IIInnnvvveeessstttiiigggaaatttiiiooonnn ooofff GGGaaasssooollliiinnneee PPPrrriiiccceee MMMaaannniiipppuuulllaaatttiiiooonnn aaannnddd PPPooosssttt---KKKaaatttrrriiinnnaaa GGGaaasssooollliiinnneee PPPrrriiiccceee IIInnncccrrreeeaaassseeesss FFFeeedddeeerrraaalll TTTrrraaadddeee CCCooommmmmmiiissssssiiiooonnn SSSppprrriiinnnggg 222000000666 Federal Trade Commission DEBORAH PLATT MAJORAS Chairman PAMELA JONES HARBOUR Commissioner JON LEIBOWITZ Commissioner WILLIAM E. KOVACIC Commissioner J. THOMAS ROSCH Commissioner Brian Huseman Chief of Staff Charles H. Schneider Executive Director Jeffrey Schmidt Director, Bureau of Competition Lydia B. Parnes Director, Bureau of Consumer Protection Michael Salinger Director, Bureau of Economics William Blumenthal General Counsel Nancy Ness Judy Acting Director, Office of Congressional Relations Nancy Ness Judy Director, Office of Public Affairs Maureen K. Ohlhausen Director, Office of Policy Planning Donald S. Clark Secretary of the Commission Inquiries concerning this report should be directed to: John H. Seesel, Associate General Counsel for Energy, at (202) 326-2702 or [email protected]. Table of Contents INTRODUCTION AND EXECUTIVE SUMMARY....................................................................... i PART I: INVESTIGATION OF PRICE MANIPULATION ........................................................1 CHAPTER 1: REFINING ..................................................................................................3 I. INDUSTRY BACKGROUND ................................................................................5 II. CAPACITY UTILIZATION AND OTHER SHORT-RUN OUTPUT DECISIONS.............................................................................................................6 A. Capacity Utilization Rates ...........................................................................6 B. Refinery Downtimes and Output Slates.......................................................8 1. Planned and Unplanned Refinery Downtimes.................................8 2. Examination of Turnarounds in California......................................9 3. Choice of Output............................................................................10 C. Other Short-Run Output Decisions............................................................12 1. Thinly-Traded Markets ..................................................................12 2. Geographic Allocation of Product .................................................12 III. LONG-RUN REFINING CAPACITY DECISIONS ............................................14 A. Market Evidence that Refiners Have Not Underinvested in Capacity Expansion...................................................................................................15 B. Documentary Evidence and Testimony that Refiners Have Not Underinvested in Capacity.........................................................................17 C. Refinery Closures and Sales ......................................................................18 IV. CONCLUSIONS....................................................................................................20 CHAPTER 2: BULK DISTRIBUTION INFRASTRUCTURE ........................................29 I. REFINED PRODUCT PIPELINES ......................................................................30 A. Background................................................................................................30 B. Factors Influencing the Likelihood of Price Manipulation........................32 1. Regulation......................................................................................32 2. Curtailing Discounts on Tariffs .....................................................32 3. Expansion Decisions......................................................................32 4. Vertical Foreclosure.......................................................................34 II. MARINE SHIPMENT OF REFINED PRODUCTS.............................................34 A. Background................................................................................................34 1. Imports and International Shipping ...............................................35 2. Domestic (Jones Act) Coastwise Trade .........................................35 B. Factors Influencing the Likelihood of Price Manipulation........................36 1. Regulation and Changing Contractual Environment .....................36 2. Likelihood of Anticompetitive Conduct ........................................39 III. TERMINALS.........................................................................................................39 A. Background................................................................................................39 B. Factors Influencing the Likelihood of Price Manipulation........................41 IV. CONCLUSIONS....................................................................................................43 CHAPTER 3: PRODUCT INVENTORY PRACTICES .................................................45 I. GASOLINE INVENTORY TRENDS...................................................................45 II. INVENTORY OVERVIEW..................................................................................46 III. INVENTORY MANAGEMENT ..........................................................................47 IV. THEORY OF COORDINATED PRODUCT INVENTORY REDUCTIONS.....48 V. CONCLUSIONS....................................................................................................49 CHAPTER 4: OTHER ISSUES INVOLVING POTENTIAL GASOLINE PRICE MANIPULATION .....................................................................................53 I. MANIPULATION OF GASOLINE FUTURES PRICES ....................................53 II. POSSIBLE MANIPULATION AND PUBLICLY REPORTED BULK SPOT PRICES..................................................................................................................56 III. MERGER EFFECTS .............................................................................................58 IV. CONCLUSIONS....................................................................................................58 PART II: GASOLINE PRICES IN THE AFTERMATH OF HURRICANE KATRINA .........59 CHAPTER 5: NATIONAL AND REGIONAL IMPACT OF HURRICANES KATRINA AND RITA ON GASOLINE PRICES ......................................................61 I. INTRODUCTION .................................................................................................61 II. THE HURRICANES= NATIONWIDE IMPACT ON GASOLINE SUPPLY.................................................................................................................62 A. Katrina........................................................................................................62 B. Rita.............................................................................................................64 III. POST-HURRICANE INCREASES IN NATIONAL AVERAGE PRICES.........65 IV. REGIONAL SUPPLY IMPACTS OF THE HURRICANES ...............................67 V. POST-HURRICANE EFFECTS ON REGIONAL PRICES.................................71 TOC-2 VI. OUTPUT RESPONSES FROM UNAFFECTED REFINERIES..........................75 VII. GASOLINE INVENTORIES ................................................................................76 VIII. IMPORT RESPONSES .........................................................................................79 IX. CONCLUSIONS....................................................................................................81 CHAPTER 6: IMPACT OF THE HURRICANES ON WHOLESALE AND RETAIL PRICES IN SELECTED URBAN AREAS...............................................95 I. WHOLESALE PRICES IN SELECTED URBAN AREAS BEFORE AND AFTER THE HURRICANES................................................................................96 A. Summary of Pre- and Post-Katrina Branded Wholesale Price Changes....96 B. Competitive Analysis of Post-Katrina Wholesale Price Changes .............98 1. Changes in Costs and Wholesale Prices ........................................98 2. Competition and Wholesale Price Changes.................................103 II. RETAIL PRICES IN SELECTED URBAN AREAS BEFORE AND AFTER KATRINA............................................................................................................104 A. Summary of Retail Price Changes ...........................................................104 B. Competitive Analysis of Post-Katrina Retail Price Changes...................105 1. Changes in Costs and Retail Prices..............................................105 2. Competition and Retail Price Changes ........................................108 III. EXTENT OF UNUSUALLY HIGH RETAIL PRICES AFTER KATRINA.....108 IV. CONCLUSIONS..................................................................................................113 CHAPTER 7: ANALYSIS OF PRICE INCREASES IN THE AFTERMATH OF HURRICANE KATRINA .......................................................................137 I. DEFINITION OF PRICE GOUGING FOR THE PURPOSES OF THIS ANALYSIS..........................................................................................................137 II. OPERATING MARGINS FOR LARGE WHOLESALE SELLERS OF REFINED PETROLEUM PRODUCTS..............................................................138 A. Group 1: Refiners....................................................................................140 B. Group 2: Wholesaler/Retailers................................................................141