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Why are gas prices still high?

Experts: Market demand, supply drive cost up or down

    With the world price of crude oil dropping significantly in the last several weeks, local consumers wonder why the price of gasoline has not dropped at the same rate.
    Record setting profits posted by the United States’ five largest petroleum companies – $59.4 billion in the first six months of 2006 – have left many consumers wondering if they are the victims of price gouging by oil refiners that produce the gasoline, wholesalers who distribute it, and retailers who sell it to the consumers at the pump.
    Jody Stubbs, owner of Stubbs Oil Company, a gasoline wholesaler based in Statesboro, said the two biggest factors in the price of gasoline are the cost for the gasoline set by the refiners and the taxes that are levied on each gallon.
    "Refiners set prices for their gasoline," Stubbs said. "What you have to remember is that gasoline is a world wide commodity. If American refiners set their prices too high as compared to other refiners around the world, those other refiners would just ship their gasoline to America instead of China, for example, undercutting the price of the American companies, and the price of gasoline from the American refineries would automatically adjust downward."
    Stubbs said that the demand for gasoline is so high, that oil refineries don't have to rush to lower the price when their internal costs decrease.
    "When consumer demand decreases, supplies build up, and the cost of gasoline is pressured downward to get the excess supply sold," Stubbs said. "Right now, demand is high."
     Ask anyone in the petroleum industry, and you will get the same answer. Ultimately, the price of gasoline is the function of a free market economy in which demand for the product sets the price in the marketplace. Simply put, with decreased demand and increased supply comes a lower price. And vice versa, with increased demand and decreased supply comes a higher price.
    Ron Planting, an economist with the American Petroleum Institute in Washington, D.C., said that a free market economy in the gasoline sector is alive and well and that there is no conspiracy to keep the price of gasoline from going down.
    "There are lots of refiners in the United States and a tremendous number of buyers," Planting said. "There are also a lot of factors that drive the market and affect the price of gasoline. Gasoline is sold in a competitive marketplace and that is what is best for consumers – competition."
    So the question becomes, is the sale of gasoline truly competitive between the large oil refiners that produce and sell it in the United States namely, ExxonMobil, BP, Shell, Chevron Texaco, ConocoPhillips, and Valero.  
    It is not, if you believe the assertions of Public Citizen, a consumer watchdog group based in Washington, D.C.
    According to Public Citizen, mergers in the oil industry between giants such as Exxon and Mobil, Chevron and Texaco, and Conoco and Phillips have resulted in just a few companies controlling a significant amount of America's gasoline which has drastically reduced the amount of competition in the marketplace. Now the largest five oil refiners in the United States, including Valero, based in San Antonio, Texas, control 55 percent of the gasoline market in this country. Ten years ago, that same market share was held by 10 companies, double what it is today.    
    What the oil companies refer to as an open and free market for gasoline is referred to as an unhealthy strong market position by Public Citizen.
    John Seesel, associate general counsel for energy at the Federal Trade Commission in Washington, said the United States government follows the price of gasoline very closely looking for any evidence of collusion or price "fixing" by the large oil refiners and those on down the line who sell it.
    "We look for illegal activity – collusion or conspiratorial behavior – that would violate antitrust laws," Seesel said. "Once the refinery parts title with the refined product, we want to know if distribution is being done in accordance with anti-trust laws."
    "Assuming sellers are acting independently and not in concert, they can sell it at any price that they want," he said. "The seller, at any point in the distribution process, has to calculate internally if it makes sense to keep selling their product at a certain price, or reduce it."
    So, where does this leave the consumer? More specifically, why are prices different on one corner than another. Why should prices be higher in Statesboro, than say, in Vidalia? Well, according to Andrew Kleit, Ph.D., a professor of energy and environmental economics at Penn State University, and the author of “The Economics of Gasoline Retailing: Petroleum Distribution and Retailing Issues in the United States,” market forces set the price for gasoline even on your local corner.
    "If someone in a local market lowers their price, market forces will go into effect and the rest will either lower theirs or choose not to," Kleit said. "There is a world demand for gasoline that is only going up. Whether you are talking the price of refined gasoline at the terminal or at the pump, the demand for product by those buying it will drive the price. If you don't like the price at one retail outlet, just go to another. Nothing is preventing the consumer from going to another town to buy their gasoline."
    Jappy Stringer, owner of Stringer's Chevron in Statesboro, said the large retailers of gasoline who have outlets in different markets can afford to lower their prices below their competitors to "buy" business in one market, and then make it up in another.
    "I know of times when these large gas retailers have sold gasoline for under their costs just to sell as much as they can and to undercut their neighbor," he said. "They can do that because they can make it up in other markets."
    Stubbs said he firmly believes that consumers drive the cost.
    "I tell people if they would just back off on their consumption, supplies would go up, and the oil companies would have to reduce their price to move the product," Stubbs said. "If there were some way that people could just not drive for one day, it would have a clear downward effect on the price of gas."
    It is no secret that American consumers are not happy with the price of gasoline at the pump. However, what is not clear is if they are ready to do something about it. Industry spokespeople agree that as a worldwide commodity, gas is subject to the market forces of demand and supply and as long as the market, whether locally or abroad, has an unquenchable thirst, the price will reflect it.

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