Testimony 

Before the Senate Committee on 

Commerce, Science, and Transportation 

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Wednesday, September 21, 2005 ENERGY MARKETS 

Gasoline Price Trends 

Statement of Jim Wells, Director 

Natural Resources and Environment 

GAO-05-1047T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-1047T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jims Wells, 

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

Highlights of GAO-05-1047T, a testimony 

to the Senate Committee on Commerce, 

Science, and Transportation 

September 21, 2005

ENERGY MARKETS

Gasoline Price Trends 

Crude oil prices and gasoline prices are inherently linked, because crude oil 

is the primary raw material from which gasoline and other petroleum 

products are produced. In the past year, crude oil prices have risen 

significantly—from August 31, 2004 to August 31, 2005, the price of West 

Texas Intermediate crude oil, a benchmark for international oil prices, rose 

by almost $27 per barrel, an increase of almost 64 percent. Over about the 

same period, average retail prices for regular gasoline rose nationally from 

$1.87 to $2.61 per gallon, an increase of about 40 percent. Major upward and 

downward movements of crude oil prices are generally mirrored by 

movements in the same direction by gasoline prices. However, based on 

recent events, at least in the short term, this historical trend has not held, 

and retail prices have risen faster than crude oil prices. 

While crude oil is a fundamental determinant of gasoline prices, a number of 

other factors also play a role in determining how gasoline prices vary across 

different locations and over time. For example, refinery capacity in the 

United States has, in recent years, not expanded at the same pace as demand 

for gasoline and other petroleum products. During the same period we have 

imported larger and larger volumes of gasoline from Europe, Canada, and 

other countries. Further, the American Petroleum Institute has 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. 

Gasoline prices may also be affected by unexpected refinery outages or 

accidents that significantly disrupt the delivery of gasoline supply. Most 

recently, Hurricane Katrina hit the Gulf Coast, doing tremendous damage to 

homes, businesses, and physical infrastructure, including roads; electricity 

transmission lines; and oil producing, refining, and pipeline facilities. 

Because the Gulf Coast refining region is a net exporter of petroleum 

products to all other regions of the country, retail gasoline prices in many 

parts of the nation rose dramatically. Average retail gasoline prices 

increased 45 cents per gallon between August 29 and September 5. The 

average price for a gallon of regular gasoline on September 5 was $3.07, the 

highest nominal price ever. 

Future gasoline prices will reflect the world supply and demand balance. 

Globally, if demand for oil and petroleum products continues to rise, supply 

will need to keep pace. The challenge is to boost supply and reduce 

demand. We need to choose wisely and we need to act soon. 

Soaring retail gasoline prices have 

garnered extensive media attention 

and generated considerable public 

anxiety in recent months, 

particularly in the aftermath of 

Hurricane Katrina. Prices in many 

areas hit by the hurricane saw 

retail gasoline prices increase to 

over $3.00 per gallon, and in one 

reported case to almost $6.00 per 

gallon, with some gasoline stations 

running out of gasoline entirely. 

The availability of relatively 

inexpensive gasoline over past 

decades has helped foster 

economic growth and prosperity in 

the United States, so large price 

increases, especially if sustained 

over a long period, pose long-term 

challenges to the economy and 

consumers. 

This testimony, as requested, 

addresses factors that help explain 

how gasoline prices are determined 

and what key factors will likely 

influence trends in future gasoline 

prices. 
Page 1 GAO-05-1047T 

Mr. Chairman and Members of the Committee: 

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

gasoline prices and the factors that will likely influence trends in those 

prices. Soaring retail gasoline prices have garnered extensive media 

attention and generated considerable public anxiety in recent months, 

particularly in the aftermath of Hurricane Katrina. Prices in many areas 

hit by the hurricane saw retail gasoline prices increase to over $3.00 per 

gallon, and in one reported case to almost $6.00 per gallon, with some 

gasoline stations running out of gasoline entirely. In addition, retail 

gasoline prices have shot up in many areas of the country that were not 

directly affected by the hurricane. It was not uncommon to see pump 

prices rise not just daily, but multiple times in the same day. Overall, 

gasoline prices have been significantly higher this year than last, costing 

American consumers considerably. 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. 

The availability of relatively inexpensive gasoline over past decades has 

helped foster economic growth and prosperity in the United States. 

However, large price increases, especially if sustained over a long period, 

pose long-term challenges to the economy and consumers. Importantly, 

some recent analyses suggest that gasoline prices may stay at today’s 

relatively high level or even increase significantly in the future. In 

contrast, others suggest that prices may fall as oil companies invest in 

more crude oil producing capacity and as consumers respond to higher 

prices by adopting more energy-efficient practices. Regardless of what 

happens in the future, the impact of gasoline prices is felt in virtually every 

sector of the U.S. economy and when prices increase sharply, as they have 

in recent months, consumers feel it immediately and are reminded every 

time they fill up their tanks. 

