By: John Kemp – Reuters – President Joe Biden’s request for an investigation into anti-competitive behavior in the oil and gas markets may be smart politics in response to rising fuel prices but he failed to present evidence of collusion in this case.
“I am writing to call your attention to mounting evidence of anti-consumer behavior by oil and gas companies,” Biden wrote to the Federal Trade Commission (FTC) in a letter released by the White House on Wednesday.
“The Federal Trade Commission has authority to consider whether illegal conduct is costing families at the pump,” the president wrote. “I believe you should do so immediately.”
At the heart of President Biden’s complaint is that gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining.
“Prices at the pump have continued to rise, even as refined fuel costs go down and industry profits go up,” he observed.
“In the last month, the price of unfinished gasoline is down more than 5 percent while gas prices at the pump are up 3 percent in the same period.
“The unexplained large gap between the price of unfinished gasoline and the average price at the pump is well above the pre-pandemic average.”
The letter goes on to complain that profits of some oil and gas companies have almost doubled compared with 2019 and they are using the proceeds to fund stock buybacks and increase dividends.
“I do not accept hard-working Americans paying more for gas because of anti-competitive or otherwise potentially illegal conduct. I therefore ask that the Commission further examine what is happening with oil and gas markets, and that you bring all the Commission’s tools to bear if you uncover any wrongdoing.”
But President Biden’s advisers are conflating different markets and different timescales to make a confused and confusing argument about prices and profitability which fails to provide a compelling rationale for intervention.
There are undoubtedly parts of the oil and gas industry where anti-competitive behavior and attempts to support prices have been common (“Crude volatility: the history and the future of boom-bust oil prices”, McNally, 2017).
For the most part, the history of the oil industry is the history of producers trying to coordinate investment and output to hold prices above the level that would prevail with all-out competition.
There may be a case for the FTC and the U.S. Department of Justice to investigate elements of the oil and gas industry for anti-competitive behavior, but the White House has not made it in this letter.
CONFUSION
The letter is a heartfelt plea from a president under political pressure because of rising fuel prices and a sudden acceleration in inflation.
Unfortunately, the letter conflates as many as four different industries: crude oil production, petroleum refining, fuel retailing, and possibly natural gas production as well.
Each one of these industries is cyclical, with violent swings in prices and profitability, subject to its own dynamics, which makes comparisons between them less relevant.
The letter also conflates short term price movements over the last month with longer-term comparisons with conditions before the pandemic.
It ignores the fact margins between the retail and wholesale costs of gasoline are extremely volatile in the short term, which ensures one month’s price data is not enough to draw even tentative conclusions.
And it presents a selection of metrics on costs, wholesale and retail prices, margins, net income and shareholder payouts to imply the industry is making excess profits.
In this, it seems to be conflating upstream profits from exploration and production with downstream profits from refining and retailing, as well as profits made in the domestic market with those from overseas operations.
Nowhere does it specify the mechanism by which oil and gas companies are supposed to be making excess profits at the expense of customers in the United States.
EVIDENCE
The core of President Biden’s argument is an empirical observation that margins between the wholesale cost of unfinished gasoline and the retail cost of fuel at the pump have widened in the last month.
It is true that the gap between retail prices (including taxes) and various measures of wholesale prices has increased in recent weeks (https://tmsnrt.rs/3Cp3HFz).
But the margin has always been volatile in the short term and is not currently abnormal. There is nothing in the data to substantiate the claim that retail prices are somehow being manipulated relative to wholesale costs.
Gasoline stocks at wholesale level are low for the time of year, which likely explains some of the recent upward pressure on margins and retail prices.
Gasoline inventories held by refiners, tank farms, pipelines and fuel blenders have fallen in each of the last six weeks by a total of 13 million barrels.
Stocks stand at just 212 million barrels, the lowest for the time of year since 2017 and before that 2014 according to data from the U.S. Energy Information Administration.
They have been drawn down as a result of strong demand as the economy re-opens, commuting resumes, but many employees continue to avoid public transport because of the pandemic.
The volume of gasoline supplied to the domestic market, a proxy for consumption, has recovered to pre-pandemic levels (“Weekly petroleum status report”, EIA, Nov. 17).
High prices and margins for gasoline at retail level can be explained by the strong demand without needing to invoke anti-competitive behavior among suppliers.
