July 5, 2005

FTC blames oil demand for gasoline price rise

By Peter Kaplan

WASHINGTON (Reuters) - The rapid rise in U.S. gasolineprices since last year is due mostly to increasing worldwidedemand for crude oil rather than collusion or consolidation inthe oil industry, U.S. antitrust regulators concluded in areport issued on Tuesday.

The report by the Federal Trade Commission blamed the gasprice hikes on soaring worldwide demand for crude oil and saidprices are a reflection of "producers' costs and consumers'willingness to pay" for the fuel.

"The vast majority of the FTC's investigations haverevealed market factors to be the primary drivers of both priceincreases and price spikes," the agency said in a report ongasoline costs.

Critics in Congress have blamed rising gas prices on oilindustry price-gouging and mergers which they say has reducedcompetition.

The average U.S. retail price for gasoline increased from$1.56 per gallon in 2003 to $2.04 in the first five months of2005, the FTC said. U.S. oil prices have steadily gained inrecent months, topping $60 a barrel in trading on Tuesday.

In its report, FTC brushed aside claims of industrymisconduct and said the rising cost of crude accounts for 85percent of the price changes in the U.S. market for gasoline.

Prices had stayed relatively low between 1984 and 2004 --despite rising U.S. appetite for gasoline -- because supplykept pace with demand, the FTC said.

Between 1985 and 2004, U.S. refineries increased theirtotal capacity to process crude oil by 7.8 percent, from 15.7million barrels per day in 1985 to 16.9 million barrels per dayas of May 2004, the FTC said.

But oil producers were unprepared in 2004 for the sharpincrease in world demand, much of it driven by the fast-growingeconomies of China and India, the FTC said.


The agency said it was "difficult, if not impossible, topredict whether this sharper rate of (demand) increaserepresents the beginning of a longer-term trend."

The report said that despite some cracks in OPEC, thecartel "still produces a large enough share of world crude oilto exert market power and strongly influence the price of crudeoil when OPEC members adhere to their assigned productionquotas."

The agency conceded that oil industry profits have been"high" of late. But it said profits were not excessive over thelong run and were a "necessary and important (role) in awell-functioning market economy."

"If high prices and high profits are expected to continue,they may draw greater investments over time into the oilindustry, in particular to crude exploration and production,the FTC said.

The agency said regional regulations and environmentalrequirements for specially formulated fuels in states likeCalifornia can also increase prices by limiting substitutegasoline supplies.

In a related report, congressional investigators said whilecleaner-burning gasoline blends have helped improve U.S. airquality, they have also raised pump costs for consumers andincreased the possibility for supply disruptions.

The roughly four dozen gasoline blends approved by thegovernment can be expensive for refiners to produce, and thosecosts are passed on to drivers, according to the GovernmentAccountability Office.

"The increasing numbers of special gasoline blends havemade it more complicated and costly to supply gasoline,elevating the risk of localized supply disruptions," the GAOsaid in a report.

Refineries have to modify their equipment to make thespecial gasoline blends. For example, the GAO pointed out thatone California refinery said it could make 12 percent moreconventional gasoline rather than cleaner-burning fuel.

(Additional reporting by Tom Doggett)