It is therefore essential to understand the market for gasoline. In this 

context, you asked us to discuss (1) how gasoline prices are determined 

and (2) what key factors will likely influence trends in future gasoline 

prices? 

To respond to your questions, we relied heavily on the gasoline primer, 

“Motor Fuels: Understanding the Factors That Influence the Retail Price of 
Page 2 GAO-05-1047T 

Gasoline,”1 and 17 other GAO products on gasoline prices and other 

aspects of the petroleum products industry. (See Related GAO Products at 

the end of this testimony.) 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, our work has shown: 

• Crude oil prices and gasoline prices are inherently linked, because crude 

oil is the primary raw material from which gasoline and other petroleum 

products are produced. In the past year, crude oil prices have risen 

significantly—from August 31, 2004 to August 31, 2005, the price of West 

Texas Intermediate crude oil, a benchmark for international oil prices, 

rose by almost $27 per barrel, an increase of almost 64 percent. Over 

about the same period, average retail prices for regular gasoline rose 

nationally from $1.87 to $2.61 per gallon, an increase of about 40 percent. 

Explanations for the large increase in crude oil and gasoline prices include 

the rapid growth in world demand for crude oil and petroleum products, 

particularly in China and the rest of Asia; instability in the Persian Gulf 

region (the source of a large proportion of the world’s oil reserves); and 

actions by the Organization of Petroleum Exporting Countries (OPEC) to 

restrict the production of crude oil and thereby increase its price on the 

world market. Figure one illustrates the relationship between crude oil 

and gasoline prices over the past three decades. The figure shows that 

major upward and downward movements of crude oil prices are generally 

mirrored by movements in the same direction by gasoline prices. 

However, based on recent events, at least in the short term, this historical 

trend has not held, and retail prices have risen faster than crude oil prices. 

 1

GAO, Motor Fuels: Understanding the Factors That Influence the Retail Price of 

Gasoline, GAO-05-525SP (Washington, D.C.: May 2, 2005).
Page 3 GAO-05-1047T 

Figure 1: Gasoline and Crude Oil Prices—1974-2004 (Not adjusted for inflation) 

• While the price and availability of crude oil is a fundamental determinant 

of gasoline prices, a number of other factors also play a role in 

determining how gasoline prices vary across different locations and over 

time. For example, refinery capacity in the United States has not 

expanded at the same pace as demand for gasoline and other petroleum 

products in recent years. During the same period the United States has 

imported larger and larger volumes of gasoline from Europe, Canada, and 

other countries. The American Petroleum Institute has 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. Further, the fact that imported 

gasoline comes from farther away than domestically produced gasoline 

means that when supply disruptions occur in the United States, it might 

take longer to get replacement gasoline than if we had excess refining 

capacity in the United States, and this could cause gasoline prices to rise 

and stay high until these new supplies can reach the market. 

• Gasoline inventories maintained by refiners or marketers of gasoline can 

also have an impact on prices. As with trends in a number of other 

Dollars per gallon

Source: GAO analysis of Energy Information Administration, Department of Energy, Monthly Energy Review, Monthly Refiner

Acquisition Cost of Crude Oil, Composite and Bureau of Labor Statistics, Monthly Motor Gasoline Prices, U.S. City Averages,

Regular Gasoline.

Year

Crude oil price

Gasoline price

0.0

0.5

1.0

1.5

2.0

2.5

1974197619781980198219841986198819901992199419961998200020022004
Page 4 GAO-05-1047T 

industries, the petroleum products industry has seen a general downward 

trend in the level of gasoline inventories in the United States. Lower levels 

of inventories may 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.” Many experts have 

concluded that the proliferation of these special gasoline blends has 

caused gasoline prices to rise and/or become more volatile, especially in 

regions such as California that use unique blends of gasoline, because the 

fuels have increased the complexity and costs associated with supplying 

gasoline to all the different markets. Finally, the structure of the gasoline 

market can play a role in determining prices. For example, we recently 

reported that some mergers of oil companies during the 1990s led to 

reduced competition among gasoline suppliers and may have been 

responsible for an increase in gasoline prices by as much as 2 cents per 

gallon on average, with boutique fuels increasing from between 1 to 7 

cents per gallon. 

• Gasoline prices may also be affected by unexpected refinery outages or 

accidents that significantly disrupt the delivery of gasoline supply. Most 

recently, Hurricane Katrina hit the Gulf Coast, doing tremendous damage 

to homes, businesses, and physical infrastructure, including roads; 

