Protecting Consumers

GAS PRICES

RULES TO PREVENT GAS PRICE GOUGING

Rise in Gas Prices
Statement from the Office of the Illinois Attorney General
Rise in Gas Prices Investigated in Wake of Hurricane Katrina

Illinois retail gasoline prices are approaching all-time highs, as are gasoline prices around the nation. Prices in most parts of Illinois, although high, have remained at or near the national average. An exception to this trend is occurring in late summer 2005, when gasoline prices in Chicago became among the highest in the nation. With larger portions of monthly household budgets going toward the cost of gasoline, Illinois consumers are finding it increasingly difficult to make ends meet. Although some consumers might make the tough choice to cancel or revise travel plans, Illinoisans who rely on their cars to get to and from work have little choice but to pay the price, and feel the pain, each time they pull up to a gas pump.

The Office of the Illinois Attorney General appreciates that soaring gas prices have left many consumers feeling powerless. Unfortunately, this sense of powerlessness can be compounded by the fact that there is no single, clear explanation for the current rise in prices. Instead, like most complex topics, gasoline pricing lends itself to a multitude of explanatory theories, some of them complementary, some of them conflicting. Even when gasoline prices soar in the wake of a catastrophic event, as they have in the days following Hurricane Katrina, attributing the price increase to a single cause, such as a supply disruption or price gouging, is an oversimplification.

To help us determine what steps we can take to alleviate the current crisis, Attorney General Madigan and her consumer and antitrust attorneys are committed to monitoring all of the factors that affect the price of gasoline at your local station. To be sure, many of these factors are complex and closely linked to global and domestic market forces—forces over which the Office of the Attorney General, as a state law enforcement agency, has little control.

But, as a law enforcement agency, we are uniquely positioned to take action when evidence suggests that high gasoline prices are the result of illegal activities. In response to the current crisis, Attorney General Madigan and her staff have taken several measures to ensure compliance with state and federal laws that prevent consumer fraud and anti-trust violations. These measures include:

• Meeting with representatives of the oil industry to seek information concerning the summer spike in gasoline prices;

• Asking the Federal Trade Commission (FTC) to investigate whether the price of gasoline in Illinois is being artificially manipulated;

• Sending investigators to gas stations throughout the state to investigate consumer complaints of dramatic price increases;

• Requesting detailed information from Illinois gasoline wholesalers and a number of gas station owners about price increases in the wake of Hurricane Katrina;; and

• Requesting the FTC, the Illinois Department of Agriculture, and the Illinois Department of Revenue to assist us with our ongoing monitoring of prices.

REPORT CONCERNS ABOUT POSSIBLE ILLEGAL ACTIVITIES TO US (Back to top)

The Office of the Attorney General is prepared to take action against gasoline retailers or suppliers that we determine to have increased their prices unjustifiably. If you believe that you have evidence of antitrust violations, consumer fraud, or any other illegal behavior involving the setting of gas prices in Illinois, please call our Consumer Fraud Hotlines at:

MORE INFORMATION ABOUT GASOLINE PRICING, THE ROLE OF THE LAW, AND FUEL SAVING TIPS

• THE ROLE OF THE LAW IN GAS PRICING

• FUEL SAVING TIPS

• BREAKDOWN OF COSTS FOR A GALLON OF GASOLINE FOR JULY 2005

• DEPARTMENT OF ENERGY EXPLANATION ON WHY GAS PRICES FLUCTUATE

MORE INFORMATION ABOUT GASOLINE PRICING, THE ROLE OF THE LAW, AND FUEL SAVING TIPS

The Office of the Attorney General is committed to sharing the information we gather on gasoline pricing with those who need it most: Illinois consumers.

Marketplace Factors
According to analysts of the petroleum industry, including the FTC, the single largest factor driving current gasoline price increases is the price of its main component, crude oil, which has increased dramatically in recent weeks. Although there is no single explanation for increases in crude oil prices, it is generally acknowledged that increased demand–not only in the US but worldwide, and particularly in growing economies such as China—has played a key role.

