GAO

United States General Accounting Office

Report to the Honorable

Dianne Feinstein, U.S. Senate

April 2000 MOTOR FUELS

California Gasoline

Price Behavior

GAO/RCED-00-121

Page 1 GAO/RCED-00-121 California Gasoline Price Behavior

Contents

Letter 3

Appendix Appendix I: Comparison of Retail Gasoline Prices in California and

Texas, a Benchmark for the U.S. Gasoline Market 26

Figures Figure 1: California’s Average Daily Gasoline Consumption Compared

With Major World Markets, 1997 6

Figure 2: California’s Gasoline Demand/Supply Network 8

Figure 3: California and U.S. Retail Gasoline Prices, Jan. 1, 1995,

Through Dec. 31, 1999 10

Figure 4: Comparison of California, Texas, and U.S. Retail Gasoline

Price Spikes, Jan. 1, 1995, Through Dec. 31, 1999 11

Figure 5: Retail Price Adjustments Relative to Changes in Wholesale

Prices 16

Figure 6: Retail Gasoline Prices in San Francisco and Los Angeles 19

Figure 7: California, Texas, and U.S. Retail Gasoline Prices, Jan. 1,

1995, Through Dec. 31, 1999 26

Abbreviations

CARB California Air Resources Board

EIA Energy Information Administration

GAO General Accounting Office
Page 2 GAO/RCED-00-121 California Gasoline Price Behavior
Page 3 GAO/RCED-00-121 California Gasoline Price Behavior

United States General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-285102 Letr

April 28, 2000

The Honorable Dianne Feinstein

United States Senate

Dear Senator Feinstein:

Retail gasoline prices in the United States have risen sharply since early

1999, mostly in response to sharply rising world crude oil prices. Although

gasoline prices have, in general, been relatively low for U.S. consumers—

compared with both historical standards and the prices paid in many other

industrialized countries—sharply rising gasoline prices can potentially

have an adverse impact on U.S. consumers, as well as on the U.S. economy.

Moreover, during the second half of the 1990s, retail gasoline prices

throughout the United States have exhibited a high degree of volatility and

fairly frequent spikes. Particularly in California, where consumers already

generally pay higher average prices than they do elsewhere in the United

States, the spikes have raised questions about the behavior of gasoline

prices both within the state and between California and the rest of the

country.

Concerned about the higher gasoline prices and the extent of price spikes

in California, you asked us to analyze the behavior of gasoline prices in the

state. Because we found no standard definition of a gasoline price spike,

for this report, we define a spike as an increase of at least 6 cents per gallon

in a 4- to 21-week period. As agreed with your office, this report addresses

the following questions: (1) To what extent do retail gasoline prices spike

more frequently and higher in California than they do in the rest of the

United States, and what factors account for any difference? (2) Do retail

gasoline prices in California rise faster than they fall in response to

increases and decreases in the wholesale price of gasoline and, if so, why?

(3) What factors account for differences in the retail prices of gasoline

between San Francisco and Los Angeles?

Results in Brief According to our analysis of gasoline price data, from January 1995 through

December 1999, retail gasoline prices spiked no more frequently in

California than they did in the rest of the United States, but the spikes that

did occur were generally higher in California than elsewhere in the nation.

Prices spiked seven times, and during six of the spikes, the price increases
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(the differences between the low and high prices) were between 3 cents

and 31 cents per gallon higher in California than in the rest of the United

States. Many federal, state, and oil industry officials told us that the higher

price spikes in California were caused primarily by unplanned refinery

outages that disrupted the state’s tight balance between gasoline supply

and demand. Because California refineries produce at almost full capacity,

supply disruptions caused by refinery outages must be made up from other

sources, such as out-of-state providers. However, obtaining gasoline from

such providers is slow and costly because only a few out-of-state refineries

can produce gasoline that meets the state’s stringent emission-reducing

standards and the gasoline must be shipped by tanker from far-away

locations. In contrast, some West Coast retailers told us that reduced

competition at the refinery and retail levels caused the higher California

spikes. The Federal Trade Commission is currently investigating gasoline

prices in California and other West Coast states.

According to the results of statistical modeling by the Department of

Energy’s Energy Information Administration, retail gasoline prices in

California rise faster than they fall in response to a delayed pass-through of

changes in the wholesale prices of gasoline—a behavior that has been

observed in other markets. The model was not designed to explain the

factors that account for this price behavior. Energy Information

Administration officials believe, however, that this price behavior has little

or no impact on consumers because their analysis shows that price

increases and decreases at the wholesale level are generally fully passed

through to the retail level, despite some delay. Oil industry officials and

experts we contacted also told us that retail prices generally fully reflect

changes in wholesale prices and that the observed price patterns may be

due to the way retail sellers react to these changes. The officials and

experts were uncertain about what effect, if any, this behavior could have

on consumers.