electricity transmission lines; and oil producing, refining, and pipeline 

facilities. The DOE reported on August 31, 2005 that as many as 2.3 

million customers were without electricity in Louisiana, Mississippi, 

Alabama, Florida, and Georgia. The DOE further reported that 21 

refineries in affected states were either shut down or operating at reduced 

capacity in the aftermath of the hurricane. This amounted to a reduction 

of over 10 percent of the nation’s total refining capacity. Two petroleum 

product pipelines that serve the Midwest and East Coast from Gulf Coast 

refineries were also out. In addition, the Minerals Management Service in 

the Department of the Interior reported that as of September 1, 2005, over 

90 percent of crude oil production in the Gulf of Mexico was out of 

operation. Because the Gulf Coast refining region is a net exporter of 

petroleum products to all other regions of the country, retail gasoline 

prices in many parts of the nation rose dramatically. Average retail 

gasoline prices increased 45 cents per gallon between August 29 and 

September 5. The average price for a gallon of regular gasoline on 

September 5 was $3.07, the highest nominal price ever. In addition, 

gasoline stations faced large increases in wholesale gasoline prices, and 

some even reported running out of gasoline. The spot price for wholesale 

gasoline delivered to New York Harbor rose by about $0.78 per gallon 
Page 5 GAO-05-1047T 

between August 26 and August 30. Gasoline supply is recovering in the 

wake of the storm, however, and prices have begun to decrease. Between 

September 5 and September 12, average gasoline prices decreased 11 

cents to $2.96 per gallon. Gasoline production increased dramatically over 

this time, rising by more than 400,000 barrels per day as most of the 

refineries shut down after the storm resumed production. Until 

production, refining, and pipeline facilities are fully operating at normal 

levels, prices are expected to continue to be higher in affected areas. 

Coming as this has on the heels of a period of high crude oil prices and a 

tight balance worldwide between petroleum demand and supply, the 

effects of the hurricane illustrate the volatility of gasoline prices given the 

vulnerability of the gasoline infrastructure to natural or other disruptions. 

• Future gasoline prices will reflect the world supply and demand balance. If 

demand for oil and petroleum products continues to rise as it has in past 

years, then oil supply will have to expand significantly to keep up. The 

EIA projects that world demand for crude oil will rise by at least 25 

percent by the year 2025. However, world surplus crude oil production 

capacity—the amount by which oil production can be increased in the 

short run without installing more drilling equipment or developing new oil 

fields—is currently very small. Moreover, many of the world’s known and 

easily accessible crude oil deposits have already been developed and many 

of these are experiencing declining volumes as the fields become depleted. 

Other new sources may be more expensive to develop. For example, there 

are large stores of crude oil in tar sands and oil shale, or potentially 

beneath deep water in the ocean, but these sources are more costly to 

extract and process than many of the sources of oil that we have already 

tapped. If developing, extracting, and refining new sources of crude oil 

are more costly than extracting and refining oil from existing fields, crude 

oil and petroleum product prices likely will rise to make these activities 

economically feasible. If, on the other hand, technological innovations 

improve the ability to extract and process oil, this will increase the 

available future supply and may ease pressure on petroleum product 

prices. 

• Although demand for crude oil is projected to increase, it could fall below 

current expectations if consumers choose more energy efficient products 

or otherwise conserve more energy. Such a reduction in demand could 

lead to lower-than-expected future prices. For example, in response to 

high gasoline prices in the United States, in the 1980s many consumers 

chose to switch to smaller or more fuel-efficient vehicles, which reduced 

demand for gasoline. Environmental issues could also have an impact on 

world crude oil and petroleum product prices. For example, international 

efforts to reduce greenhouse emissions could cause reductions in demand 
Page 6 GAO-05-1047T 

for crude oil and petroleum products as more fuel-efficient processes are 

adopted or as cleaner sources of energy are developed. Additional factors 

that will likely influence future oil and gasoline prices include geopolitical 

issues, such as the stability of the Middle East; the valuation of the U.S. 

dollar in world currency markets; and the pace of development of 

alternative energy supplies, such as hydrogen fuel cell technology. 

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. A 

great deal of the crude oil consumed in this country goes into production 

of gasoline and, as a nation, we use about 45 percent of all gasoline 

produced in the world.2

 Products made from crude oil—petroleum 

products, including gasoline—have been instrumental in the development 

of our modern lifestyle. In particular, gasoline, diesel, and jet fuel have 

provided the nation with affordable fuel for automobiles, trucks, airplanes 

and other forms of public and goods transportation. Together, these fuels 

account for over 98 percent of the U.S. transportation sector’s fuel 

consumption. In addition, petroleum products are used as raw materials 

in manufacturing and industry; for heating homes and businesses; and, in 

small amounts, for generating electric power. Gasoline use alone 

constitutes about 44 percent of our consumption of petroleum products in 

the United States, so when gasoline prices rise, as they have in recent 

months, the effects are felt throughout the country, increasing the costs of 

producing and delivering basic retail goods and making it more expensive 

to commute to work. It is often the case that prices of other petroleum 

products also increase at the same time and for the same reasons that 

gasoline prices rise. For example, today’s high gasoline prices are 

mirrored by high jet fuel prices, creating financial pressure on airline 

companies, some of which are currently in the midst of economic 

difficulties. Gasoline prices vary a great deal over time. For example, in 

the period January 1, 1995 through August 29, 2005, the national average 

price for a gallon of regular grade gasoline has been as low as $1.10 and as 

high as $2.80 without adjusting for inflation. 

