07-04-04
While OPEC has been assigned much of the blame for this spring's spiralling
gasoline prices, the US oil industry took some lumps of its own for a perceived
lack of competition that economists said allowed chronic tight fuel inventories
to drag on.
In testimony before the Senate Judiciary Committee, analysts said mergers within the industry had left the market in the hands of relatively few major companies that now have little incentive to produce surplus gasoline.
"The problem is not a conspiracy, but the rational action of large
companies with market power," pointed out Mark Cooper, director of research
for the American Consumer Federation.
Cooper continued: "With weak competitive market forces, individual
companies have flexibility for strategic actions that raise prices and profits.
Individual companies can let supplies become tight in their area and keep stocks
low since there are few competitors who might counter this strategy."
The Automobile Association of America said that thenationwide average price
for a gallon had reached a record $ 1.77 at a time of year when they should have
been at their lowest. Analysts agree that the present bull market has been
fuelled by OPEC's moves to rein in production and keep crude prices supported;
also this tough market is caused by the oil industry's on-going inability to
build up its inventory of gasoline to levels considered adequate to meet demand
in the coming summer months.
"Conventional wisdom would seem to dictate that rapidly rising prices would
have some dampening effect on gasoline consumption," the US Energy
Information Administration said. "But with preliminary data showing
first-quarter 2004 gasoline demand reaching an all-time record of nearly 8.8 mm
bpd, high gasoline prices, at least in the short-term, have not proven to be a
deterrent to consumers' appetite for gasoline."
Although no genuine shortages of gasoline have been reported, the
supply-and-demand situation has the market jumpy. Prices for crude and gasoline
futureson the New York Mercantile Exchange were up sharply when the EIA reported
an unexpected 2 mm barrel decline in crude inventories.
Part of the problem from the industry's point of view is that its refineries are
already running at nearly full capacity, making it virtually impossible to
ramp-up production to any significant levels. The situation has stirred dialogue
in Washington about the costs of producing cleaner-burning gasoline, the need
for better access to new petroleum reserves and the artificial restrictions
caused by “boutique” gasoline formulas sold only in certain areas of the
country where clean-air standards can differ.
The testimony, however, raised the contention that the very structure of the
oil industry has made it less able to ease the supply tightness and, for the
most part, is largely unconcerned with the situation.
"The story behind the headline numbers -- that does not get coverage -- is
that a merger wave in the mid-1990s dramatically increased the concentration of
the petroleum industry into the hands of a small number of giant, vertically
integrated companies," Cooper informed the senators. "Business
decisions restricted capacity, undermined independents and have rendered many
markets uncompetitive and vulnerable to manipulation."
A key to gasoline market, according to the testimony, is the presence of a
healthy number of independent refiners and retailers who are free to buy and
sell gasoline to one another. Now ideally, those independent refiners would be
taking up the slack in supply by selling their product to independent gas
station chains, including convenience chains -- such as to 7-11 and to discount
warehouse stores like the behemoth Costco. Meanwhile, the familiar majors such
as Shell, Exxon and Chevron, continue to supply gasoline to their branded
stations.
"Unbranded wholesale markets are truly competitive," Yale economist
Justine Hastings testified. "They are the only market where gasoline is
gasoline, and retailers are free to purchase from the lowest-price
supplier."
Hastings explained that truly independent wholesale markets are characterized
by intense price competition. But with the relative lack of independent
refineries, the independent retailers must turn more and more to the major
refiners, which Hastings pointed out, would not be inclined to provide any
breaks on price. In addition, according to testimony, the lack of competition
means the major companies have no incentive to keep inventories at levels much
above what their branded stations require.
"If the industry were vigorously competitive, each firm would have to worry
a great deal more about being caught with short supplies or inadequate capacity
and they would hesitate to raise prices for fear of losing sales to
competitors," Cooper maintained. "Oil companies do not behave this way
because they have power over price and can control supply."
While mergers were blamed for the decline in the number of independent market
players over the years, economics also played a role as small refineries found
they were unable to compete during times when gasoline prices were low and their
overhead was increasing, in part due to the cost of implementing new
environmental regulations. Some of the plants were closed for good, while others
were converted to products other than gasoline, such as diesel, heavy fuel oil
and asphalt.
Since that bell can't be un-rung, it appears that the United States will be
relying more and more on imports of not only crude oil but gasoline as well in
order to satisfy its ever-growing appetite for fuel.
Source: United Press International