New Study Finds Low Gasoline Inventories Unreasonably Driving Up Pump Prices

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Santa Monica, CA — A new report points to deliberately low refinery inventories as the chief reason for the longer, higher gasoline price spikes in the West, leaving the region vulnerable to disaster-level shortages in the event of refinery outages.
Read the study here.

The report, produced by independent oil industry analyst Tim Hamilton for the nonprofit, nonpartisan Foundation for Taxpayer and Consumer Rights (FTCR) found that higher gasoline prices in the Western states this month are due to oil companies maintaining a low inventory in the region, currently just an estimated 18 days as opposed to an estimated 48 days in Gulf Coast states.

“By maintaining too little supply, the oil companies have been able to charge Western states motorists outrageous prices for gasoline, far in excess of production and raw material costs,” said Hamilton.

FTCR pointed to three recommendations 1) Regulating the gasoline supply to prevent artificial shortages; 2) Modernizing anti-trust laws; 3) Enactment of a November California ballot measure for alternative fuel development by the state to boost inventories by blending cleaner, cheaper fuels with petroleum.

“The public needs new laws requiring oil companies to maintain sufficient inventories and aiding development of alternative fuels that can reduce the refiners’ grip over the market and our dependence on petroleum,” said FTCR’s Judy Dugan. “Californians can start with the November ballot measure instructing the state to develop cleaner, cheaper fuels.”

The study finds that gasoline supplies in the West are so low that prices would likely spike to $4 and above if there is a refinery fire or other disruption during the peak summer driving season.

The chief points of the study, “Running on Empty in the West,” are:

  • Oil companies have used “just-in-time” inventory practices to artificially drive up pump prices in the U.S. and especially in the West. Gasoline prices are sensitive to local inventory, so keeping supplies at levels just above what would trigger shortages on the street results in dramatic price spikes, most of it profit;
  • Western regional inventory is too low to prevent severe shortages in the event of a major refinery outage. Mid-May gasoline inventory for the Gulf Coast was an estimated 49 days’ supply, up from previous years despite Katrina. The West was at 18 days, down from previous years and not enough to get outside supplies into the West if there is a major refinery fire. Small disruptions could mean $4 gasoline, and major ones could drive prices, especially in California, to $5;
  • Increases in the “spot” market price of crude oil accounted for only a maximum of 17 cents per gallon of pump price increases. Even accounting for local tax increases, most of the price increases went to refinery and marketing profit margins for the oil companies;
  • Neither the MTBE phase-out nor the substitution of ethanol is a serious part of the increase. Washington State uses only conventional gasoline and Puget Sound contains the largest refining capacity in the West outside California, yet the rise in its pump prices nearly mirrored that in California, which uses an ethanol blend; and
  • States and the federal government should update anti-trust laws and require the oil industry to maintain adequate levels of motor fuel. States like California also need to encourage the construction of locally owned and operated ethanol production facilities; a pending November ballot measure to create a state fund for alternative fuels could significantly decrease gasoline prices by increasing production of ethanol and other gasoline alternatives outside oil company control.

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Consumer Watchdog
Consumer Watchdog
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