Tidbit for Floridians/gas prices

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From Attorney Generals office:

Hurricane Dennis brings
GAS PAINS
High prices perplex and annoy Floridians

After Charley, it was ice and generators. After Frances and Ivan, more
of the same.

But after Hurricane Dennis whopped Florida in early July, the
umber-one complaint from consumers was about gasoline. An
overwhelming 1,900 out of just over 2,000 complaints to the Attorney
General’s Price-Gouging Hotline were about gas prices.

Drivers all over the state reported a steep increase at just about the
time the hurricane hit, with prices going up 10 cents here, 25 cents
there and even 50 cents in a few places. Investigators and attorneys
are still pouring over these reports, and they have issued subpoenas
for more information to fuel distributors.

No doubt about it, higher prices, especially suddenly, attract
attention. Ever since gas prices began a sharp climb a couple of
years ago, the Attorney General’s Office has been working to
understand the trend.

Now a new report commissioned by the Attorney General helps explain
why gasoline in Florida can abruptly increase. The main reasons,
according to the authors, are strong demand from consumers and
supplies kept so tight that the slightest disruption can send prices
soaring.

A "cooperative atmosphere" within the oil industry deters companies
from competing aggressively over price, but the report found no
evidence of unlawful anti-competitive
practices.

"Express collusion on price is not necessary because each company
recognizes that with tight supply each would be better off with higher
prices and, given inelastic demand,consumers would have little choice
but to pay those higher prices," it says.

The report focuses on a spike in Florida gas prices in early 2004.
The analysis does not explain what happened much later during Dennis.
But it does paint an informative, if complicated, portrait of the oil
business and how it affects Florida consumers.

According to the report, prepared by Keith B. Leffler, an economics
professor at the University of Washington, and Peter K. Ashton, a
consultant and expert on the oil industry --

Floridians buy about 23 million gallons of gasoline a day at more than
9,000 gas stations. Consumption of gasoline in Florida has been going
up nearly three percent annually in recent years, nearly twice as much
as nationally.

Demand is up because the population is growing. Also, incomes are
increasing, and when people make more money they are more willing to
spend it on gasoline. Another significant reason is that many people
drive fuel-inefficient SUVs.

Refinery prices to blame

None of the gas consumed in Florida is produced here. Gasoline in
this part of the country is derived from crude oil that comes mostly
from overseas, particularly the Middle East and Latin America, and
the rest, about 40 percent, from U.S.sources.

Florida has no refineries. Gasoline comes either via barge from
refineries on the Gulf Coast or, 20 percent of it, from overseas
refineries via tanker. Then it is stored in terminals and trucked
to gas stations.

Most of the price of a gallon of gasoline is attributable to the cost
of crude oil -- 73 cents per gallon in 2000, $1.08 in late 2004 and
$1.36 in early 2005. The report looked at other components of the
price of a gallon and found that between 2000 and 2004 refining on
average added about another 21 cents, storage about 6 cents and retail
sale about 13 cents. Taxes added another 48 cents or so.

The main reason for the spike of early 2004 was a sharp increase in
the cost of gasoline coming out of refineries. In May 2004, prices at
gas pumps in Florida shot up to $1.94 a gallon, about 50 cents more
than at the beginning of the year. Added costs attributable to
refineries amounted to most of the increase, before prices dropped
back down by the
end of the year.

Why? The answer appears to be mainly a lack of refineries, leading to
an inability to increase supplies quickly, plus low inventories of
gasoline available to consumers.

"By carrying lower inventories, refiners and wholesalers have, in
effect, transferred the risk of short-term supply disruptions away
from themselves and placed this risk (and consequent price effect)
squarely on consumers," the report says.

"The reductions in average inventory levels make consumers much more
susceptible to price spikes. Unlike the mid- and late-1990s, there is
little cushion of supply to meet any temporary supply problems. With
no flexibility in the system, if demand increases beyond expected
levels and/or supply becomes tight, the response is an increase in
price."

Eight big oil companies control most of the production -- 82 percent
-- at U.S. refineries. No new refineries have been built in this
country for 30 years, and the existing facilities are operating
practically flat-out. "These very high utilization rates imply
essentially no remaining flexibility in domestic supply to counter any
other supply or demand factors leading to price increases," the report
says.

What’s more, oil producers keep inventories lower than they used to,
as do many other industries, in order to reduce storage costs.
Sophisticated computers track supply and demand. Gasoline is meant to
arrive "just in time." The oil companies save about $3.6 million a
year by storing less gasoline in Florida than a few years ago.

"From an average of approximately 18 days of supply in 1997, the
Florida average fell to only 11 days of supply during the first four
months of 2004, hitting an all-time low of 7.4 days in February 2004,"
the report says.

Disruptions -- a barge accident, a refinery fire -- "now inevitably
lead to large price spikes because of domestic refining capacity
limitations and the lack of domestic inventories to buffer such
disruptions."

When supplies are tight, oil companies do not jump to undercut other
companies with lower prices. That’s because the companies are highly
interdependent, relying on one another with a profusion of "exchange
agreements." These contracts enable one company to supply gas to
another company in one location in return for getting gas from that
company in another location -- lowering transportation costs but also
leading to a cooperative atmosphere.

And most significantly, price increases allow the companies to make
more money. In late 2004, supplies were finally increased and prices
subsided. But "this delay in the ‘competitive response’ allowed
refiners to reap extraordinary profits while consumers were forced to
pay significantly higher prices at the pump."

Investigating Gas Prices

In the wake of Hurricane Dennis, the Attorney General’s Office is
investigating hundreds of complaints about a spike in gas prices. The
office issued subpoenas to two companies -- Tate Oil Company, a gas
distributor, and Motiva Enterprises, one of its suppliers and a
subsidiary of Royal Dutch Shell -- to determine why gasoline prices
that they charged gas stations increased by as much as 30 cents per
gallon as Dennis approached.

A preliminary investigation found that the number of Shell gas
retailers involved in price-gouging complaints was more than double
those about any other retail brand and that many of the stations
complained about were Shell stations that receive their gas from Tate,
which buys a portion of its supply from Motiva.

Attorney General Charlie Crist has been looking into gas prices for
some time. In 2003, he met with oil company representatives to
discuss factors that might have led to a sharp increase at that time,
and urged the federal Department of Energy to press the companies for
an explanation. Their response was that high prices were attributable
to increased demand, as well as uncertainties in Venezuela and Iraq,
along with cold weather.

In May of 2004, and again in October, the office subpoenaed large oil
companies for information about pricing and other matters, including
agreements between companies that allow them to assist one another in
providing supplies.

In its investigation over the past year, the Attorney General's
Antitrust Division has reviewed viewed nearly 240,000 documents and
computer disks containing nearly 60,000 files in order to examine
recent gas price increases and determine their likely causes.