Retail gasoline prices are higher in San Francisco than in Los Angeles, in

part because of local supply and demand conditions. Retail gasoline prices

were, on average, about 11 cents higher in San Francisco than in Los

Angeles for the period from January 1992 through December 1999. Among

the local supply and demand conditions that are important in explaining

the price differences between the two cities are (1) the number and

location of retail gasoline stations, (2) the costs of building and operating

gasoline stations, and (3) consumers’ incomes. Together, these conditions

would be expected to lead to higher retail gasoline prices in San Francisco

than in Los Angeles, although the exact magnitude of the effects on prices
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Page 5 GAO/RCED-00-121 California Gasoline Price Behavior

cannot be determined with the available data. The local supply and demand

conditions we identified may not entirely explain the price differences

between the two cities. Other factors, such as competition at the refining

level, may help explain these differences, but we were unable to obtain

proprietary data that would have allowed us to explore this possibility.

Background Gasoline prices in California and the rest of the United States have risen

sharply over the past year, largely because of increases in the price of

world crude oil, which rose from a low of about $12 per barrel in February

1999 to a high of about $34 per barrel in early March 2000. In spite of this

sharp rise, gasoline prices are still lower in real terms than they were at

their peak in 1981. For example, in early March of this year, the average

price of gasoline in the United States was $1.50 per gallon, compared with

about $2.47 in 1981 (in 1999 dollars). In addition, the amount of oil the U.S.

economy uses per unit of gross domestic product has decreased since 1979.

Finally, average fuel economy for the new vehicle fleet—including light

trucks and sport utility vehicles—has risen slightly since 1980, although it

has been declining since about 1988 with the increasing share of light

trucks and sport utility vehicles, which have a lower average fuel economy

than cars. If fuel efficiency continues to decline, the impact of higher

gasoline prices on consumers will also rise. Moreover, the increased price

volatility over the last year may have adverse effects on consumers and the

U.S. economy.

California consumed almost 1 million barrels of gasoline per day in 1999,

more than any other state in the country. Furthermore, from 1996 through

1999, California’s gasoline demand grew at an annual rate of about 1.4

percent. To put these data into perspective, in 1997 (the last year data were

available for international comparisons) California was the third largest

consumer of gasoline in the world, behind only the United States and Japan

and ahead of such major countries as China, Germany, and Russia (see fig.

1).
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Figure 1: California’s Average Daily Gasoline Consumption Compared With Major

World Markets, 1997

Consumption in thousands of barrels per day.

Source: Energy Information Administration (EIA).

According to oil industry, federal, and California officials, in general,

California’s gasoline demand is met almost entirely by supply from refinery

production within the state. In 1999, 23 refineries in California made

gasoline: 11, owned by five large refiners, had the capacity to make almost

0

100

200

300

400

500

600

700

800

900

Japan

California

China

Germany

Russia

932 911

774 751

530

Refineries

2,000

3,000

4,000

5,000

6,000

7,000

8,000 8017

United

States
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95 percent of the gasoline refined in the state, and 2, owned by independent

refiners, had the rest of the gasoline-producing capacity. Other refineries

made other petroleum products, such as asphalt and lubricants. Some

conventional gasoline and gasoline that met federal standards for

reformulated gasoline made by California refineries was shipped primarily

to other West Coast markets, such as Oregon, Arizona, and Nevada.1

Gasoline is transported primarily by pipeline from the refineries to storage

terminals and then, typically, by truck from the storage terminals to retail

gasoline stations.

The remaining supply comes from using existing gasoline inventories and

from out-of-state providers. Gasoline brought into California from the U.S.

Gulf Coast or other out-of-state locations typically travels by water on

tankers or barges. Inventories and out-of-state providers generally play a

minimal role except during disruptions in refinery production, when they

become important supply sources. Events that substantially disrupt the

supply of gasoline through this system could have a significant impact on

the prices paid by consumers. Figure 2 shows California’s gasoline demand/

supply network.

1

Reformulated gasoline is designed to reduce harmful exhaust emissions that cause smog.
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Figure 2: California’s Gasoline Demand/Supply Network

Note: Demand/supply data are for 1998.

Source: EIA for demand/supply data; an oil industry official for supply percentages.

To improve its air quality, California established gasoline standards that are

more stringent than the federal standards and different from those of any

other state. On March 1, 1996, California implemented a program that

exceeded the federal requirements for states to use reformulated gasoline

in areas with serious ozone problems. The California reformulated gasoline

program is administered by the California Air Resources Board (CARB). To

Demand

(about 946,000 barrels per day)

Supply

(about 946,000 barrels per day)

= 

Refinery

production

in California 98%

2% • Imports 

(from overseas 

and/or net receipts 

from out of state)

 • Withdrawal 

from inventory
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Page 9 GAO/RCED-00-121 California Gasoline Price Behavior

make reformulated gasoline to meet the more stringent California

standards, referred to as CARB gasoline, California refiners invested

billions of dollars to modify their refineries to add sophisticated equipment

and processes needed to make such gasoline. According to several industry

officials and experts and CARB officials, some refiners, especially smaller

ones, that could not make the needed modifications, partly because of high

modification costs, shut down their refineries. This contributed to the

reduction in the number of refineries in California that can make gasoline.