 2

The large percentage of total world gasoline production consumed by the United States, in 

part, reflects the fact that diesel is a commonly used fuel for cars in Europe, while 

automobiles in the United States primarily run on gasoline. If all motor vehicle fuels were 

accounted for, the United States’ share of these fuels would be smaller than its share of 

gasoline. However, we do not have the data to present this more comprehensive measure. 

Background 
Page 7 GAO-05-1047T 

The future path of gasoline prices is difficult to predict, but it is clear that 

the use of petroleum products worldwide is going to increase for the near 

term and maybe beyond. Some analysts have predicted much higher 

crude oil prices—and as a result, higher prices for petroleum products—

while others expect prices to moderate as producers respond to high 

prices by producing more crude oil and consumers respond by conserving 

more, and investing in more energy-efficient cars and other products. In 

either case, the price of gasoline will continue to be an important factor 

affecting the household budgets of individual Americans for the 

foreseeable future and therefore, it is important to understand how prices 

are determined so that consumers can make wise choices. 

Crude oil prices directly affect the price of gasoline, because crude oil is 

the primary raw material from which gasoline is produced. For example, 

according to our analysis of EIA data, in 2004 crude oil accounted for 

about 48 percent of the price of a gallon of gasoline on average in the 

United States. When crude oil prices rise, as they have over the past year, 

refiners find their cost of producing gasoline also rises, and in general, 

these higher costs are passed on to consumers in the form of higher 

gasoline prices at the pump. However, based on recent events, at least in 

the short term, this historical trend has not held, and retail prices have 

risen faster than crude oil prices. Figure 2 illustrates the importance of 

crude oil in the price of gasoline. The figure also shows that taxes, 

refining, and distribution and marketing also play important roles.3

 

 3

The latter two categories, refining and distribution and marketing, includes costs 

associated with these activities as well as profits. The figure is a snapshot of how much 

each component contributes to the price of a gallon of gasoline, and how the relative 

proportions attributable to each component vary over time as crude oil prices and other 

factors change. 

Gasoline Prices Are 

Determined by the 

Price of Crude Oil and 

a Number of Other 

Factors 
Page 8 GAO-05-1047T 

Figure 2: Elements in the Price of a Gallon of Gasoline (Average for 2004) 

Because crude oil is the primary raw material used in the production of 

gasoline, understanding what determines gasoline prices requires 

examining how crude oil prices are set. Overall, the price of crude oil is 

determined by the balance between world demand and supply. A major 

cause of rising crude oil prices in recent months has been rapid growth in 

world demand, without a similar growth in available supplies. In 

particular, the economy of China has grown rapidly in recent years, 

leading to increases in their demand for crude oil. In contrast, oil 

production capacity has grown more slowly, leading to a reduction in 

surplus capacity—the amount of crude oil that is left in the ground, but 

could be extracted on short notice in the event of a supply shortfall. EIA 

has stated that the world’s surplus crude oil production capacity has fallen 

to about one million barrels per day, or just over one percent of the 

world’s current daily consumption, making the balance between world 

demand and supply of crude oil very tight. This tight balance between 

world crude oil demand and supply means that any significant supply 

disruptions will likely cause prices to rise. Such a disruption occurred in 

Nigeria in October 2004, when a workers’ strike in Nigeria’s oil sector 

forced world crude oil prices to record highs. (Nigeria is the world’s 

seventh largest oil producer, supplying an average 2.5 million barrels per 

day in 2004.) 

Another important factor affecting crude oil prices is the behavior of the 

Organization of Petroleum Exporting Countries (OPEC)—members of 

which include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, 

23%

12%

17%

48%

Taxes

Sources: GAO analysis of EIA data; GAO (photo).

Distribution and marketing

Refining

Crude oil
Page 9 GAO-05-1047T 

Saudi Arabia, United Arab Emirates, and Venezuela. OPEC members 

produce almost 40 percent of the world’s crude oil and control almost 70 

percent of the world’s proven oil reserves. In the recent past and on 

numerous other occasions, OPEC members have collectively agreed to 

restrict the production of crude oil in order to increase world prices. 

Turning now to the price of gasoline seen at the pump, it is important to 

discuss the role of taxes. In the United States, on average, taxes 

accounted for 23 percent of what consumers paid for a gallon of gasoline 

in 2004, according to EIA’s data. This percentage includes estimated 

federal and average state taxes totaling 44 cents per gallon (see figure 3).4 

 

Federal taxes accounted for 18.4 cents of this total, while state taxes 

averaged 25.6 cents per gallon, although taxes vary among states. 

Figure 3: Estimated Federal and Average State Gasoline Taxes per Gallon (2004) 

 4

EIA uses tax data from the American Petroleum Institute (API) for its tax analysis. 

According to API, these data include applicable state sales taxes, gross receipts taxes, and 

other applicable fees but largely exclude local taxes, which may average about 2 cents per 

gallon nationwide. 

18.4 25.6 Average state tax

44 cents per gallon

Sources: GAO analysis of API data; GAO (photo).

