United States Government Accountability Office

GAO Testimony 

Before the Committee on the Judiciary, 

United States Senate

ENERGY MARKETS 

Factors Contributing to 

Higher Gasoline Prices 

Statement of Jim Wells, Director 

Natural Resources and Environment 

For Release on Delivery

Expected at 9:30 a.m. EST 

Wednesday, February 1, 2006 

 

GAO-06-412T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 1, 2006

ENERGY MARKETS

Factors Contributing to Higher Gasoline 

Highlights of GAO-06-412T, a report to the Prices 

Committee on the Judiciary, United States 

Senate 

Soaring retail gasoline prices, 

increased oil company profits, and 

mergers of large oil companies 

have garnered extensive media 

attention and generated 

considerable public concern. 

Gasoline prices impact the 

economy because of our heavy 

reliance on motor vehicles. 

According to the Department of 

Energy’s Energy Information 

Administration (EIA), each

additional ten cents per gallon of

gasoline adds about $14 billion to 

America’s annual gasoline bill. 

Given the importance of gasoline 

for the nation’s economy, it is 

essential to understand the market 

for gasoline and how prices are 

determined. In this context, this 

testimony addresses the following 

questions: (1) What factors affect

gasoline prices? (2) What has been 

the pattern of oil company mergers 

in the United States in recent 

years? (3) What effects have

mergers had on market

concentration and wholesale 

gasoline prices? 

To address these questions, GAO 

relied on previous reports,

including (1) a 2005 GAO primer on 

gasoline prices, (2) a 2005 GAO

report on the proliferation of 

special gasoline blends, and (3) a 

2004 GAO report on mergers in the 

U.S. petroleum industry. GAO also

collected updated data from a 

number of sources that we deemed 

reliable. This work was performed

in accordance with generally

accepted government auditing

standards. 

Crude oil prices are the major determinant of gasoline prices. A number of 

other factors also affect gasoline prices including (1) refinery capacity in the 

United States, which has not expanded at the same pace as demand for 

gasoline and other petroleum products in recent years; (2) gasoline 

inventories maintained by refiners or marketers of gasoline, which as with 

trends in a number of other industries, have seen a general downward trend 

in recent years; and (3) regulatory factors, such as national air quality 

standards, that have induced some states to switch to special gasoline 

blends that have been linked to higher gasoline prices. Finally, the structure 

of the gasoline market can play a role in determining prices. For example, 

mergers raise concerns about potential anticompetitive effects because 

mergers could result in greater market power for the merged companies, 

potentially allowing them to increase prices above competitive levels. 

During the 1990s, the U.S. petroleum industry experienced a wave of 

mergers, acquisitions, and joint ventures, several of them between large 

oil companies that had previously competed with each other for the sale 

of petroleum products. During this period, more than 2,600 merger 

transactions occurred—almost 85 percent of the mergers occurred in the 

upstream segment (exploration and production), while the downstream 

segment (refining and marketing of petroleum) accounted for about 13 

percent, and the midstream segment (transportation) accounted for 

about 2 percent. Since 2000, we found that at least 8 additional mergers 

have occurred, involving different segments of the industry. Petroleum 

industry officials and experts we contacted cited several reasons for the 

industry’s wave of mergers since the 1990s, including increasing growth, 

diversifying assets, and reducing costs. 

Mergers in the 1990s contributed to increases in market concentration in 

the refining and marketing segments of the U.S. petroleum industry, 

while the exploration and production segment experienced little change 

in concentration. GAO evaluated eight mergers that occurred in the 

1990s after they had been reviewed by the FTC—the FTC generally 

reviews proposed mergers involving the petroleum industry and only 

approves such mergers if they are deemed not to have anticompetitive 

effects. GAO’s econometric modeling of these mergers showed that the 

majority resulted in small wholesale gasoline price increases. While 

mergers since 2000 also increased market concentration, we have not 

performed modeling on more recent mergers and thus cannot comment 

on any potential additional effect on wholesale gasoline prices. 

www.gao.gov/cgi-bin/getrpt?GAO-06-412T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells at 

(202) 512-3841 or wellsj@gao.gov.. 
Energy Markets

Mr. Chairman and Members of the Committee: 

I am pleased to participate in the Committee’s hearing to discuss the 

factors that influence gasoline prices, including oil company mergers. 