Gasoline Price Spikes

Were No More

Frequent in California

Than in the Rest of the

Nation but Were

Generally Higher,

Primarily Because of

Refinery Outages

The retail price of regular gasoline spiked the same number of times in

California and in the rest of the United States from 1995 through 1999.2

However, all but one of the price spikes were higher in California than

elsewhere in the country. Many federal, state, and oil industry analysts and

officials believe that the California spikes were higher primarily because

unplanned refinery outages disrupted the state’s tight balance between

gasoline supply and demand. In contrast, some West Coast gasoline

retailers believe that the higher California spikes resulted from reduced

competition at the refinery and retail levels.

Retail Gasoline Price Spikes

in California Were No More

Frequent but Were

Generally Higher

Regular gasoline retail prices spiked seven times in California and in the

rest of the United States (excluding California) from January 1, 1995,

through December 31, 1999, as shown in figure 3. Moreover, five of the

seven California spikes started at about the same time as the U.S. spikes,

and six California spikes overlapped the corresponding U.S. spikes by at

least 4 weeks. Generally, these spikes coincided with increases in crude oil

prices and increases in the demand for gasoline during the spring and

summer driving seasons.3 Price spikes in California and in the rest of the

2

Because we found no standard definition of a gasoline price spike, we analyzed gasoline

prices in California and in the rest of the United States (excluding California) between Jan.

1, 1995, and Dec. 31, 1999, to identify apparent spikes. During that time, there were seven

periods when California and U.S. prices increased by at least 6 cents per gallon in a

relatively short period of time—from 4 to 21 weeks. For this report, we refer to these

increases as spikes.

3

The director of EIA’s Petroleum Division testified on Mar. 9, 2000, that gasoline retail prices

in the United States were about $1.50 per gallon—about 23 cents higher than at the

beginning of the year—citing increases in crude oil prices as a major contributing factor.
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United States occurred at different times only between the fall of 1996 and

the spring of 1997. During this period, U.S. prices spiked in the fall of 1996,

and California prices spiked in the spring of 1997, with a 1-week overlap.

Figure 3: California and U.S. Retail Gasoline Prices, Jan. 1, 1995, Through Dec. 31, 1999

Source: EIA.

In terms of size, retail gasoline price spikes were higher in California than

in the rest of the United States from January 1, 1995, through December 31,

1999, with one exception, as shown in figure 4. During six of the spikes, the

California price increases (the differences between the low and high

prices) were between 3 cents and 31 cents per gallon greater than the

corresponding price increases in the rest of the United States. The smallest

difference occurred in the summer of 1999, when California prices spiked 3

cents per gallon higher than prices in the rest of the United States (20 cents

versus 17 cents). The largest difference occurred in the spring of 1999,

0

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1/3/95 7/3/95 1/3/96 7/3/96 1/3/97 7/3/97 1/3/98 7/3/98 1/3/99 7/3/99 1/3/00

Cents per gallon

California retail price for regular gasoline 

U.S. retail price for regular gasoline (excluding California) 
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Page 11 GAO/RCED-00-121 California Gasoline Price Behavior

when California prices spiked 31 cents per gallon higher (53 cents versus 22

cents). Conversely, U.S. prices spiked 7 cents per gallon higher than

California prices (14 cents versus 7 cents) in the spring of 1995.

Figure 4: Comparison of California, Texas, and U.S. Retail Gasoline Price Spikes,

Jan. 1, 1995, Through Dec. 31, 1999

Source: EIA.

In addition, the relationship between California and U.S. prices changed

after CARB gasoline requirements were implemented. The difference

between gasoline prices in California and in the rest of the United States

increased by about 6 cents per gallon—California prices were 10.5 cents

per gallon higher than U.S. prices before CARB and 16.9 cents per gallon

higher after CARB.

0

10

20

30

40

50

60

Spring

1995

Spring

1996

Fall 1996/

Spring 1997 

Summer

1997

Spring

1998

Spring

1999

Summer

1999

California

Rest of United States 

Texas

Cents per gallon
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A comparison of the number and size of gasoline retail price spikes in

California and in Texas—a large refining state that is comparable to

California in terms of its role in the U.S. gasoline market—corroborated

our finding that spikes were no more frequent but were generally higher in

California than in the rest of the United States. (See app. I for details of this

related analysis.)

Higher Price Spikes in

California Were Due

Primarily to Unplanned

Refinery Outages, but Other

Factors May Have

Contributed

Many oil officials and analysts told us that refinery outages were the

primary reason California gasoline prices spiked higher than prices in the

rest of the United States. However, some West Coast retailers believe that

reduced competition was the primary reason.

