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Skyrocketing Gas Prices Are Result of Consolidation of Big Oil Companies and Opposition to Improved Fuel Economy Standards

Aug. 26, 2003

Skyrocketing Gas Prices Are Result of Consolidation of Big Oil Companies and Opposition to Improved Fuel Economy Standards

WASHINGTON, D.C. – Record increases in gasoline prices are socking Americans in the pocketbook as the Labor Day weekend approaches, but instead of promoting policies that would moderate prices – such as stronger fuel economy standards and tighter oversight of Big Oil – Congress is steering toward passage of anti-consumer energy legislation that would do little but shower billions in taxpayer subsidies on energy companies.

The nationwide average price for gasoline soared to a new all-time record on Monday, hitting $1.75 per gallon – just in time for one of the heaviest driving seasons of the year.

Some industry analysts blame a broken pipeline in Arizona and the temporary shutdown of seven refineries due to the massive electricity blackout in the Northeast. But such disruptions occur periodically and would not cause this type of price spike if the government promoted conservation and exercised proper oversight of the industry by, for example, requiring oil companies to maintain minimum reserves and adequate inventories.

A bigger problem, on the supply side, is industry consolidation that gives a handful of companies tremendous pricing power through mechanisms such as keeping inventories of crude oil and refined gasoline low in advance of peak demand periods. On the demand side, the number of gas-hogging sport utility vehicles has more than tripled since 1992 (to nearly 22 million) and the number of pickup trucks has grown by 40 percent (to 38 million). But the federal government has not upgraded fuel economy standards significantly since the 1970s, and the Senate version of energy legislation contains new hurdles to raising those standards.

The proliferation of SUVs and pickup trucks has reversed the course of oil savings that began with the passage of Corporate Average Fuel Economy (CAFE) standards in 1975, following the Arab oil embargoes. Even though they are used much like cars, SUVs are treated as “light trucks” and have more lenient fuel economy requirements.

“Strengthening fuel economy standards would make motorists and our economy less vulnerable to supply disruptions, market manipulation and price shocks,” said Public Citizen President Joan Claybrook. “Congress should be focusing on conservation, but instead it is pursuing an energy bill that gives away billions in taxpayer dollars to big energy companies with no savings for consumers or help for the environment.”

In terms of gasoline consumption, the average 2002 model SUV uses 40 percent more gasoline than an average 2002 model car for a 100-mile trip. Largely as a result of the SUV proliferation, the average fuel economy of the U.S. passenger vehicle fleet declined from 21.7 miles per gallon (mpg) in 1992 to 20.4 mpg in 2002, the lowest level since 1981. Less efficiency triggers greater demand for gasoline, putting pressure on prices.

SUV owners also pay significantly more at the gas pumps. With gas prices at $1.66 per gallon (the average price on Aug. 25), the driver of the average 2002 model SUV would pay $9.59 to drive 100 miles, while the driver of an average 2002 car would pay $6.83. (Click here to view a fact sheet with more information.)

On the supply side of the equation, as a result of mergers, the five largest oil companies operating in the United States now control 61 percent of the domestic retail gasoline market, 48.5 percent of the domestic oil refinery market and 50 percent of domestic oil exploration and production. ExxonMobil, ChevronTexaco, ConocoPhillips, BP and Shell also control 15 percent of the world’s oil production. These top five corporations now produce more oil everyday than Saudi Arabia, Kuwait and Yemen combined.

“It is no surprise that gasoline prices are skyrocketing as we approach Labor Day weekend,” said Wenonah Hauter, director of Public Citizen’s Critical Mass Energy and Environment Program. “This is what you get when you have a handful of mega-corporations dominating the market, and it is what we predicted when the Federal Trade Commission (FTC) allowed massive consolidation of the oil industry in 1999 and 2000.”

These new mega-corporations are involved in all facets of the oil and gas industry: exploration, production, refining, transportation and retail sales. This vertical integration has resulted in a handful of corporations controlling a substantial chunk of the domestic oil and gas market, allowing them to artificially inflate prices and take advantage of any supply disruptions by gouging consumers.

In March 2001, the FTC reached a curious conclusion about high gasoline prices in the Midwest. While it claimed that no collusion had taken place under current law, it found that “conscious (but independent) choices by industry participants” to intentionally withhold supplies resulted in artificially high prices. The report, however, did not publicly name the names of the companies it alleged to have inflated prices, since the FTC considered the information proprietary.

In response to this latest gasoline crunch, Public Citizen urges that:

  • Congress raise CAFE standards for all passenger vehicles, including SUVs, to 40 mpg, to be phased in by 2015;
  • The federal government require oil companies to maintain sufficient reserves and inventory to reduce price volatility;
  • Congress immediately conduct hearings to determine the cause of price spikes and conduct regular reviews of the status of competitive markets in the oil industry; and,
  • Congress reject the current energy legislation pending in a House-Senate conference committee.