Soaring retail gasoline prices, increased oil company profits, and mergers 

of large oil companies have garnered extensive media attention and 

generated considerable public concern, particularly in the immediate 

aftermath of hurricanes Katrina and Rita. More recently, retail gasoline 

prices have fallen from those extremes but remain considerably higher 

than they were for much of the past decade. In 2004, the United States 

consumed about 20.5 million barrels per day of crude oil accounting for 

roughly 25 percent of world oil production. About half of the crude oil 

consumed in this country goes into production of gasoline. High gasoline 

prices impact the economy because of our heavy reliance on motor 

vehicles—the United States consumes roughly 45 percent of all gasoline 

consumed in the world. To put this in context, according to the 

Department of Energy’s Energy Information Administration (EIA), 

nationally, each additional ten cents per gallon of gasoline adds about $14 

billion to America’s annual gasoline bill. 

Data from the Energy Information Administration (EIA) indicate that there 

are currently 149 refineries in the United States with a total crude oil 

distillation capacity of about 16.9 million barrels per day. Demand for 

petroleum products has been rising at a faster rate than domestic refining 

capacity and the difference has come from imports, including gasoline 

from Europe. Although refining capacity has risen gradually since the mid 

1980s as refineries are upgraded, no new major refinery has been built on

the U.S. mainland in the last 25 years. Looking forward, domestic demand 

for petroleum products is projected to increase by about 20 percent by 

2020, raising concerns about our ability to satisfy growing demand for 

gasoline and other petroleum products without increasingly relying on

imports. 

Given the importance of gasoline for our economy, it is essential to 

understand the market for gasoline and how prices are determined. In this 

context, this testimony addresses the following questions: (1) What factors 

affect gasoline prices? (2) What has been the pattern of oil company 

mergers in the United States in recent years? (3) What effects have 

mergers had on market concentration and wholesale gasoline prices? 

To address these questions, we relied on previous GAO reports on 

gasoline prices and other aspects of the petroleum industry, including (1) 

a 2005 GAO primer on gasoline prices, (2) a 2005 GAO report on the 

Page 1 GAO-06-412T
Energy Markets

proliferation of special gasoline blends, and (3) a 2004 GAO report on 

mergers in the U.S. petroleum industry.1

 We also collected updated data

from a number of sources that we deemed reliable. This work was 

performed in accordance with generally accepted government auditing 

standards. 

In summary we found the following:

• Crude oil prices are the fundamental determinant of gasoline prices. A 

number of other factors also affect gasoline prices including (1) refinery 

capacity in the United States, which has not expanded at the same pace as

demand for gasoline in recent years; (2) gasoline inventories maintained 

by refiners or marketers of gasoline, which have seen a general downward 

trend in recent years; and (3) regulatory factors, such as national air 

quality standards, that have induced some states to switch to special 

gasoline blends that have been linked to higher gasoline prices. Finally, the 

structure of the gasoline market can play a role in determining prices. For 

example, mergers raise concerns about potential anticompetitive effects 

because mergers could result in greater market power for the merged 

companies, potentially allowing them to increase prices above competitive 

levels. 

• The 1990s saw a wave of merger activity in which over 2600 mergers 

occurred involving all three segments of the U.S. petroleum industry—

almost 85 percent of the mergers occurred in the upstream segment 

(exploration and production), while the downstream segment (refining 

and marketing of petroleum) accounted for about 13 percent, and the 

midstream segment (transportation) accounted for about 2 percent. Since 

2000, we found that at least 8 additional mergers have occurred, involving

different segments of the industry. 

• This wave of mergers contributed to increases in market concentration in 

the refining and marketing segments of the U.S. petroleum industry. 

Econometric modeling we performed of eight mergers that occurred in the 

1990s showed that the majority resulted in small wholesale gasoline price 

increases—changes were generally between about 1 and 7 cents per 

 1

See U.S. GAO, Energy Markets: Effects of Mergers and Market Concentration in the U.S.

Petroleum Industry, GAO-04-96 (Washington, D.C.: May 17, 2004); U.S. GAO, Motor Fuels:

Understanding the Factors That Influence the Retail Price of Gasoline, GAO-05-525SP 

(Washington, D.C.: May 2, 2005); and U.S. GAO, “Gasoline Markets: Special Gasoline 

Blends Reduce Emissions and Improve Air Quality, but Complicate Supply and 

Contribute to Higher Prices,” GAO-05-421, (Washington, D.C.: June 17, 2005). 