Production quotas for the Organization of the Petroleum Exporting Countries (OPEC) also affect the supply and, indirectly, the price of crude oil. Unrest in the oil-rich countries of the middle east creates market nervousness over the future supply of crude oil, driving up prices, as do strained relations between the US and Venezuela, a major supplier of crude oil.

The number of refineries in the US has decreased in the last two decades, as old refineries closed down and no new refineries were built. Nevertheless, according to a recent report from the FTC, the expansion of the remaining refineries, coupled with the development of more efficient technologies, has allowed domestic refinery production to keep up with demand. (See Gasoline Prices: The Dynamic of Supply, Demand, and Competition, Federal Trade Commission, 2005.)

At the same time, according to the FTC, US refineries have lowered their inventories over the years in an effort to lower inventory costs. Lower inventory holdings can result in price spikes for certain areas when supply is disrupted, as it was by Hurricane Katrina.

For a more in-depth analysis of how market forces affect gasoline prices, see the Department of Energy Explanation on Why Gas Prices Fluctuate , below.

THE ROLE OF THE LAW IN GAS PRICING (Back to more information)

Antitrust Laws
State and federal antitrust laws are designed to promote competition among sellers by forbidding unfair conduct such as agreements among competitors on price or output. High prices by themselves do not constitute a violation of the antitrust laws. Competitors may sell their product for whatever price they believe they can get in a freely competitive market. It is generally not illegal for one retailer to follow the price of another, whether upward or downward. A gas station owner, for example, might look out her window, see that her competitor has raised his price by two cents, and choose to raise her own price by the same amount.

By contrast, if high prices are the result of an agreement on price or output, the antitrust laws come into play. Let’s say, for example, that a gas station owner calls her competitor down the street and the two of them decide to raise their prices by the same amount. This is an illegal agreement. Agreements on price or output are serious violations of law, which can lead to criminal as well as civil liability. If there is reason to believe such a violation may have occurred, the Office of the Illinois Attorney General, as well as federal law enforcement, will investigate, as we have done in the past.

Consumer Protection Laws
The Illinois Consumer Fraud Act does not provide a remedy for dealing simply with high prices for goods and services. Generally, the Consumer Fraud Act is triggered by deceptive practices. After 9-11 the Office of the Attorney General sued some gasoline retailers for charging exorbitant prices per gallon while exploiting a national disaster. Under the extraordinary circumstances, the dramatic price hike rose to the level of a deceptive practice. However, price increases tied solely to increased worldwide and regional demand and marketplace forces do not give rise to an action under the Consumer Fraud Act. If Illinois gasoline consumers are exploited in a future national disaster, the Attorney General will again move quickly to protect them. This is why our office has significantly increased its scrutiny of gasoline prices in the days following Hurricane Katrina.

FUEL SAVING TIPS (Back to more information)

Although we cannot control the many factors that influence gas prices, there are some day-to-day measures Illinois consumers can take to save money at the pump and reduce the amount of fuel they must purchase. These include:

• Use the correct grade of gasoline  Check you owner’s manual to find out the manufacturer’s recommendations for the appropriate octane level for your vehicle. Octane ratings measure gasoline's ability to resist engine knock. The higher the octane, the higher the price: Premium (highest octane) gas sells for an average of 17 cents more per gallon than regular gas. Only about 6 percent of cars sold in the U.S. need premium gas. 

• Keep your tires inflated to the proper level. Properly inflated tires provide less road-resistance and can improve fuel efficiency. Check your owner's manual for appropriate inflation levels.

• Make sure that you perform regular maintenance.  Regular maintenance as prescribed by the manufacturer will keep your automobile running at its best fuel economy. Additionally, dirty air filters can greatly decrease fuel efficiency.

• Lighten the vehicle load.  Don’t carry a larger load than you need, and avoid packing items on the top of your car. Carrying loads on the top of your vehicle can increase wind resistance and decrease fuel efficiency. A vehicle’s fuel economy can be decreased by 1 to 2 percent for each additional 100 pounds carried in your trunk.

• Minimize vehicle idling.  Today’s automobiles are manufactured to warm-up quickly, eliminating the need to warm-up by running the engine.  Remember, your vehicle gets zero miles to the gallon when idling.