Unplanned Refinery Outages

Were the Primary Cause of

Higher California Price Spikes

California refineries had unplanned outages every year from 1995 through

1999. When such outages disrupted the California gasoline supply, oil

companies met demand with gasoline from other sources. They obtained

gasoline from out-of-state providers, used existing inventory, and increased

production at California refineries whose operations were not disrupted.

Obtaining gasoline from such sources was necessary when refinery outages

significantly disrupted California’s supply, as they did in the following

instances:

• On April 1, 1996, an explosion at the Shell refinery in northern California

virtually shut down the refinery’s production, which amounted to about

100,000 barrels of gasoline a day. Before the Shell refinery was fully

repaired, explosions and mechanical problems disrupted operations at

several other refineries. According to the Energy Information

Administration (EIA), these disruptions affected about 12 percent of the

state’s production for several months. Our analysis showed that

California gasoline prices spiked about 39 cents per gallon that spring.

The spike was primarily due to the refinery disruptions, according to

CARB and oil industry officials. Gasoline was brought into California

from as far away as Finland to make up for the lost production.

• An explosion at Tosco’s northern California refinery in February 1999

and subsequent outages in at least three other California refineries

significantly disrupted gasoline production for several months,

adversely affecting 12 to 15 percent of the state’s production, according

to EIA and others. California Energy Commission officials and oil

industry analysts told us that these outages forced some oil companies
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Page 13 GAO/RCED-00-121 California Gasoline Price Behavior

to buy gasoline on the spot market, driving up wholesale prices and,

consequently, retail prices. Our analysis showed that California retail

prices spiked 53 cents per gallon that spring. Gasoline from U.S. Gulf

Coast, U.S. Virgin Islands, and foreign refineries helped lower prices.

However, additional problems at several California refineries in the

summer disrupted the state’s supply again, and these disruptions were

exacerbated by a June 10 explosion that shut down part of the Olympic

Pipeline, which transports thousands of barrels of gasoline a day from

Washington State to Oregon. Federal, state, and oil industry officials told

us that the West Coast gasoline market is interrelated and that a major

supply disruption anywhere in the region affects supply and prices

throughout the region. Our analysis showed that California retail prices

spiked 20 cents per gallon that summer. According to EIA, gasoline from

the U.S. Gulf Coast and U.S. Virgin Islands was used to meet California’s

gasoline demand.

Bringing gasoline into California is slow and costly because California is

isolated from out-of-state sources in two ways. First, only a few refineries

outside the state can make gasoline that meets the state’s CARB gasoline

requirements. These few refineries are not set up to make CARB gasoline

routinely, and they have to reconfigure their refining operations to produce

it. Some oil industry officials told us that making the decision and

reconfiguring for CARB gasoline production takes up to a week and adds

costs for blending, storing, and segregating the gasoline. Second, because

California has no pipelines that can bring gasoline into the state, tankers

and other means must be used. According to oil industry analysts, CARB

gasoline has been brought into California by tankers from the U.S. Gulf

Coast, the U.S. Virgin Islands, and countries as far away as Finland,

Singapore, and South Korea. According to EIA and oil industry officials and

analysts, shipping gasoline into California from these locations takes

between 11 and 40 days and adds 3 to 12 cents per gallon to the retail price.

To a limited extent, oil companies have also used gasoline in inventory and

have increased output at uninterrupted refineries to meet demand when

some California refineries’ production has been disrupted. California

inventories offered little potential relief because oil companies maintain

relatively low inventories to avoid tying up resources. Similarly, California

refineries can increase their production to only a limited degree because

they are already operating at almost full capacity. According to CARB

officials, California refineries were operating at about 97 percent of

capacity in 1999.
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Page 14 GAO/RCED-00-121 California Gasoline Price Behavior

Reduced Competition May Have

Contributed to Higher California

Spikes

Several West Coast retailers we contacted and others believe that reduced

competition at the refinery and retail levels was the primary reason why

California spikes were higher than U.S. spikes from 1995 through 1999.

According to the executive director of the California Service Stations and

Automotive Repair Association, which represents about 850 gasoline

service stations, a lack of competition in California caused the spring 1999

spike. Testifying before the California legislature on April 28, 1999, he noted

that consumption in the state increased 30 percent between 1982 and 1999,

while the number of refineries decreased from 43 to 23 and the number of

service stations decreased from 14,687 to 9,513. Similarly, representatives

from the Automotive Trade Organizations of California, which represents

the owners of over 2,000 service stations, repair facilities, and related

businesses, told us that reduced competition was the major cause of the

California price spikes. Additionally, the executive director of the

Automotive United Trade Organization, which is headquartered in

Washington State, attributed the generally higher gasoline price spikes in

California and other West Coast states to the limited competition facing

large oil companies in these states at both the refiner and the retail levels.