Page 2 GAO-06-412T
Energy Markets

gallon. The 8 additional mergers since 2000 did increase the level of 

industry concentration. However, because we have not performed 

modeling on these mergers, we cannot comment on any potential 

additional effect on wholesale gasoline prices. 

Crude oil prices are the fundamental determinant of gasoline prices. As 

figure 1 shows, crude oil and gasoline prices have generally followed a 

similar path over the past three decades and have risen considerably over 

the past few years. 

Figure 1: Gasoline and Crude Oil Prices—1976-2005 (Not adjusted for inflation)

Source: GAO analysis of data from the Energy Information Administration, Department of Energy, Monthly Energy Review, Monthly 

Refiner Acquisition Cost of Crude Oil, Composite and Monthly Motor Gasoline Prices, U.S. City Averages, Regular Unleaded Gasoline.

Refining capacity also plays a role in determining how gasoline prices vary

across different locations and over time. Refinery capacity in the United 

States has not expanded at the same pace as demand for gasoline and 

other petroleum products in recent years. The American Petroleum 

Institute recently reported that U.S. average refinery capacity utilization 

has increased to 92 percent. As a result, domestic refineries have little 

room to expand production in the event of a temporary supply shortfall. 

Furthermore, the fact that imported gasoline comes from farther away 

than domestically produced gasoline means that when supply disruptions 

Crude Oil Prices and 

Other Factors Affect 

Gasoline Prices 

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

Year

Dollars pergallon

Crude oil price

Gasoline price

Page 3 GAO-06-412T
Energy Markets

occur in the United States it might take longer to get replacement gasoline 

than if we had excess refining capacity in the United States. This could 

cause gasoline prices to rise and stay high until the imported supplies can 

reach the market. 

Gasoline inventories maintained by refiners or marketers of gasoline can

also have an impact on prices. As have a number of other industries, the 

petroleum products industry has adopted so-called “just-in-time” delivery 

processes to reduce costs leading to a downward trend in the level of 

gasoline inventories in the United States. For example, in the early 1980s

private companies held stocks of gasoline in excess of 35 days of average 

U.S. consumption, while in 2004 these stocks were equivalent to less than 

25 days consumption. While lower costs of holding inventories may reduce 

gasoline prices, lower levels of inventories may also cause prices to be 

more volatile because when a supply disruption occurs, there are fewer 

stocks of readily available gasoline to draw from, putting upward pressure 

on prices. 

Regulatory factors also play a role. For example, in order to meet national 

air quality standards under the Clean Air Act, as amended, many states 

have adopted the use of special gasoline blends—so-called “boutique 

fuels.” As we reported in a recent study, there is a general consensus that 

higher costs associated with supplying special gasoline blends contribute 

to higher gasoline prices, either because of more frequent or more severe 

supply disruptions, or because higher costs are likely passed on, at least in 

part, to consumers. 

Finally, the structure of the gasoline market can play a role in determining 

prices. For example, mergers raise concerns about potential 

anticompetitive effects because mergers could result in greater market 

power for the merged companies, potentially allowing them to increase 

prices above competitive levels.2

 On the other hand, mergers could also 

yield cost savings and efficiency gains, which may be passed on to 

consumers through lower prices. Ultimately, the impact depends on 

whether market power or efficiency dominates. 

 2

Federal Trade Commission and Department of Justice have defined market power for a

seller as the ability profitably to maintain prices above competitive levels for a significant 

period of time.

Page 4 GAO-06-412T
During the 1990s, the U.S. petroleum industry experienced a wave of 

mergers, acquisitions, and joint ventures, several of them between large oil 

companies that had previously competed with each other for the sale of 

petroleum products.3

 More than 2,600 merger transactions have occurred 

since 1991 involving all three segments of the U.S. petroleum industry. 

Almost 85 percent of the mergers occurred in the upstream segment 

(exploration and production), while the downstream segment (refining 

and marketing of petroleum) accounted for about 13 percent, and the 

midstream segment (transportation) accounted for about 2 percent. The 

vast majority of the mergers—about 80 percent—involved one company’s 

purchase of a segment or asset of another company, while about 20 

percent involved the acquisition of a company’s total assets by another so

that the two became one company. 

