second largest, thus forming ExxonMobil. GAO was asked to examine the effects of the mergers on the U.S. petroleum industry since the 1990s. For this period, GAO examined (1) mergers in the U.S. petroleum industry and why they occurred, (2) the extent to which market concentration (the distribution of market shares among competing firms) and other aspects of market structure in the U.S. petroleum industry have changed as a result of mergers, (3) major changes that have occurred in U.S. gasoline marketing, and (4) how mergers and market concentration in the U.S. petroleum industry have affected U.S. gasoline prices at the wholesale level. Commenting on a draft of GAO's report, FTC asserted that the models were flawed and the analyses unreliable. GAO used state-of-the-art econometric models to examine the effects of mergers and market concentration on wholesale gasoline prices. The models used in GAO's analyses were peer reviewed by independent experts. Thus, GAO believes its analyses are sound. Over 2,600 mergers have occurred in the U.S. petroleum industry since the 1990s. The majority occurred later in the period, most frequently among firms involved in exploration and production. Industry officials cited various reasons for the mergers, particularly the need for increased efficiency and cost savings. Economic literature also suggests that firms sometimes merge to enhance their ability to control prices. Market concentration has increased substantially in the industry, partly because of these mergers. Concentrated markets can enable firms to raise prices above competitive levels but can also lead to cost savings and lower prices. Evidence suggests mergers also have changed other factors that affect competition, such as the ability of new firms to enter the market. According to industry officials, two major changes have occurred in U.S. gasoline marketing related to these mergers. First, the availability of generic gasoline, which is generally priced lower than branded gasoline, has decreased substantially. Second, refiners now prefer to deal with large distributors and retailers, which has motivated further consolidation in distributor and retail markets. GAO's econometric analyses indicate that mergers and increased market concentration generally led to higher wholesale gasoline prices in the United States from the mid-1990s through 2000. Six of the eight mergers GAO modeled led to price increases, averaging about 1 cent to 2 cents per gallon. GAO found that increased market concentration, which reflects the cumulative effects of mergers and other competitive factors, also led to increased prices. For conventional gasoline, the predominant type used in the country, the change in wholesale price due to increased market concentration ranged from a decrease of about 1 cent per gallon to an increase of about 5 cents per gallon. For boutique fuels sold in the East Coast and Gulf Coast regions, wholesale prices increased by about 1 cent per gallon, while prices for boutique fuels sold in California increased by over 7 cents per gallon. Mon, 17 May 2004 00:00:00 -0400 U.S. Ethanol Market: MTBE Ban in California, February 27, 2002 http://www.gao.gov/new.items/d02440r.pdf The 1990 amendments to the Clean Air Act require that an additive be added to gasoline in areas with excessive carbon monoxide or ozone pollution. Specifically, those areas with "severe" ozone pollution are required to use reformulated gasoline, which contains at least two percent oxygen by weight. In California, as in other areas of the country, oil refining companies primarily use the oxygenate methyl tertiary butyl ether (MTBE) to meet that requirement. Because MTBE has been detected in ground water, the governor of California has banned MTBE in the state's gasoline by the end of 2002. If California decides to use ethanol to replace MTBE, ethanol production capacity from 2003 through 2005 could likely satisfy U.S. consumption. However, if other states also banned MRBE and moved to ethanol, consumption could increase and affect the industry's ability to meet demand. Moreover, production capacity projections may be overstated because they include not only existing plants and plants under construction, but also new plants being planned, which may not materialize. Although prices have been relatively stable so far, ethanol price spikes could occur in California if supplies were disrupted by either production or distribution problems. Wed, 27 Feb 2002 00:00:00 -0500 Alternative Motor Fuels and Vehicles: Impact on the Transportation Sector, July 10, 2001 http://www.gao.gov/new.items/d01957t.pdf The transportation sector accounts for roughly two thirds of the nation's petroleum consumption and one quarter of the total U.S. energy use. Several steps have been taken during the last 25 years either to reduce petroleum consumption or to increase fuel diversity in the transportation sector, including tax incentives, mandates for alternative fuel vehicles, and laws to promote automobile fuel efficiency. This testimony discusses the extent of alternative fuel vehicle acquisition and fuel use, some of the barriers inhibiting greater use of alternative fuels and vehicles, and the federal tax incentives used to promote the use of alternative motor fuels and vehicles. So far, alternative fuels and vehicles have not made much of a dent in the conventional fuel and vehicle dominance of the U.S. vehicle fleet, primarily because