Petroleum Product Pricing in a Free Market: How to Monitor Prices to Insure Competition

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Petroleum Product Pricing in a Free Market How
to Monitor Prices to Insure Competition

• Aileen Bohn
• Office of Oil and Gas
• US DOE/Energy Information Administration

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(No Transcript)
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Objective for Workshop 4Petroleum Product
Pricing

• To review monitoring systems that are designed to
  insure the public and elected officials that
  petroleum products are priced in manner
  consistent with economic competition and void of
  collusion.

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Section for Workshop 4Petroleum Product Pricing

• 4A Overview of how competition is monitored
• 4B Price and market concentration data
• 4C Price analysis
• 4D Financial statistics

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Section for Workshop 4Petroleum Product Pricing

• QA
• Blue print for insuring competition

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What the U.S. team cannot do

• Make a determination of whether certain price
  levels or price increases are fair
• Whether re-control of the petroleum industry is
  warranted

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Workshop 4A Overview

• Definition of Competition
• Who monitors competition
• How competition is assessed

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Definition of Competition

• Large number of buyers and sellers
• No concentrated buyers or sellers
• Homogenous product
• Perfect information
• Freedom of entry

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The Federal Trade Commission Monitors Competition
at the National Level
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FTC Acts (Mandates) Relevant to the Energy
Industry

• Federal Trade Commission Act
• Energy Policy and Conservation Act

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How the FTC works

• Investigation
• Consent agreement
• Administrative complaint
• Trade Regulation Rules

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EPA Assesses Competition

• To determine whether areas can opt-into clean
  fuels programs

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FERC Assesses Competition

• Set pipeline rates

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Energy Information Administration on Competition

• Collect data
• Informally monitor
• Testimony
• Respond to public inquiries

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Typical Control coming into the U.S. DOE

• March 21, 1999
• OPEC hasnt met as yet, or decided to cut back
  oil production, or for that matter how much, yet
  the gas stations in my area have already raised
  the price per gallon of gas substantially, led by
  EXXONThis when everyone knows the oil companies
  have huge inventories of low priced oil. In the
  past year or so, oil prices propped by
  approximately 50 and it took MONTHS for the
  price of gasoline to come down...

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Routine response to Control

• Petroleum prices prices are determined by
  worldwide supply and demand, not the government
• Description of recent events that may have
  influenced prices

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Recent/Proposed Mergers

• BP/Amoco
• approved, to be completed in 6 months
• Exxon/Mobil
• under review
• Phillips/Ultramar Diamond Shamrock
• Marathon/Ashland
• Shell/Texaco/Star (joint venture)

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Exxon-Mobil Merger
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BP Amoco PLC and ARCO Merger
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BP Amoco PLC and ARCO Merger
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Top 10 U.S. Refiners, 1999 (est.)
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Market Concentration

• Top 4 and 8-firm market shares
• Herfindahl-Hirschman Index (HHI)
• lt1,000 unconcentrated
• 1,000 - 1,800 moderately concentrated
• gt1,800 highly concentrated

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Market Concentrations (HHI) for Jet Fuel
WA 4,042
WA 4,042
MA 3,139
IL 3,476
CO 3,492
MO 2,838
CA 2,838
CA 2,838
GA 2,364
TX 1,784
FL 2,877
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Workshop 4B Price and Market Concentration Data

• Petroleum product price data collection systems.
  Sampling and frame development.
• As already demonstrated, data on market shares
  (that is, market concentration) is also important
  in assessing competition.

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Types of Petroleum Data Available from EIA

• Crude Oil and Product Supplies
• Crude Oil and Product Prices
• Product Sales Volumes

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Petroleum Prices
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Petroleum Prices
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Petroleum Prices
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EIA Petroleum Price Data

• First purchase price

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EIA Petroleum Price Data

• Crude oil acquisition costs

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EIA Petroleum Price Data

• Monthly wholesale
• Monthly retail prices

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EIA Petroleum Price Data

• Twice monthly winter heating oil prices
• Weekly gasoline and diesel retail prices

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EIA Petroleum Price Data

• Petroleum Product Sales Identification Survey

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EIA Data on Market Shares

• From 782 surveys
• EIA is the only clearinghouse for such data

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EIA Data Files, Special Reports

• Summaries of Company-Level Data
• Analyses
• Unpublished Aggregations
• Detailed Import Statistics by Company
• Time Series Reports

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Workshop 4C Price Analysis

• The analysis of petroleum product prices, an
  overview of analyses done by EIA in response to
  national concerns.

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Use of EIA Prices in Analysis

• Monitor supply and demand
• Interpret market events
• Develop Fuel Outlooks

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EIA Gasoline Price Studies

• Spring 1996
• Done For The White House
• Spring 1997
• Many Changes From Previous Year
• August 1997
• California Got Special Attention