Most of the mergers occurred since the second half of the 1990s, including

those involving large partially or fully vertically integrated companies. For 

example, in 1998 British Petroleum (BP) and Amoco merged to form 

BPAmoco, which later merged with ARCO, and in 1999 Exxon, the largest 

U.S. oil company merged with Mobil, the second largest. Since 2000, we 

found that at least 8 large mergers have occurred. Some of these mergers 

have involved major integrated oil companies, such as the ChevronTexaco merger, announced in 2000, to form ChevronTexaco, which went 

on to acquire Unocal in 2005. In addition, Phillips and Tosco announced a 

merger in 2001 and the resulting company, Phillips, then merged with 

Conoco to become ConocoPhillips. Independent oil companies have also 

been involved in mergers. For example, Devon Energy and Ocean Energy, 

two independent oil producers, announced a merger in 2003 to become the 

largest independent oil and gas producer in the United States. 

Petroleum industry officials and experts we contacted cited several 

reasons for the industry’s wave of mergers since the 1990s, including 

increasing growth, diversifying assets, and reducing costs. Economic 

literature indicates that enhancing market power is also sometimes a 

motive for mergers, which could reduce competition and lead to higher 

prices. Ultimately, these reasons mostly relate to companies’ desire to 

maximize profits or stock values. 

Mergers Occurred in 

All Segments of the 

U.S. Petroleum 

Industry in Recent 

Years for Several 

Reasons 

 3

We refer to all of these transactions as mergers. 

Page 5 GAO-06-412T Energy Markets
Mergers in the 1990s contributed to increases in market concentration in 

the refining and marketing segments of the U.S. petroleum industry, while 

the exploration and production segment experienced little change in

concentration. Econometric modeling we performed of eight mergers that 

occurred in the 1990s showed that the majority resulted in small wholesale 

gasoline price increases. The effects of some of the mergers were 

inconclusive, especially for boutique fuels sold in the East Coast and Gulf 

Coast regions and in California. While we have not performed modeling on 

mergers that occurred since 2000, and thus cannot comment on any 

potential additional effect on wholesale gasoline prices, these mergers 

would further increase market concentration nationwide since there are 

now fewer oil companies. 

Proposed mergers in all industries are generally reviewed by federal 

antitrust authorities—including the Federal Trade Commission (FTC) and 

the Department of Justice (DOJ)—to assess the potential impact on 

market competition and consumer prices. According to FTC officials, FTC 

generally reviews proposed mergers involving the petroleum industry 

because of the agency’s expertise in that industry. To help determine the 

potential effect of a merger on market competition, FTC evaluates, among 

other factors, how the merger would change the level of market 

concentration. Conceptually, when market concentration is higher, the 

market is less competitive and it is more likely that firms can exert control 

over prices.

DOJ and FTC have jointly issued guidelines to measure market 

concentration. The scale is divided into three separate categories: 

unconcentrated, moderately concentrated, and highly concentrated. The 

index of market concentration in refining increased all over the country 

during the 1990s, and changed from moderately to highly concentrated on

the East Coast. In wholesale gasoline markets, market concentration 

increased throughout the United States between 1994 and 2002. 

Specifically, 46 states and the District of Columbia had moderately or 

highly concentrated markets by 2002, compared to 27 in 1994.

While market concentration is important, other aspects of the market that 

may be affected by mergers also play an important role in determining the 

level of competition in a market. These aspects include barriers to entry, 

which are market conditions that provide established sellers an advantage 

over potential new entrants in an industry, and vertical integration. 

Mergers may have also contributed to changes in these aspects. However, 

we could not quantify the extent of these changes because of a lack of 

relevant data. 

Mergers in the 1990s 

Increased Market 

Concentration and 

Led to Small 

Increases in 

Wholesale Gasoline 

Prices, but the Impact 

of More Recent 

Mergers is Unknown 

Page 6 GAO-06-412T Energy Markets
Energy Markets

To estimate the effect of mergers on wholesale gasoline prices, we 

performed econometric modeling on eight mergers that occurred during 

the 1990s: Ultramar Diamond Shamrock (UDS)-Total, Tosco-Unocal, 

Marathon-Ashland, Shell-Texaco I (Equilon), Shell-Texaco II (Motiva), BPAmoco, Exxon-Mobil, and Marathon Ashland Petroleum (MAP)-UDS. 