of fundamental economic obstacles, such as the relatively low price of oil, insufficient availability of alternative fuel refueling infrastructure, and the relatively high cost of some alternative fuel vehicles. As GAO reported in February 2000 (RCED-00-59), any significant increase in the use of alternative motor fuels and vehicles by the general public will depend on the following two factors: (1) a dramatic and sustained increase in the price of gasoline and (2) very large incentives, far above the current levels, to reduce the cost of using alternative fuels and vehicles. Depending on what happens to conventional fuel prices, these incentives would likely need to be maintained for some time--at least until the number of vehicles reaches the level necessary to support an economically sustainable infrastructure. Tue, 10 Jul 2001 00:00:00 -0400 Motor Fuels: Gasoline Prices in the West Coast Market, April 25, 2001 http://www.gao.gov/new.items/d01608t.pdf 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. Wed, 25 Apr 2001 00:00:00 -0400 Motor Fuels: Gasoline Prices in Oregon, February 23, 2001 http://www.gao.gov/new.items/d01433r.pdf This correspondence provides 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 found 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. Fri, 23 Feb 2001 00:00:00 -0500 Motor Fuels: California Gasoline Price Behavior, April 28, 2000 http://www.gao.gov/archive/2000/rc00121.pdf Retail gasoline prices in the United States have risen sharply since early 1999, mostly in response to soaring world crude oil prices. Moreover, during the second half of the 1990s, retail gasoline prices throughout the United States have shown a high degree of volatility and fairly frequent spikes. Particularly in California, where consumers already generally pay higher average prices than they do elsewhere in the United States, the spikes have raised questions about the behavior of gasoline prices both within the state and between California and the rest of the country. This report answers the following questions: (1) To what extent do retail gasoline prices spike more often and higher in California than they do in the rest of the country, and what factors account for any difference? (2) Do retail gasoline prices gasoline prices in California rise faster than they fall in response to increases and decreases in the wholesale prices of gasoline and, if so, why? (3) What factors account for differences in the retail prices of gasoline between San Franciso and Los Angeles? Fri, 28 Apr 2000 00:00:00 -0400 Motor Fuels: Gasoline Price Spikes in Oregon in 1999, February 23, 2000 http://www.gao.gov/archive/2000/rc00100r.pdf Pursuant to a congressional request, GAO provided information on the extent to which retail gasoline prices in Oregon spiked from January through August 1999 and the factors that accounted for the spikes. GAO noted that: (1) retail gasoline prices in Oregon spiked in the spring and again in the summer of 1999; (2) during the spring spike, average retail prices rose from a 4 1/2-year low of $1.01 per gallon in February to a high of $1.47 per gallon in April--an increase of 46 cents; (3) for the summer spike, after falling by about 14 cents per gallon, average prices rose from $1.33 per gallon in June to $1.52 per gallon in August--an increase of 19 cents; (4) over the whole period, from February to August, Oregon's average retail gasoline prices increased by about 51 cents per gallon, compared to an average of about 33 cents per gallon for the rest of the United States; (5) the price spikes in Oregon were due primarily to supply-related problems in California and Washington; (6) according to oil industry officials and experts GAO contacted, the spring spikes were caused primarily by disruptions in refinery operations in California, which reduced gasoline production; (7) according to estimates by the Department of Energy's Energy Information Administration, about 12 to 15 percent of California's gasoline production may have been affected by these disruptions during this period; (8) the summer spike was due mostly to a combination of additional refinery disruptions in California and an explosion, in June, on the Olympic Pipeline, which carries the bulk of the gasoline supplies that go from Washington to Oregon; (9) gasoline supplies from Washington to Oregon through the pipeline went from 2.65 million barrels per month in May to 1.49 million barrels in June and 1.02 million barrels by September; (10) alternative modes of transportation, such as barges, tankers, and trucks, were used to ship gasoline to Oregon to compensate for this outage; (11) this added to the price increases because these types of transportation are generally more expensive and slower than pipeline; (12) in both spikes, price increases may have been exacerbated because uncertainty about supply may have caused gasoline dealers to scramble to buy more gasoline than is usual for fear of running out of supplies in the future; (13) this increased demand would contribute to rising wholesale and, ultimately, retail prices; (14) in addition, crude oil prices were generally rising during the period of the price spikes, leading to higher gasoline prices in Oregon and in the rest of the country; and (15) as part of the West Coast gasoline market, Oregon's price trends tend to more closely resemble trends in California than in the United States in general. Wed, 23 Feb 2000 00:00:00 -0500