Federal tax
Page 10 GAO-05-1047T 

Differences in gasoline taxes across states help explain why gasoline 

prices vary from place to place in the United States. In addition to federal 

taxes that apply across the board, states and, in some cases, local 

jurisdictions also impose taxes and other fees on gasoline that add to the 

price. Figure 4 shows total state and federal gasoline taxes for each of the 

50 states and the District of Columbia, as of November 2004. New York, 

Hawaii, and California have the highest total gasoline taxes, while Alaska, 

Wyoming, and New Jersey have the lowest. While differences in taxes 

affect the price of gasoline, there is no consistent relationship between 

high taxes and high prices. For example, on March 7, 2005, gasoline cost 

$1.91 per gallon in North Carolina and $1.98 per gallon in Alaska, even 

though the taxes paid in North Carolina were almost 17 cents per gallon 

higher. 
Page 11 GAO-05-1047T 

Figure 4: Motor Gasoline Taxes as of November 2004 

Note: According to API, these tax data include applicable state sales taxes, gross receipts taxes, and 

other applicable fees but largely exclude local taxes, which may average about 2 cents per gallon 

nationwide. 

In addition to the cost of crude oil, taxes, refining, and distribution and 

marketing costs, gasoline prices are influenced by a variety of other 

factors. These include refining capacity constraints, low inventories, 

0 10 20 30 40 50 60

Alaska

Wyoming

New Jersey

Georgia

Kentucky

South Carolina

Missouri

Oklahoma

New Mexico

Mississippi

Arizona

Virginia

District of Columbia

Louisiana

Texas

Vermont

New Hampshire

North Dakota

Tennessee

Iowa

Arkansas

Alabama

Colorado

Minnesota

Delaware

Maryland

Massachusetts

Oregon

South Dakota

Utah

North Carolina

Idaho

Kansas

West Virginia

Indiana

Nebraska

Ohio

Maine

Pennsylvania

Montana

Illinois

Washington

Michigan

Florida

Rhode Island

Wisconsin

Connecticut

Nevada

California

Hawaii

New York

(Cents per gallon)

Source: GAO analysis of API data.
Page 12 GAO-05-1047T 

unexpected refinery or pipeline outages, environmental and other 

regulations, and mergers and market power in the oil industry. 

First, domestic refining capacity has not kept pace with growing demand 

for gasoline. As demand has grown faster than domestic refining capacity, 

the United States has imported larger and larger volumes of gasoline and 

other petroleum products from refiners in Europe, Canada, and other 

countries. EIA officials told us that, in general, this increase in imports 

has reflected the availability of gasoline from foreign sources at lower cost 

than could be achieved by building and operating additional refining 

capacity in the United States. However, the American Petroleum Institute 

(API) has recently reported that capacity utilization has been high in the 

U.S. refinery sector. Refining capacity has typically averaged over 90 

percent, and has recently increased to 92 percent—much higher than the 

rate in many other industries that API reports as more typically operating 

at around 80 percent of capacity. 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 occur in the United States, it might take longer to get 

replacement gasoline than if we had excess refining capacity in the United 

States, and this could cause gasoline prices to rise and stay high until these 

new supplies can reach the market. 

Second, the level of gasoline inventories can also play an important role in 

determining gasoline prices over time because inventories represent the 

most accessible and available source of supply in the event of a 

production shortfall or increase in demand. Similar to trends in other 

industries, the level of gasoline inventories has been falling for a number 

of years. In part, this reflects a trend in business to more closely balance 

production with demand in order to reduce the cost of holding large 

reserves. However, reduced inventories may contribute to increased price 

volatility, because when unexpected supply disruptions or increases in 

demand occur, there are lower stocks of readily available gasoline upon 

which to draw. This puts upward pressure on gasoline prices until new 

supplies can be refined and delivered domestically, or imported from 

abroad. 

Third, gasoline prices may be affected by unexpected refinery outages or 

accidents that significantly disrupt the delivery of gasoline supply. Most 

recently, Hurricane Katrina hit the Gulf Coast, doing tremendous damage 

to homes, businesses, and physical infrastructure, including roads; 

electricity transmission lines; and oil producing, refining, and pipeline 
Page 13 GAO-05-1047T 