• For the seven mergers that we modeled for conventional gasoline, five led 

to increased prices, especially the MAP-UDS and Exxon-Mobil mergers, 

where the increases generally exceeded 2 cents per gallon, on average. 

• For the four mergers that we modeled for reformulated gasoline, two—

Exxon-Mobil and Marathon-Ashland—led to increased prices of about 1 

cent per gallon, on average. In contrast, the Shell-Texaco II (Motiva) 

merger led to price decreases of less than one-half cent per gallon, on 

average, for branded gasoline only. 

• For the two mergers—Tosco-Unocal and Shell-Texaco I (Equilon)—that 

we modeled for gasoline used in California, known as California Air 

Resources Board (CARB) gasoline, only the Tosco-Unocal merger led to 

price increases. The increases were for branded gasoline only and were 

about 7 cents per gallon, on average.

Our analysis shows that wholesale gasoline prices were also affected by 

other factors included in the econometric models, including gasoline 

inventories relative to demand, supply disruptions in some parts of the 

Midwest and the West Coast, and refinery capacity utilization rates. 

Our past work has shown that, crude oil price is the fundamental 

determinant of gasoline prices. Refinery capacity, gasoline inventory levels

and regulatory factors also play important roles. In addition, merger 

activity can influence gasoline prices. During the 1990s, mergers decreased

the number of oil companies and refiners and our findings suggest that 

this change caused wholesale prices to rise. The impact of more recent 

mergers is unknown. While we have not performed modeling on mergers 

that occurred since 2000, and thus cannot comment on any potential 

additional effect on wholesale gasoline prices, these mergers would 

further increase market concentration nationwide since there are now 

fewer oil companies. 

Our analysis of mergers during the 1990s differs from the approach taken 

by the FTC in reviewing potential mergers because our analysis was 

retrospective in nature—looking at actual prices and estimating the 

Concluding 

Observations 

Page 7 GAO-06-412T
Energy Markets

impacts of individual mergers on those prices—while FTC’s review of 

mergers takes place necessarily before the mergers. Going forward, we 

believe that, in light of our findings, both forward looking and 

retrospective analysis of the effects of mergers on gasoline prices are 

necessary to ensure that consumers are protected from anticompetitive 

forces. In addition, we welcome this hearing as an opportunity for 

continuing public scrutiny and discourse on this important issue. We 

encourage future independent analysis by the FTC or other parties, and 

see value in oversight of the regulatory agencies in carrying out their 

responsibilities. 

Regardless of the causes, high gasoline prices specifically, and high energy

prices in general are a challenge for the nation. Rising demand for energy 

in the United States and across the world will put upward pressure on 

prices with potentially adverse economic impacts. Clearly none of the 

options for meeting the nation’s energy needs are without tradeoffs. 

Current U.S. energy supplies remain highly dependent on fossil energy 

sources that are costly, imported, potentially harmful to the environment, 

or some combination of these three, while many renewable energy options

are currently more costly than traditional options. Striking a balance 

between efforts to boost supplies from alternative energy sources and 

policies and technologies focused on improved efficiency of petroleum 

burning vehicles or on overall energy conservation present challenges as 

well as opportunities. How we choose to meet the challenges and seize the 

opportunities will help determine our quality of life and economic 

prosperity in the future. 

We are currently studying gasoline prices in particular, and the petroleum 

industry more generally, including an analysis of the viability of the 

Strategic Petroleum Reserve, an evaluation of world oil reserves, and an

assessment of U.S. contingency plans should oil imports from a major oil 

producing country, such as Venezuela, be disrupted. With this body of 

work, we will continue to provide Congress and the American people the 

information needed to make informed decisions on energy that will have 

far-reaching effects on our economy and our way of life. 

Mr. Chairman, this completes my prepared statement. I would be happy to

respond to any questions you or the other Members of the Subcommittee 

may have at this time. 

Page 8 GAO-06-412T
For further information about this testimony, please contact me at (202) 

512-3841 (or at wellsj@gao.gov ). Godwin Agbara, Samantha Gross, John 

Karikari, and Frank Rusco made key contributions to this testimony. 

Page 9 GAO-06-412T Energy Markets

GAO Contacts and 

Staff 

Acknowledgments 

(360669) 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER