FTC Competition Director Testifies Before Senate Regarding Recent Midwest Gasoline Price Increases

Presenting Federal Trade Commission testimony today before the U.S. Senate Committee on Energy and Natural Resources regarding recent gasoline price increases in the Midwest, FTC Competition Director Richard G. Parker described several potential causes for the increases and assured Congress that the Commission's investigation into whether such increases have resulted from anti-competitive, collusive or otherwise illegal behavior will be "thorough, objective and as expeditious as possible."

Beginning the testimony by saying that "competition in the energy sector - particularly in the petroleum industry - is vital to the health of the economy of the United States," Parker stressed that antitrust enforcement "has an important role to play in ensuring that the industry is, and remains, competitive." With consumers in some Midwest markets such as Chicago and Milwaukee seeing gasoline prices rise from an average of $1.85 in Chicago to nearly $2.13 per gallon between May 30 and mid-June, before falling back under $2.00 in early July, he said, "increases as dramatic as those seen ... without any obvious complete explanation, call for scrutiny by antitrust enforcement authorities to determine whether they result from collusion or other unlawful anticompetitive conduct."

According to the testimony, publicly available information suggests that several factors may have contributed to the recent price increases. The first is the reduced global supply of crude oil, resulting from OPEC's curtailed production in the second half of 1999. At the same time, several Asian countries began to recover from a regional recession, leading to an increase in their demand for petroleum products. Combined with the continued expansion of the U.S. economy and growth of many foreign economies, this led to a worldwide consumption of oil that exceeded production and lowered existing inventories. Refiners responded by cutting gasoline production and using inventories to meet demand, expecting that these inventories could be replenished once crude prices dropped. As a result, gasoline supplies tightened and the spread between crude oil and conventional gasoline prices increased. Crude prices dropped temporarily last spring after OPEC agreed to increase production, but recovered, reaching $33 a barrel in June - compared to a low of $12 a barrel in early 1999. Two further production increases have been announced over the past month, but their effect on gasoline prices remains to be seen.

At the same time, according to the testimony, "one factor specific to the Midwest that may have contributed to the price increases" was the introduction of EPA Phase II regulations for summer-blend reformulated gasoline (RFG) that went into effect on May 1, 2000 at the wholesale level in Chicago and Milwaukee. The new, more stringent regulations "may have led to abnormally low inventories," the testimony stated, with some reports indicating that summer-blend Phase II RFG is more difficult to refine than expected, and the ethanol-based blend used in Chicago and Milwaukee is proving to be the most difficult of all to make. St. Louis has now entered the RFG program for the first time, adding additional demand to an already tight Midwest RFG supply situation. However, the testimony states, "as with the OPEC factor, RFG-related issues seem unlikely ... to provide a complete explanation for the recent Midwest gas price increases, given that in the Midwest as a whole, conventional gas prices have risen more dramatically than RFG prices since the end of May."

According to the testimony, another possible factor leading to price increases could be last March's break in the Explorer pipeline which moves petroleum from the Gulf of Mexico inland. But none of these factors "precludes the possibility that collusion may have occurred at some point that further contributed to higher gas prices for consumers." This has led the FTC to initiate an independent investigation into the recent Midwest gas price increases. While this investigation will not determine whether prices are too high or too low, it will determine "whether or not specific anticompetitive and unlawful conduct has occurred that interferes with the operation of the free market" and whether there is reason to believe that antitrust laws have been violated.

The testimony continued by describing the FTC's antitrust enforcement authority in the merger and nonmerger areas, stating that this investigation "will focus on whether any industry participants have engaged in collusion because it does not appear, at the outset, that any single oil company has sufficient market power to raise prices unilaterally." The Commission's investigation will be a civil matter and will involve "a thorough search for evidence that the industry participants are engaging in, or have engaged in, collusive behavior prohibited by the antitrust laws." Information will be collected from "various entities that refine, transport and distribute gasoline in the Midwest, as well as suppliers, customers and other knowledgeable or affected persons." The Commission has also authorized staff to use compulsory process to collect information, and has begun issuing subpoenas to "entities involved in the chain of the gas supply to the region," including refiners, pipeline owners and operators, terminal owners and operators, and blend plant owners and operators. FTC staff also have begun interviewing market participants, corporate gasoline users and others, according to the testimony, with the objective of determining who raised prices and "whether there was any illegal contact, communication or signaling among competitors before or during the time prices increased."

The Commission must show more than parallel behavior among market participants to prove collusion, the testimony concluded. The courts have held that some "plus factor" beyond the fact of simultaneous industry-wide price increases is required to demonstrate an unlawful agreement. The Commission will provide an interim status report on its investigation to Congress by the end of this month, but the full review may take significantly longer to ensure "the thorough investigation that this matter deserves."

The Commission vote to approve the testimony and submit a prepared copy for the record was 5-0.

NOTE: The testimony mentioned in this release is 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; 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.

Mitchell J. Katz

Office of Public Affairs

202-326-2161

Matt Downs

Office of Congressional Relations

202-326-2457

(File No. 0010174)

*The information in this release, as well as that in Richard Parker's prepared statement, represent the views of the Federal Trade Commission. His oral presentation and response to questions are his own, and do not necessarily represent the views of the Commission or any individual Commissioner.