In addition, referring to a 1999 preliminary report on California gasoline

prices, the California attorney general issued a press release expressing

concern that the relative lack of competition in California contributed to

the state’s high gasoline prices.4 We could not confirm that reduced

competition was the primary reason for the higher California price spikes

because the information needed to do so, such as oil companies’ pricing

formulas, plans, or policies, was not readily available.

The Federal Trade Commission is investigating gasoline prices in West

Coast states, including California, Oregon, and Washington. This

investigation was prompted by allegations of anticompetitive behavior by

oil companies. As of January 2000, Commission officials had reached no

conclusions on the matter.

4

Keith Leffler and Barry Pulliam, Preliminary Report to the Attorney General Regarding

California Gasoline Prices (Nov. 22, 1999).
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Retail Gasoline Prices

in California Rise

Faster Than They Fall

in Response to

Changes in Wholesale

Prices

According to statistical modeling completed by EIA at our request, from

April 1996 through July 1999, retail gasoline prices in California rose faster

than they fell in response to changes in the wholesale prices of gasoline. In

other words, the pattern of retail price adjustments to increases and

decreases in the wholesale prices of gasoline was asymmetric.5 The

modeling did not separately estimate how much faster retail prices

increased versus decreased in response to wholesale price changes. A

previous study by EIA also found this asymmetric pattern for price

adjustments in the Midwest, and the pattern is consistent with the findings

of several other studies cited in the EIA report.6 Figure 5 illustrates an

asymmetric pattern of retail price adjustments to wholesale price increases

and decreases using California price data over a 10-week period during the

price spike in the spring of 1999.

5

EIA’s statistical modeling also tested for the pattern of gasoline retail price increases and

decreases in response to changes in the wholesale price in Texas, using Texas data for the

same period. The result showed that retail prices in Texas also rose faster than they fell in

response to changes in wholesale prices.

6

See Price Changes in the Gasoline Market: Are Midwestern Gasoline Prices Downward

Sticky? DOE/EIA, Washington, D.C. (Mar. 1999).
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Page 16 GAO/RCED-00-121 California Gasoline Price Behavior

Figure 5: Retail Price Adjustments Relative to Changes in Wholesale Prices

Source: EIA and the Oil Price Information Service.

As the figure illustrates, when wholesale prices rose, retail prices adjusted

to this increase by also rising, but with a lag. However, the figure also

shows that before retail prices reached their peak, wholesale prices began

to fall. Again, retail prices responded to wholesale prices by falling, but

with a lag. The figure also shows that retail prices rose at a faster rate than

they fell. Although retail prices did not reach the peak of the increase in

wholesale prices before the latter started falling, they stayed up longer, or

fell more slowly, than the decline in wholesale prices. In this example of an

actual price spike, retail prices rose for 4 weeks and fell for 6.

The finding that retail gasoline prices have risen faster than they have fallen

in response to wholesale price changes may have little or no implication for

gasoline consumers apart from a consideration of the extent to which the

wholesale price changes were passed on to consumers. EIA officials told us

that their analyses of the data for California and other U.S. markets have

shown that while the time taken for wholesale price changes to be fully

reflected at the retail level varies among markets, all increases and

0

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3/15/1999 4/12/1999 5/10/1999

Cents per gallon

California retail price for regular gasoline 

California wholesale price for regular gasoline 
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Page 17 GAO/RCED-00-121 California Gasoline Price Behavior

decreases in wholesale prices were completely passed through to the retail

level. According to these officials, because both increases and decreases in

wholesale prices are ultimately fully passed through to the retail level, the

pattern of the pass-through has little or no adverse impact on consumers.

Many of the oil industry officials and experts we contacted also believe

that, in general, because of competition at the retail level, retail prices fully

reflect wholesale price changes, although they do so with a lag when prices

are changing.

To understand why retail gasoline prices may rise faster than they fall in

response to wholesale price changes, and because there is no consensus in

the economic literature as to why, we discussed this asymmetric price

pattern with EIA and other oil industry officials and experts. EIA officials

said that the observed pattern is almost entirely driven by the way retail

prices respond with a lag to changes in wholesale prices. In general, this

explanation is consistent with the description of the price patterns

depicted in figure 5 above.