facilities. The DOE reported on August 31, 2005 that as many as 2.3 

million customers were without electricity in Louisiana, Mississippi, 

Alabama, Florida, and Georgia. The DOE further reported that 21 

refineries in affected states were either shut down or operating at reduced 

capacity in the aftermath of the hurricane. The refining capacity of the 

shutdown refineries alone is equivalent to over 10 percent of the nation’s 

total refining capacity. Two petroleum product pipelines that serve the 

Midwest and East Coast from Gulf Coast refineries were also out. The 

Minerals Management Service of the Department of the Interior reported 

that as of September 1, 2005, over 90 percent of crude oil production in the 

Gulf of Mexico was out of operation. Because the Gulf Coast refining 

region is a net exporter of petroleum products to all other regions of the 

country, retail gasoline prices in many parts of the nation have risen 

dramatically, with news reports that many locations have seen prices over 

$3.00 per gallon, and in one reported case to almost $6.00 per gallon. In 

addition, many gasoline stations have reported running out of stocks and 

have faced large increases in wholesale gasoline prices—the spot price for 

wholesale gasoline delivered to New York Harbor rose by about $0.78 per 

gallon between August 26 and August 30. Until production, refining, and 

pipeline facilities are back up and running at normal levels, prices are 

expected to continue to be higher in affected areas. Coming as this has on 

the heels of a period of high crude oil prices and a tight balance worldwide 

between petroleum demand and supply, the effects of the hurricane 

illustrate the volatility of gasoline prices given the vulnerability of the 

gasoline infrastructure to natural or other disruptions. Such disruptions 

also have the potential to adversely affect the economy. For example, in 

2004, the International Energy Agency reported that a $10 increase in the 

world price of crude oil would lead to at least a one half percent reduction 

in world GDP – equivalent to $255 billion – in the year following the price 

increase. The effects on individual countries would vary depending on 

whether or not they are net oil importers and on the level of energy 

intensity of their economies. 

Fourth, regulatory steps to reduce air pollution have also influenced 

gasoline markets and consequently have increased gasoline prices. For 

example, since the 1990 amendments to the Clean Air Act, the use of 

various blends of cleaner-burning gasoline—so-called “boutique fuels—

has grown as states have adopted the use of such fuels to meet national air 

quality standards. The use of these special blends has provided 

environmental and health benefits by reducing emissions of a number of 

pollutants. However, the proliferation of these special gasoline blends has 

also put stress on the gasoline supply infrastructure and has led to 

increased price volatility because areas that use special blends cannot as 
Page 14 GAO-05-1047T 

easily find suitable replacement gasoline in the event of a local supply 

disruption.5

Finally, we recently reported that industry mergers increased market 

concentration and in some cases caused higher wholesale gasoline prices 

in the United States from the mid-1990s through 2000.6

 Overall, the report 

found that the mergers led to price increases averaging about 2 cents per 

gallon on average. For conventional gasoline, the predominant type used 

in the country, the change in the wholesale price, due to specific mergers, 

ranged from a decrease of about 1 cent per gallon—due to efficiency gains 

associated with the merger—to an increase of about 5 cents per gallon—

attributed to increased market power after the merger. For special blends 

of gasoline, wholesale prices increased by from between 1 and 7 cents per 

gallon, depending on location. 

Looking into the future, daunting challenges lie ahead in finding, 

developing, and providing sufficient quantities of oil to meet projected 

global demand. For example, according to EIA, world oil demand is 

expected to grow to nearly 103 million barrels per day in 2025 under low 

growth assumptions, and may reach as high as 142 million barrels per day 

in 2025—increases of between 25 and 71 percent from the 2004 

consumption level of 83 million barrels per day. Looking further ahead, 

the rapid pace of economic growth in China and India, two of the world’s 

most populous and fastest growing countries, may lead to a rapid increase 

in their demand for crude oil and petroleum products. While current 

consumption of oil by China and India is far below that of the United 

States, it is projected to grow at a far more rapid rate. Specifically, EIA’s 

medium-growth projections estimate that oil consumption for China and 

India will each grow by about 4 percent annually through 2025, while 

consumption in the United States is projected to grow at an annual rate of 

1.5 percent over the same period. 

 5

For more details see GAO,Gasoline Markets: Special Gasoline Blends Reduce Emissions 

and Improve Air Quality, but Complicate Supply and Contribute to Higher Prices, GAO05-421 (Washington, D.C.: June 17, 2005). 

6

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

Petroleum Industry, GAO-04-96 (Washington, D.C.: May 17, 2004).

Future Oil and 

Gasoline Prices Will 

Reflect 

Supply/Demand 

Balance, but 

Technological Change 

and Conservation Will 

Also Play a Role 
Page 15 GAO-05-1047T 

To meet the rising demand for gasoline and other petroleum products, 

new oil deposits will likely be developed and new production facilities 

built. Currently, many of the world’s known and easily accessible crude 

oil deposits have already been developed, and many of these are 

experiencing declining volumes as fields become depleted. For example, 

the existing oil fields in California and Alaska have long since reached 

their peak production, necessitating an increasing volume of imported 

crude oil to West Coast refineries. Developing new oil deposits may be 

more costly than in the past, which could put upward pressure on crude 

oil prices and the prices of petroleum products derived from it. For 

example, some large potential new sources, such as oil shales, tar sands, 

and deep-water oil wells, require different and more costly extraction 

methods than are typically needed to extract oil from existing fields. In 

addition, the remaining oil in the ground may be heavier and more difficult 

to refine, necessitating investment in additional refinery processes to 

make gasoline and other petroleum products out of this oil. If developing, 

extracting, and refining new sources of crude oil are more costly than 

extracting and refining oil from existing fields, crude oil and petroleum 

product prices likely will rise to make these activities economically 

feasible. 

