FTC Issues Report on Midwest Gasoline Price Investigation

After a nine-month investigation into the causes of the gasoline price spikes in local markets in the Midwest during the spring and summer of 2000, the Federal Trade Commission today announced its findings into the causes behind such price increases. While the Commission found no credible evidence of collusion or other anticompetitive conduct by the oil industry, the investigation found that a combination of many factors was likely responsible for the price spike. These factors included circumstances beyond the control of the industry as well as those within their control - "conscious, (but independent) choices by industry participants" to engage in profit-maximizing strategies.

"There were many causes for the extraordinary price spike in Midwest markets last summer," stated Chairman Robert Pitofsky. "Importantly, there is no evidence that the price increases were a result of conspiracy or any other antitrust violation. Indeed, most of the causes were beyond the immediate control of the oil companies. There were, however, some strategic choices by some oil companies designed to maximize profits that contributed to the temporary price increases. Once the magnitude of the price increases became apparent, several oil companies moved aggressively to bring supply into the Midwest market, and the price spike was eliminated." Pitofsky added that "while there were many short-term causes of the increases, the underlying lack of U.S. refinery capacity threatens similar price spikes in the future in the Midwest and elsewhere."

The Investigation

While gasoline prices increased nationwide in the spring and early summer of 2000, increases in some local markets, particularly in the Midwest, eclipsed those experienced in past years and were far greater than those experienced in other U.S. markets. Consumers in Chicago and Milwaukee saw significant price spikes at the retail level for reformulated gasoline ("RFG") required under the Clean Air Act, and consumers throughout the Midwest saw significant price increases for conventional gasoline. The price runup was intense, and peaked during the week of June 18-24. In response to requests for an investigation by a bipartisan group of Senators and Representatives, the Commission began the investigation on June 20, 2000.

The investigation examined many potential causes for the price increases, including possible antitrust violations. During June and July, the Commission issued subpoenas for testimony and Civil Investigative Demands for compilations of data and answers to written questions to 13 refiners and 10 entities that own or control pipelines serving the Midwest markets. Staff received nearly 1000 boxes of documents and 100 compact disks containing data in response to these formal requests.

After reviewing and analyzing the documents and information provided in response to these requests, staff conducted investigational hearings of key employees from eight of the oil companies serving the Midwest gasoline markets. Staff also interviewed experts knowledgeable about the factors that may have contributed to the price spikes, industry structure, and the regulatory environment. In addition, staff visited a refinery, retained two outside economists, and reviewed the voluminous published materials analyzing the industry as well as the price and supply issues relating to Summer 2000. Staff also met with representatives of the Environmental Protection Agency and the Department of Energy.

Findings

The report states that the spike "appears to have been caused by a mixture of structural and operating decisions made previously (high capacity utilization, low inventory levels, the choice of ethanol as an oxygenate), unexpected occurrences (pipeline breaks, production difficulties), errors by refiners in forecasting industry supply (misestimating supply, slow reactions), and decisions by some firms to maximize their profits (curtailing production, keeping available supply off the market)."

The report finds "the damage was ultimately limited by the ability of the industry to respond to the price spike within three or four weeks with increased supply of products." But the Commission warns that "[u]nless gasoline demand abates or refining capacity grows, price spikes are likely to occur in the future in the Midwest and other areas of the country."

Primary factors for the increase included refinery production problems; pipeline disruptions and low inventories. Secondary factors included the unavailability of reformulated gasoline using MTBE as an oxygenate ("RFM") as a substitute for reformulated gasoline using

ethanol as an oxygenate ("RFE") in Chicago and Milwaukee; the assertion by one refiner of certain patents relating to the production of RFG, multiple waivers of the RFG requirements that allowed the continued use of conventional gasoline in St. Louis, which increased the incentive to supply conventional gasoline to St. Louis and may have increased expectations of waivers in Chicago and Milwaukee; high crude oil prices which contributed to low inventory levels; increased demand for gasoline in the Midwest; and local gasoline sales taxes.

The report states that "[a]lthough the principal causes of the price spike were largely beyond the immediate control of industry participants, the industry as a whole made errors in supply forecasts and underestimated the potential for supply shortages in the Midwest in the spring and early summer 2000."

According to the report, "[o]nce prices spiked, several firms acted quickly to increase production and to ship additional gasoline into the Midwest, thus moderating the severity of the price spike. Several other firms, however, delayed shipments of additional products into the Midwest in the expectation that prices would soon abate."

The report states that "[a] significant part of the reduction in the supply of RFG was caused by the investment decisions of three firms." The report explains that "[w]hen determining how they would comply with the stricter EPA regulations for summer-grade RFG that took effect in the spring 2000 . . . each independently concluded it was most profitable to limit capital expenditures to upgrade their refineries only to the extent necessary to supply their branded gas stations and contractual obligations." The report added, "[c]onsequently, these three firms . . . could not produce summer-grade RFG to sell on the spot market as they had done in prior years."

The report discusses one company which "increased its summer-grade RFG production substantially and, as a result, had excess supplies of RFG available and had additional capacity to produce even more RFG at the time of the price spike. It thus found itself with considerable market power in the short term. This firm did sell off some inventoried RFG, but acknowledged that it limited the magnitude of its response because it recognized that increasing supply to the market would push down prices and thereby reduce the profitability of its overall RFG sales."

The report was approved by a Commission vote of 5-0, with Commissioner Orson Swindle issuing a separate statement.

Commissioner Swindle stated that while he "voted to approve the Commission's Final Report on the Midwest Gasoline Price Investigation so that it might, after some delay, finally be submitted to Congress," he also expressed a "grave concern, not with the method of investigation or the factual findings of the Final Report, but rather with the way these findings are being characterized." He observed that the Report found that prices rose "because of factors beyond the industry's immediate control," perhaps the most important of which was "a change, mandated by the Environmental Protection Agency (EPA), from one formulation of gasoline (RFG I) to another formulation (RFG II) that caused unforeseen production difficulties." Commissioner Swindle also stated that "it is unfair to try to assign blame to industry participants -- directly or through insinuation -- for undertaking varying responses to these market factors," and that the "crucial point that may get lost in applying 20/20 hindsight to the firms' actions is that the industry acted quickly in response to the price spike, which was intense but relatively short-lived because of the effective workings of the market." He emphasized that the "bottom line is that the problems in the Midwest were caused not by antitrust violations -- of which there is no evidence -- but by a combination of the EPA requirement and unforeseen market circumstances. Ultimately, the market worked to correct the situation. These conclusions, and not certain between-the-lines insinuations, should be the overarching message of the Final Report."

Copies of the report and Commissioner Swindle's statement are available from the FTC's web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; toll-free: 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC Matter No. 001-0174)