In our discussions with oil industry officials and experts, several of them

said that retail gasoline prices probably rise faster than they fall in response

to wholesale price changes because retailers try to make up, during falling

prices, for revenues lost when wholesale prices were rising. According to

some oil industry officials and experts, although retail prices may rise fairly

quickly in response to increases in wholesale prices, the increases in retail

prices may not always fully reflect the wholesale price increases. They said

that retailers exercise caution in raising their prices when wholesale prices

are rising to avoid decreased sales and to forestall any backlash from

consumers and public officials. Therefore, they explained, when wholesale

prices fall, retailers lower prices more slowly in an attempt to recoup

revenues lost when prices were rising. Furthermore, some argued that

while retail prices may be slow to follow when wholesale prices fall,

competition eventually forces retail prices down. The officials and experts

we contacted said they did not know what impact this pattern of price

adjustments would have on consumers. Furthermore, they pointed out that

such price patterns are generally short lived and are not typical of long-run

price behaviors.
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Retail Gasoline Prices

Are Higher in San

Francisco Than in Los

Angeles, in Part

Because of Local

Supply and Demand

Conditions

Retail gasoline prices are higher in San Francisco than in Los Angeles, and

these differences have increased since the introduction of CARB gasoline

in 1996. The price differences between the two cities are explained in part

by local supply and demand conditions, including (1) the number and

location of retail gasoline stations, (2) the costs of building and operating

gasoline stations, and (3) consumers’ incomes. These local supply and

demand conditions may not entirely explain the price differences between

the two cities. Other factors, such as competition at the refining level, may

help explain these differences, but we were unable to obtain proprietary

data that would have allowed us to explore this possibility.

Retail Prices in San

Francisco Have Been Higher

Than in Los Angeles Since at

Least 1992

We examined retail gasoline prices from January 1992 through December

1999 and found that with few exceptions, San Francisco had higher prices

than Los Angeles.7 According to data from the Oil and Gas Journal, the

average difference was about 11 cents over the entire period. Moreover, as

discussed below, the average difference grew larger in the second half of

the period, from March 1996 through 1999, and grew still further in 1999.8

Figure 6 shows retail gasoline prices in the two cities from January 1992

through December 1999.

7

We chose the period from 1992 through 1999 so that we could examine the price differences

between San Francisco and Los Angeles before and after CARB gasoline was introduced.

8

We used data from the Oil and Gas Journal to calculate the differences in retail gasoline

prices between San Francisco and Los Angeles. We compared these data with data from the

Lundberg survey that we received from an industry source. The Lundberg data showed a

similar pattern of price differences between San Francisco and Los Angeles, but the

differences were about 3 cents per gallon smaller. For example, the average difference

between prices from Jan. 1992 through Feb. 2000 was about 8 cents using Lundberg data

compared with 11 cents using Oil and Gas Journal data. Similarly, according to Lundberg

data, the average differences before and after CARB were about 3 cents and 14 cents,

respectively, compared with 6 cents and 17 cents using Oil and Gas Journal data.
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Page 19 GAO/RCED-00-121 California Gasoline Price Behavior

Figure 6: Retail Gasoline Prices in San Francisco and Los Angeles

Source: Oil and Gas Journal.

From January 1992 through February 1996, the retail price of regular

gasoline was, on average, about 6 cents higher in San Francisco than in Los

Angeles, but this difference increased to about 17 cents over the period

from March 1996 through December 1999. In addition, refinery shutdowns

in the Bay Area in the summer of 1999 further increased the price

difference between the two cities to about 38 cents in August and

September—the highest difference between 1992 and 1999. The price

difference remained above 26 cents through December 1999.

0

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1/8/92 7/8/92 1/8/93 7/8/93 1/8/94 7/8/94 1/8/95 7/8/95 1/8/96 7/8/96 1/8/97 7/8/97 1/8/98 7/8/98 1/8/99 7/8/99

Cents per gallon

Los Angeles retail price for self-service regular gasoline 

San Francisco retail price for self-service regular gasoline 
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Page 20 GAO/RCED-00-121 California Gasoline Price Behavior

Supply and Demand

Conditions Help Explain

Price Differences Between

San Francisco and Los

Angeles

In general, local supply and demand factors help explain why retail

gasoline prices are higher in San Francisco than in Los Angeles. On the

supply side, according to some experts and industry officials we

interviewed, one key factor explaining the price differences is that

consumers have fewer places to buy gasoline in San Francisco than in Los

Angeles. In 1996, for example, there were about 19 gasoline stations in San

Francisco for every 100,000 people, compared with about 25 stations in Los

Angeles. One explanation for why there are fewer gasoline stations per

capita in San Francisco than in Los Angeles is that land is relatively more

developed in San Francisco, which raises the cost of acquiring a site for a

gasoline station. For example, according to a recent study, gasoline station

development costs—real estate and construction costs—are about 50

percent higher in San Francisco than in Los Angeles.9 In addition, zoning

and other regulations make it harder for station owners in San Francisco to

operate convenience stores on the same property as gasoline stations and

therefore eliminate profitable secondary sales. Being unable to spread high

land costs over gasoline and convenience store sales would tend to make

the costs of selling gasoline and also its price higher in San Francisco than

in Los Angeles.