On the other hand, technological advances in oil exploration, extraction, 

and refining could mitigate future price increases. In the past, advances in 

seismic technology significantly improved the ability of oil exploration 

companies to map oil deposits, while improvements in drilling technology 

have enabled oil companies to drill in multiple directions from a single 

platform. Together, these advances have enabled companies to identify 

and extract oil more efficiently, essentially increasing the supply of oil. 

Further, refining advances over the years have also enabled U.S. refiners 

to increase the yield of gasoline from a given barrel of oil—while the total 

volume of petroleum products has remained relatively constant, refiners 

have been able to get a greater proportion of the more valuable 

components, such as gasoline, out of each barrel, thereby increasing the 

supply of these components. Similar technological improvements in the 

future that lower costs or increase supply of crude oil or refined products 

would likely lead to lower prices for such commodities. 

Innovations that reduce the costs of alternative sources of energy could 

also reduce the demand for crude oil and petroleum products, and thereby 

ease price pressures. For example, hydrogen is the simplest element and 

most plentiful gas in the universe and when used in fuel cells produce 

almost no pollution. In addition, hydrogen fuel cell cars are expected to 

be roughly three times more fuel-efficient than cars powered by typical 
Page 16 GAO-05-1047T 

internal combustion engines. Currently, enormous technical problems 

stand in the way of converting America’s fleet of automobiles from 

gasoline to hydrogen, including how to produce, store, and distribute the 

flammable gas safely and efficiently, and how to build hydrogen cars that 

people can afford and will want to buy. However, there are federal and 

state initiatives under way as well as many private efforts to solve these 

technical problems, and if they can be solved in an economical way in the 

future, the implications for gasoline use could be profound. 

Greater conservation or improved fuel efficiency could also reduce future 

demand for crude oil and petroleum products, thereby leading to lower 

prices. The amount of oil and petroleum products we will consume in the 

future is, ultimately, a matter of choice. Reducing our consumption of 

gasoline by driving smaller, more fuel-efficient cars—as occurred in the 

1980s in response to high gasoline prices—would reduce future demand 

for gasoline and put downward pressure on prices. For example, the 

National Academies of Science recently reported that if fuel-efficiency 

standards for cars and light trucks had been raised by an additional 15 

percent in 2000, gasoline consumption in the year 2015 would be 10 billion 

gallons lower than it is expected to be under current standards. The 

Congress established fuel economy standards for passenger cars and light 

trucks in 1975 with the passage of the Energy Policy and Conservation Act. 

While these standards have led to increased fuel efficiency for cars and 

light trucks, in recent years, the switch to light trucks has eroded gains in 

the overall fuel efficiency of the fleet of American passenger vehicles. 

Future reductions in demand for gasoline could be achieved if either fuel 

efficiency standards for cars and light trucks are increased, or if 

consumers switch to driving smaller or more fuel-efficient cars. 

The effect of future environmental regulations and international initiatives 

on oil and petroleum products prices is uncertain. On one hand, 

regulations that increase the cost or otherwise limit the building of 

refining and storage capacity may put pressure on prices in some 

localities. For example, the California Energy Commission told us the lack 

of storage capacity for imported crude oil and petroleum products may be 

a severe problem in the future, potentially leading to supply disruptions 

and price volatility. Alternatively, international efforts to reduce the 

generation of greenhouse gas emissions could cause reductions in the 

demand for crude oil and petroleum products through the development 

and use of more fuel-efficient processes and as cleaner, lower-emissions 

fuels are developed and used. 
Page 17 GAO-05-1047T 

Moreover, geopolitical factors will likely continue to have an impact on 

the price of crude oil and petroleum product in the future. Because crude 

oil is a global commodity, the price we pay for it can be affected by any 

events that may affect world demand or supply. For example, 

Venezuela—which produces around 2.6 million barrels of crude oil per 

day, and which supplies about 12 percent of total U.S. oil imports—is 

currently experiencing considerable social, economic, and political 

difficulties that have, in the past, impacted oil production. Finally, 

instability in the Middle East, and particularly the Persian Gulf, has in the 

past, caused major disruptions in oil supplies, such as occurred toward the 

end of the first Gulf War, when Kuwaiti oil wells were destroyed by Iraq. 

Finally, the value of the U.S. dollar on open currency markets could also 

affect future crude oil prices. For example, because crude oil is typically 

denominated in U.S. dollars, the payments that oil-producing countries 

receive for their oil are also denominated in U.S. dollars. As a result, a 

weak U.S. dollar decreases the value of the oil sold at a given price. Some 

analysts have recently reported in the popular press that this devaluation 

can influence long-term prices in two ways. First, oil-producing countries 

may wish to increase prices for their crude oil in order to maintain their 

purchasing power in the face of a weakening U.S. dollar. Secondly, 

because the dollars that these countries have accumulated, which they 

use, in part, to finance additional oil exploration and extraction, are worth 

less, the costs they pay to purchase technology and equipment from other 

countries whose currencies have gained relative to the dollar will increase. 