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Crude Oil and Gasoline Prices
100
Retail Ex-Tax U.S.
N.Y. Spot Conv.
90
WTI
80
70
Cents per Gallon
60
50
40
Jul-95
Jul-96
Jul-97
Apr-95
Oct-95
Apr-96
Oct-96
Apr-97
Jan-95
Jan-96
Jan-97
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Gasoline Demand
8,700
July
8,500
8,300
8,100
Thousand Barrels Per Day
7,900
7,700
7,500
7,300
1997
7,100
1996
Average 1992-1996
6,900
6,700
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
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Gasoline Production
8,300
8,100
July
7,900
7,700
Thousand Barrels Per Day
7,500
7,300
7,100
1997
1996
6,900
Average 1992-1996
6,700
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
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PADD 3 Refinery Capacity Inputs
Thousand Barrels Per Day
8,000
Operable Capacity
7,500
7,000
6,500
6,000
Gross Inputs
to Distillation
5,500
5,000
Jan-93
Jan-86
Jan-87
Jan-88
Jan-89
Jan-94
Jan-90
Jan-91
Jan-95
Jan-97
Jan-92
Jan-96
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Gasoline Net Imports
600
500
400
300
Thousand Barrels Per Day
July
200
1997
100
1996
Average 1992-1996
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
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U.S. Gasoline Stocks
225
220
215
210
Average
205
Range
Million Barrels
200
195
190
185
180
Jul-96
Jul-97
Jan-97
Mar-97
Jan-98
Mar-98
May-97
May-98
Sep-96
Sep-97
Nov-96
Nov-97
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Changing Term Structure for Crude Oil Futures
Dollars per Barrel
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December 1996
April 1996
24
Sept 1996
July 1996
22
August 1997
20
18
October 1995
16
1-96
3-96
5-96
7-96
9-96
1-97
3-97
5-97
7-97
9-97
1-98
3-98
5-98
11-95
11-96
11-97
12/26/96
10/2/95
4/15/96
7/1/96
9/3/96
8/29/97
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California - A Special Case

• Why are California gasoline prices higher than in
  other parts of the U.S.?
• Why do California prices rise and fall more than
  in other parts of the country?

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Regular Gasoline Prices (including taxes)
180
80
Total U.S.
70
California
160
Difference
60
140
50
120
40
100
Cents per Gallon
30
80
20
60
10
40
0
-10
20
-20
0
Jan-83
Jan-84
Jan-85
Jan-90
Jan-86
Jan-87
Jan-88
Jan-89
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
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Gasoline Price Components
(Average 1996)
140
120
State
Fed Tax
100
Retail
80
Markup
Cents Per Gallon
60
Refining,
Marketing,
40
Dist
Crude
20
0
CA
US
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Refining/Marketing Operating Costs
20
15
Cents per Gallon of Products Sold
10
5
California Refiners
Other Majors
0
1988
1989
1990
1991
1992
1993
1994
1995
1996
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(No Transcript)
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RFG Supply Sources
100
90
80
70
Net Imports
60
Net Receipts
50
40
Production
and Stock
30
Draw
20
10
0
PADD 1
PADD 5
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California Market Differences That Impact Price
Volatility

• Isolated
• Unique Fuel
• Little Excess Production Capacity
• Different Logistical System

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Price Passthrough
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EIA Petroleum Price Publications

• Weekly Petroleum Status Report
• Motor Gasoline, Distillate, Crude Oil, and
  Propane Watches
• Petroleum Supply Monthly and Annual
• Petroleum Marketing Monthly
• Annual Fuel Oil and Kerosene Sales Report

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Trends EIA Internally Monitors

• Mergers
• Joint ventures
• Rise of Independent Refiners

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Trends EIA Internally Monitors

• Mergers
• Joint ventures
• Rise of Independent Refiners

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Other Trends in the Petroleum Industry

• Clean Fuels
• Consolidation
• Consolidation among customers

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Workshop 4D Financial Data

• The analysis of financial statistics related to
  petroleum product pricing

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EIAs Financial Reporting System
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EIAs Financial Reporting System
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FRS Showed Higher ROI
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FRS Showed Decline in Operating Costs
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Comparative Profit Rates Give Insight on
Competitiveness
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QA
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QA

• Why are direct importers able to sell their
  products at a lower price than the local refiners
  i.e. Petron, Caltex and Shell?

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On average, Far East refining is relatively simple
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World Oil Refining Capacity
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QA

• The other issue refers to the local refiners. How
  come they are able to sell their products in the
  same price levels despite their different
  conditions e.g. crude sources, operating and
  marketing costs.

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QA

• From monitored crude prices e.g. from Reuters or
  Platt's, how do we estimate near term prices?
  Considering our sources for crudes and products,
  what factors should we monitor that drive price
  fluctuations?

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Monthly Crude Oil Prices
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World Oil Demand
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World Oil Production
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Monthly Net Stock Change
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Backwardated Futures Prices, Low Stocks, and High
Spot Prices
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Crude Oil Accounts for a Quarter of the U.S.
Retail Price
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QA

• In addition to sellers, should we consumers
  prices?

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Blueprint for Insuring Competition
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Blueprint

• Mandates prohibiting anti-competitive behavior
• Data collection
• Data monitoring
• Assessments

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Data Collection

• Prices
• Volumes
• Costs
• Financial data
• Supply components

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Data Monitoring

• Prices at all segments of the industry
• ROI
• Operating costs
• Market concentration
• Other industry trends

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Prices at Various Segments
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Refiner Margins

• Mergers
• Joint ventures
• Rise of Independent Refiners

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Return on Investment
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Operating Costs
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Market Concentrations
WA 4,042
WA 4,042
MA 3,139
IL 3,476
CO 3,492
MO 2,838
CA 2,838
CA 2,838
GA 2,364
TX 1,784
FL 2,877
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Other Industry Trends

• Demand
• Production
• Imports
• Stocks
• Consolidation
• Transportation
• Clean fuels

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Provide Assessments for

• Publications
• Public inquiries
• Testimony
• Ad hoc analyses