• Follow the posted speed limit and drive defensively but not aggressively.  All vehicles lose fuel economy at speeds over 65 miles per hour.  Avoid aggressive driving and short stopping; not only are these dangerous but they also reduce fuel efficiency.        

• Consider your commuting options.  Car-pooling and taking advantage of public transportation options conserve fuel and have the additional benefit of protecting the environment.

• Take time to seek out the best price.  Because gas prices can vary up to 10 percent in local markets, it is worthwhile to seek out gas stations in your area that consistently have the lowest prices. The Office of the Attorney General advises Illinois consumers to shop for the lowest gas prices in your community by visiting the following Web sites:
• http://www.chicagogasprices.com
• http://www.illinoisgasprices.com
• http://www.illinois.gov/gasprices

BREAKDOWN OF COSTS FOR A GALLON OF GASOLINE FOR JULY 2005 (Back to more information)

From the US Department of Energy

DEPARTMENT OF ENERGY EXPLANATION ON WHY GAS PRICES FLUCTUATE (Back to more information)
Primer on Gasoline Prices
Note: This primer is based on gas pricing data from 2002 and 2003.

Gasoline, one of the main products refined from crude oil, accounts for just about 17 percent of the energy consumed in the United States. The primary use for gasoline is in automobiles and light trucks.  Gasoline also fuels boats, recreational vehicles, and various farm and other equipment. While gasoline is produced year-round, extra volumes are made in time for the summer driving season.  Gasoline is delivered from oil refineries mainly through pipelines to a massive distribution chain serving 167,000 retail gasoline stations throughout the United States. 1 There are three main grades of  gasoline: regular, mid-grade, and premium.  Each grade has a different octane level.  Price levels vary by grade, but the price differential between grades is generally constant.

The cost to produce and deliver gasoline to consumers includes the cost of crude oil to refiners, refinery processing costs, marketing and distribution costs, and finally the retail station costs and taxes. The prices paid by consumers at the pump reflect these costs, as well as the profits (and some- times losses) of refiners, marketers, distributors, and retail station owners.

In 2003, the price of crude oil averaged $28.50 per barrel, and crude oil accounted for about 44% of the cost of a gallon of regular grade gasoline (Figure 1).   In comparison, the average price for crude oil in 2002 was $24.09 per barrel, and it composed 43% of the cost of a gallon of regular gasoline. The share of the retail price of regular grade gasoline that crude oil costs represent varies somewhat over time and among regions.

Federal,  State,  and local taxes are a large component of the retail price of gasoline. Taxes (not including  county and local taxes)  account for approximately 27 percent of the cost of a gallon of gasoline. Within this national average, Federal excise taxes are 18.4 cents per gallon and State excise taxes average about 21 cents per gallon. 2 Also, eleven States levy addition al State sales and other taxes,  some of which are applied to the Federal and State excise taxes. Additional local county and city taxes can have a significant impact on the price of gasoline.

Refining costs and profits comprise about 15% of the retail price of gasoline.   This component varies from region to region due to the different formulations required in different parts of the country.

Distribution, marketing and retail dealer costs and  profits combined make up 14% of the cost of a gallon of gasoline. From the refinery, most gasoline is shipped first by pipeline to terminals near consuming areas, then loaded into trucks for delivery to individual stations. Some retail outlets are owned and operated by refiners, while others are independent businesses that purchase gasoline for resale to the public. The price on the pump reflects both the retailer’s purchase cost for the product and the other costs of operating the service station. It also reflects local market  condi- tions and factors, such as the desirability of the location and the marketing strategy of the owner.

1 National Petroleum News,  Volume 96, Number  6, June 2004.
2Energy Information Administration, Petroleum Marketing Monthly June 2004,                
  Table EN1 at: Click Here for Department of Energy PDF Data Publication

Even when crude oil prices are stable, gasoline prices normally fluctuate due to factors such as seasonality and local retail station competition. Additionally, gasoline prices can change rapidly due to crude oil supply disruptions stemming from world events, or domestic problems such as refinery or pipeline outages.

Seasonality in the demand for gasoline - When crude oil prices are stable, retail gasoline prices tend to gradually rise before and during the summer, when people drive more, and fall in the winter.  Good weather and vacations cause U.S. summer gasoline demand to average about 5% higher than during the rest of the year.  If crude oil prices remain unchanged, gasoline prices would typically increase by 10-15 cents from January to the summer.