On the demand side, the annual per-capita consumption of gasoline is

higher in San Francisco than in Los Angeles—in 1996, about 520 and 390

gallons, respectively. Tourists consume part of the gasoline, and on a percapita basis, more tourists visit San Francisco than Los Angeles. For

example, according to a survey done in 1998 for the California Department

of Commerce, San Francisco County—with a population of around

783,000—was host to about 10 million leisure visitors, or about 13 per

capita. In contrast, Los Angeles County—with a population of about

9,587,000—had about 24 million visitors, or about 2.5 per capita. Travelers

to San Francisco County were also more likely to rent cars—about 12

percent of the leisure visitors to San Francisco rented cars compared with

about 8 percent for Los Angeles. Besides increasing the total demand for

gasoline, tourists may be less inclined than residents to search for low

prices, enabling gasoline stations in areas with high tourist traffic to charge

higher prices. Per-capita incomes are also higher in San Francisco than in

Los Angeles, which may make the demand for gasoline in San Francisco

less sensitive to price. Finally, the market structure of the two areas may

play a role in explaining the price differences. For example, ARCO−a self9

Gasoline Station Development Issues in San Francisco, prepared for the Western States

Petroleum Association by Kosmont & Associates, Inc. (Jan. 1998).
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Page 21 GAO/RCED-00-121 California Gasoline Price Behavior

declared and commonly recognized seller of low-priced gasoline at the

retail level−has a bigger market share in southern California than in

northern California, potentially contributing to the lower prices in Los

Angeles.

The local supply and demand conditions that led to generally higher prices

in San Francisco than in Los Angeles may also explain why these price

differences rose when CARB gasoline was introduced in 1996 and why they

rose further during refinery outages in 1999. The introduction of CARB

gasoline in March 1996 caused prices to rise in California relative to the rest

of the United States, in part by raising the cost of refining gasoline. At the

same time, the supply of gasoline in California became more sensitive to

supply disruptions because no outside source of CARB gasoline is readily

available. When the cost of producing gasoline rose, refiners would have

passed at least some of the cost on to retailers in the form of higher

wholesale gasoline prices, in turn causing retail prices to rise. However,

both wholesale and retail prices apparently increased more in San

Francisco than in Los Angeles—the gasoline spot price (a wholesale price)

rose about 2 cents more in San Francisco, and the difference in retail prices

between the two cities increased from 6 cents to 17 cents, an increase of 11

cents.10 There is no consensus among experts and industry officials as to

why higher price increases occurred in San Francisco. One explanation

offered is that higher refining costs are easier to pass on to consumers in

San Francisco because of its local supply and demand conditions. Another

is that the new fuel requirements might have tightened the gasoline supply

and demand balance more in the northern part of the state than in the

southern part. Consensus is also lacking as to why the refinery shutdowns

in 1999 caused such a large increase in the retail price difference between

the two cities, particularly since gasoline can be shipped by barge between

San Francisco and Los Angeles for between 2 and 4 cents per gallon.

However, as noted, local supply and demand conditions may make it easier

to pass on refinery costs and wholesale price increases in San Francisco

than in Los Angeles.

10We were unable to gather data on the two other principal wholesale prices—“rack” and

“dealer tank wagon”—so we cannot determine the extent to which wholesale prices in

general changed when CARB gasoline was introduced.
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Page 22 GAO/RCED-00-121 California Gasoline Price Behavior

Other Factors May Play a

Role in Explaining

Differences in Gasoline

Prices

The 1999 preliminary report on California gasoline prices for the California

attorney general concluded that there is less competition at the refiner

level in California than in the rest of the United States. The report stated

that refiners engage in the practice of zone pricing, which enables them to

charge different wholesale prices to different retail dealers according to

what the market will bear. The report stated that retail dealers pay higher

wholesale prices in San Francisco (17 cents higher for the first 9 months of

1999) than in Los Angeles and that these differences in wholesale prices

explain most of the differences in retail prices between the two cities.

Although zone pricing is not unique to California, this practice could be a

significant cause of retail price differences between San Francisco and Los

Angeles. However, we were unable to obtain proprietary data on the actual

wholesale prices paid by specific retail dealers, and without this

information, we could not explore this possibility. Moreover, the ability of

refiners to engage in and benefit from zone pricing depends to a large

extent on other factors we have addressed in this report. For example,

refiners may not be able to charge higher wholesale prices for gasoline if

competition among retail dealers will preclude them from passing the

higher prices on to consumers.

Agency Comments We provided a draft of this report to the Department of Energy and EIA for

review and comment. We discussed the report with EIA officials, including

the Director, Petroleum Division. EIA agreed with the report and provided

clarifying comments that we incorporated, where appropriate.

