04/22/2008: "Why Gas Is So Expensive"

Why Gas Is So Expensive

Attorney General releases final gas price investigation report:

While many vehicle owners have been wondering aloud about gas pricing conspiracies, Washington State Attorney General Rob McKenna has released a report that found no evidence of wrongdoing by those involved in fuel production and sales.

McKenna’s year-long investigation into gas prices, which included an in-depth analysis of factors influencing prices at the pump, found two causes for the increases. local competition at the gas pump was one, and ironically the root cause for the second one was found to be related to the cost of obtaining and transporting fuel to stations. In other words, the cost of fuel, to transport fuel, raises the cost of fuel to the consumer.

Increasing worldwide demand for oil and an inability for regional refineries to meet local supply demands are the primary contributors to erratically climbing prices, not illegal price manipulation.

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“In Spokane, we found that prices are actually lower now than the state average,” McKenna said. “Bellingham was the only city among those we looked at where prices couldn’t be explained by wholesale and supply cost differences or retail competition; the markup is happening at the retail level. We suspect Bellingham retailers are able to charge more because of the city’s proximity to Canada, where prices are even higher.”

The investigation found that gas price differences across Washington communities are primarily due to operational costs – wholesale prices, transportation, the cost of doing business in that community and the presence of local competition.

“That’s not surprising,” McKenna said, “and the data supports what we’d expect to see in a competitive marketplace.”

“West Coast refineries are running at capacity,” McKenna said. “We’re importing higher-priced refined gasoline to meet consumer demand, which raises average prices at the pump. Any glitches in the supply system can cause significant price spikes. Meanwhile, crude oil costs nearly four times as much as it did five years ago.”

Additional findings from the report include:

• Crude oil is a bigger factor. The cost of crude historically accounted for about 40 percent of pump price in Washington but now comprises about 65 percent.
• Diesel consumption has risen significantly while demand for gasoline has declined slightly. The amount of gas consumed by Washington drivers decreased by 1 percent between 2003 and 2007. Over the same period, diesel consumption increased by 31 percent.
• Retail diesel prices are increasing at a faster rate than gasoline. Increases in diesel can be attributed to increased consumption and increasingly stringent emission controls that require the refining of more costly low-sulfur content diesel.
• Volatility in refining differentials continues. Refining differentials, defined as the difference between the cost of crude oil and the wholesale price of gasoline, went from a high of $1.32 in April 2007 to a low of less than 16 cents in December 2007. The observed increase in the volatility in refining differentials implies that Washington state wholesale gasoline prices have become less dependent on the cost of crude oil.
• Refining costs continue to increase. After accounting for crude oil costs and taxes, only about 67 cents of the current per-gallon price of gasoline remains to compensate refiners for production, transportation and other costs. The refining value of diesel has exceeded that of gas for the first time.
• Wholesale price differences across the state are relatively small. On average, the range between the highest and lowest wholesale prices is 3.4 cents per gallon. The varying costs to supply gasoline to wholesale distribution centers in each region largely explain the difference in the wholesale prices. These transportation costs range from about 1 cent per gallon to Seattle (via pipeline) up to 7.8 cents to Moses Lake when trucked from the Puget Sound.

Results from the investigation are included in a 67-page report available at www.atg.wa.gov/gas.aspx .
When the state began the investigation in April 2007, the public and policymakers wondered why Washington prices were higher than those in other states. They also asked why prices in Bellingham and, at one point, Spokane, were higher than other communities.

State leaders including McKenna, whose office has an important role in ensuring that gas is sold in a competitive environment, wanted new data to help answer those questions. The Attorney General’s Antitrust Division collects and analyzes petroleum pricing data every month and publishes a quarterly Gasoline Report that helps explain factors that affect gasoline prices in Washington. However, the last major comprehensive study of Washington gas prices was published in 1991 by the state Department of Community, Trade and Economic Development.

The Attorney General’s Office chose Dr. Keith Leffler, a University of Washington economist with expertise in the petroleum industry, to conduct the analysis of price data. The office also conducted interviews with industry representatives, sought expertise from CTED’s Energy Policy Division and conducted three public forums to gather consumer comments.

“To understand factors affecting Washington prices, you have to also look outside the state,” Leffler said. “The West Coast is a fuel island, separate from the rest of the U.S. domestic market. So when local supplies aren’t sufficient, petroleum distributors start searching as far as Finland and Saudi Arabia to meet demand.”
Washington’s gas tax, the highest in the nation, also must be considered. Unlike most states, Washington depends almost exclusively on the gas tax, as opposed to general tax revenue, to construct and maintain state highways. Washington’s combined state and federal fuel tax is currently 54.4 cents per gallon.