Changes in the cost of crude oil - Events in crude oil markets were a major factor in all but one of the five run-ups in gasoline prices between 1992 and 1997, according to the National Petroleum Council’s study, U.S. Petroleum Supply - Inventory Dynamics. About 47 barrels of gasoline are   produced from every 100 barrels of crude oil processed at  U. S. refineries, with other refined products making up the remainder.

Crude oil prices are determined by worldwide supply and demand, with significant influence by the Organization of  Petroleum Exporting Countries (OPEC).  Since it was organized in 1960, OPEC has tried to keep world oil prices at its target level by setting an upper production limit on its members.  OPEC has the potential to influence oil prices world- wide because its members possess such a great portion of the world’s oil supply, accounting for about 39% of the world’s production of crude oil and holding more than two-thirds of the world’s estimated crude oil reserves.

Rapid gasoline price increases have occurred in response to crude oil shortages caused by, for example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf conflict in 1990. Gasoline price increases in recent years have been due in part to OPEC crude oil production cuts, turmoil in key oil producing countries, and problems with petroleum infrastructure (e.g., refineries and pipelines) within the United States.

Product supply/demand imbalances - If demand rises quickly or supply declines unexpectedly due to refinery production problems or lagging imports, gasoline inventories (stocks) may decline rapidly.  When stocks are low and falling, some wholesalers become concerned that supplies may not be adequate over the short term and bid higher for available product.  Such imbalances have occurred when a region has changed from one fuel type to another (e.g., to cleaner-burning gasoline) as refiners and marketers adjust to the new product.

Gasoline may be less expensive in one summer when supplies are plentiful vs. another summer when they are not.  These are normal price fluctuations, experienced in all commodity markets.

However, prices of basic energy (gasoline, electricity, natural gas, heating oil) are generally more volatile than prices of other commodities.  One reason is that consumers are limited in their ability to substitute between fuels when the price for gasoline, for example, fluctuates. So, while consumers can substitute readily between food products when relative prices shift, most do not have that option in fueling their vehicles.

Although price levels vary over time, Energy Information Administration (EIA) data indicate that average retail gasoline prices tend to typically be higher in certain States or regions than in others (Figure 2).   Aside from taxes, there are other factors that contribute to regional and even local differences in gasoline prices:

Proximity of supply - Areas farthest from the Gulf Coast (the source of more than 35 percent of the gasoline produced in the U.S. and, thus, a major supplier to the rest of the country), tend to have higher prices. The proximity of refineries to crude oil supplies can even be a factor, as well as shipping costs (pipeline or waterborne) from refinery to market.

Supply disruptions - Any event which slows or stops production of gasoline for a short time, such as planned or unplanned refinery maintenance, can prompt bidding for available supplies.  If the transportation system cannot support the flow of surplus supplies from one region to another, prices will remain comparatively high.

Competition in the local market - Competitive differences can be substantial between a locality with only one or a few gasoline suppliers versus one with a large number of competitors in close proximity. Consumers in remote locations may face a trade-off between higher local prices and the inconvenience of driving some distance to a lower- priced alternative.

Environmental programs - Some areas of the country are required to use special gasolines. Environmental programs, aimed at reducing carbon monoxide, smog, and air toxics, include the Federal and/or State-required oxygenated, reformulated, and low-volatility (evaporates more slowly) gasolines. Other environmental programs put restrictions on transportation and storage. The reformulated gasolines required in some urban areas and in California cost  more  to produce than conventional gasoline served elsewhere, increasing the price  paid at the pump.

Nineteen States have passed legislation to restrict the use of the gasoline additive MTBE, but of these, only California, Connecticut, Kentucky, Missouri, and New York relied on the additive to begin with. MTBE removal requires large changes to gasoline production and distribution. California faced temporary supply dislocations and price volatility during the summer of 2003 as MTBE was removed from gasoline in the State. Other states may face similar  issues as they make the transition to gasoline without MTBE.

Operating costs -  Even stations co-located have different traffic patterns, rents, and sources of supply that influence retail price.

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