Such higher costs may deter further expansion of oil production, leading 

to even higher oil prices.7

In closing, the wide-ranging effects of Hurricane Katrina on gasoline prices 

nationwide are a stark illustration of the interconnectedness of our 

petroleum markets and reveal the vulnerability of these markets to 

disruptions, natural or otherwise. Current U.S. energy supplies remain 

highly dependent on fossil energy sources that are costly, largely 

imported, and potentially harmful to the environment. No matter what the 

price of petroleum is, alternative energy options seem always to remain 

uneconomic. Striking a balance between efforts to boost petroleum 

 7

Higher oil prices, because they increase the U.S. trade deficit, may also contribute to the 

further devaluation of the dollar. Hence, analysts have called this process a vicious cycle in 

which a weak dollar drives up oil prices, which then feeds back into the trade deficit 

causing the dollar to weaken further. 

Conclusions 
Page 18 GAO-05-1047T 

supply, provide incentives for developing of alternative energy sources, 

develop policies and technologies focused on improving the fuel efficiency 

of petroleum burning vehicles, and promote overall energy conservation, 

presents challenges as well as opportunities. Clearly, all providers and 

consumers of energy need to get serious about conserving energy. The 

challenge is to boost supply and reduce demand. We need to choose 

wisely and we need to act soon. 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 the determinants of gasoline prices in particular, 

and the petroleum industry more generally, including an evaluation of 

world oil reserves; an assessment of the security of maritime facilities for 

handling and transporting petroleum, natural gas, and petroleum products; 

an analysis of the viability of the Strategic Petroleum Reserve; and an 

assessment of the impacts of a potential disruption of Venezuelan oil 

imports. With this body of work, we hope to continue to provide Congress 

and the American people the information needed to make informed 

decisions about 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 Committee may 

have at this time. 

Contact points for our Offices of Congressional Relations and Pulic Affaris 

may be found on the last page of this statement. For further information 

about this testimony, please contact Jim Wells at (202) 512-3841 (or at 

wellsj@gao.gov ). Individuals who made key contributions to this 

statement include Godwin Agbara, Byron Galloway, Dan Haas, Michelle 

Munn, Melissa Arzaga Roye, and Frank Rusco. 

GAO Contacts and 

Staff 

Acknowledgments 
Page 19 GAO-05-1047T 

Motor Fuels: Understanding the Factors That Influence the Retail Price 

of Gasoline. GAO-05-525SP. Washington, D.C. May 2, 2005 

Oil and Gas Development: Increased Permitting Activity Has Lessened 

BLM’s Ability to Meet Its Environmental Protection Responsibilities. 

GAO-05-418. Washington, D.C. June 17, 2005. 

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.

Energy Markets: Understanding Current Gasoline Prices and Potential 

Future Trends. GAO-05-675T. Washington, D.C. May 9, 2005. 

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

Petroleum Industry. GAO-04-96. Washington, D.C. May 17, 2004. 

Research and Development: Lessons Learned from Previous Research 

Could Benefit Freedom CAR Initiative. GAO-02-810T. Washington, D.C.: 

June 6, 2002. 

U.S. Ethanol Market: MTBE Ban in California. GAO-02-440R. 

Washington, D.C.: February 27, 2002. 

Motor Fuels: Gasoline Prices in the West Coast Market. GAO-01-

608T.Washington, D.C.: April 25, 2001. 

Motor Fuels: Gasoline Prices in Oregon. GAO-01-433R. Washington, D.C.: 

February 23, 2001. 

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO Work. 

RCED-00-301R. Washington, D.C.: September 25, 2000. 

Cooperative Research: Results of U.S.-Industry Partnership to Develop a 

New Generation of Vehicles. RCED-00-81. Washington, D.C.: March 30, 

2000. 

Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil 

and Shipping Industries and Consumers. RCED-99-191. Washington, 

D.C.: July 1, 1999. 

International Energy Agency: How the Agency Prepares Its World Oil 

Market Statistics. RCED-99-142. Washington, D.C.: May 7, 1999. 

Related GAO Products 

Oil and Gasoline 
Page 20 GAO-05-1047T 

Energy Security and Policy: Analysis of the Pricing of Crude Oil and 

Petroleum Products. RCED-93-17. Washington, D.C.: March 19, 1993. 

Energy Policy: Options to Reduce Environmental and Other Costs of 

Gasoline Consumption. T-RCED-92-94. Washington, D.C.: September 17, 

1992. 

Energy Policy: Options to Reduce Environmental and Other Costs of 

Gasoline Consumption. RCED-92-260. Washington, D.C.: September 17, 

1992. 

Alaskan Crude Oil Exports. T-RCED-90-59. Washington, D.C.: April 5,

1990. 

Energy Security: An Overview of Changes in the World Oil Market. 

RCED-88-170. Washington, D.C.: August 31, 1988. 

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