Scope and

Methodology

To determine the extent to which retail gasoline prices spike more

frequently and higher in California than in the rest of the United States, we

obtained and analyzed average weekly price data from EIA for selected

retail regular gasoline markets for the period from January 1, 1995, through

December 31, 1999. Specifically, we compared price data for California

reformulated gasoline with price data for all formulations of U.S. gasoline

(excluding California). We also compared price data for California

reformulated gasoline with price data for all formulations of Texas

gasoline, using Texas as a benchmark state for U.S. prices. Specifically, we

calculated the differences between the low and high gasoline prices in

California, Texas, and the rest of the United States during the periods we

identified as spikes—when the California and U.S. prices increased at least

6 cents per gallon in a 4- to 21-week period. To ascertain the reasons for the

differences, we reviewed expert studies and relevant federal and state
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Page 23 GAO/RCED-00-121 California Gasoline Price Behavior

records, and we interviewed officials and experts in the oil industry

(selected oil companies, consulting firms, and trade organizations) and at

EIA and the Federal Trade Commission, the California Energy Commission

and CARB, and the University of California at Berkley and Purdue

University.

To determine whether California retail gasoline prices rise faster than they

fall in response to changes in wholesale gasoline prices, we worked with

EIA to develop and interpret an econometric model. This type of model is

generally used by energy analysts to determine whether the prices of

petroleum products, such as gasoline and home-heating oil, rise at a

different rate than they fall in response to wholesale or even crude oil price

changes—a phenomenon commonly referred to by analysts as price

asymmetry. We used this model to analyze the response of retail prices to

wholesale price changes from April 1996 through July 1999. To the extent

possible, we used data in EIA’s database, which we supplemented with data

purchased from the Oil Price Information Service (a private vendor).

However, these purchased data were not available at the level of detail

needed to fully explain price behavior. To determine the reasons for the

gasoline price asymmetry, we interviewed officials and experts in the oil

industry, EIA, state agencies, and academia. We also reviewed existing

studies and economic literature on gasoline markets.

To determine the extent to which gasoline prices were higher in San

Francisco than in Los Angeles, we analyzed data on retail and wholesale

gasoline prices for the San Francisco/Bay Area and Los Angeles. To

determine the reasons for the differences in the gasoline prices for these

two areas, we assessed the potential effects on gasoline prices of such

factors as geographical characteristics, barriers to market entry, and cost

differences. A lack of data prevented us from fully describing the

importance of all these variables. We also interviewed officials from the oil

industry, EIA, the California Energy Commission, and academia.

We conducted our work between June 1999 and March 2000 in accordance

with generally accepted government auditing standards.

Unless you publicly announce its contents earlier, we plan no further

distribution of this report until 7 days after the date of this letter. At that

time, we will send copies to appropriate congressional committees and

interested Members of Congress. We will also make copies available to

others upon request.
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Page 24 GAO/RCED-00-121 California Gasoline Price Behavior

If you have any questions about this report or need additional information,

please call me at (202) 512-3841. Key contributors to this report included

Daniel Haas, Godwin Agbara, Byron Galloway, and Frank Rusco.

Sincerely yours,

Barry T. Hill

Associate Director, Energy,

Resources, and Science Issues
Page 25 GAO/RCED-00-121 California Gasoline Price Behavior
Page 26 GAO/RCED-00-121 California Gasoline Price Behavior

Appendix I

Comparison of Retail Gasoline Prices in Apendxies

California and Texas, a Benchmark for the

U.S. Gasoline Market ApendxiI

We compared gasoline prices in California and Texas to determine whether

California prices were different from prices in the rest of the United States.

We selected Texas as a benchmark for the comparison because Texas, like

California, played a major role in the U.S. gasoline market from January 1,

1995, through December 31, 1999. Texas and California, respectively, were

the first and third largest refining states and the second and first largest

consuming states.

Gasoline prices in Texas followed a pattern similar to prices in the rest of

the United States (excluding California and Texas), increasing seven times,

as shown in figure 7. However, two Texas price increases, which averaged

less than 6 cents per gallon in the fall of 1996 and the spring of 1998, did not

meet the criteria for a spike that we applied to California price increases.

Figure 7: California, Texas, and U.S. Retail Gasoline Prices, Jan. 1, 1995, Through Dec. 31, 1999

Source: Energy Information Administration.

0

20

40

60

80

100

120

140

160

180

1/3/95 7/3/95 1/3/96 7/3/96 1/3/97 7/3/97 1/3/98 7/3/98 1/3/99 7/3/99 1/3/00

Cents per gallon

California retail price for regular gasoline 

U.S. retail price for regular gasoline (excluding California and Texas)

Texas retail price for regular gasoline
Appendix I

Comparison of Retail Gasoline Prices in

California and Texas, a Benchmark for the

U.S. Gasoline Market

Page 27 GAO/RCED-00-121 California Gasoline Price Behavior

The size of the retail gasoline price spikes was greater in California than in

Texas. Six of the seven California price spikes were between 4 and 34 cents

per gallon higher than the corresponding Texas price spikes or increases.

The smallest difference occurred the summer of 1999 (20 cents per gallon

in California versus 16 cents per gallon in Texas), and the largest difference

occurred in the spring of 1999 (53 cents per gallon in California versus 19

cents per gallon in Texas). Once, in the spring of 1995, Texas prices spiked

6 cents per gallon higher than California prices (13 cents versus 7 cents per

gallon).

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