In the last week we have seen gas prices rise and fall quite dramatically. As a result, the events surrounding Hurricane Ike have generated a lot of discussion on this blog and in many other arenas. Much of the discussion revolves around the impact of the markets on the price at the pump. Like in anything, not everyone agrees.
A few years ago, Hurricane's Katrina and Rita unleashed a path of devastation and human tragedy that is still hard to fully comprehend to this day. As we all learned through that event, the US Gulf Coast is home to a large portion of the American refining sector along with many oil platforms. In the days that followed, gas prices rose and many accusations were leveled against the industry. This site didn't exist then, but I did many media interviews to try and explain what was going on and respond to the accusations of unseemly behaviour. As we all know, pump prices came back down and most people moved on.
In the days that followed, two reports were issued on the subject with little fanfare. One from the Competition Bureau of Canada and another from the Federal Trade Commission in the US that are worth looking at, especially in light of the events of the past week. Please read on.
The situation we've been through with respect to Hurricane Ike is certainly less traumatic than what occured following the devastation of Katrina and Rita. Many of the refineries learned from that experience and shut down their facilities in advance of the hurricane to minimize damage. Supply concerns can have an impact on the market and before Ike hit land, about 20% of the US refining capacity was already dark. Hopefully, these measures will allow the facilities to re-start with minimal issues once they gain access to reliable power.
One similarity though, is the heated discussion regarding what may or may not be occuring with respect to gas prices. Just check out the comments on my last post. Those same accusations were made the last time Hurricanes Katrina and Rita topped the news. When the facts came out afterwards, most everyone had moved on. No suprise there. But the work that was completed and released in 2005/2006 provides some great perspective that is as relevant today as it was back then. You can find the full Competition Bureau of Canada report here and the Federal Trade Commission's report here.
While I encourage anyone with strong views to take a look at the reports, I offer up a few unedited excerpts for your review.
From the Competition Bureau of Canada report:
What did the Competition Bureau find?
The Bureau found that the major reasons for the price shock were uncertainty over supply caused by a lack of data immediately following Hurricane Katrina, the closure of several refineries in the Gulf Coast region, and damage to pipelines that supply oil from the Gulf Coast to other refineries in the U.S. According to the Energy Information Administration in the U.S., 10% - 15% of total U.S. gasoline production was halted as a result of the hurricane.
The supply interruption broke down the normal relationship between crude and wholesale prices. With a lack of refined product available to North America, prices increased dramatically even though the cost of crude did not change. Price increases are a normal outcome when supply is reduced and demand remains constant. Market forces increase the price in response to a shortage of gasoline. At significantly higher prices, consumers will consume less gasoline, which will reduce the likelihood of shortages.
In addition, historical data suggest that estimated gross refining margins are similar between Canada and the U.S. Right after Hurricane Katrina, there were short-lived differences between the two countries. Statistical analysis showed there was a lag on wholesale prices and gross refiner margins between selected Canadian and northern U.S. cities. However, the prices and margins quickly re-adjusted and converged to similar levels after mid-September. If Canadian refiners were engaging in an anticompetitive fashion, we would expect to see a protracted major deviation in wholesale prices and margins between Canada and the U.S. The data did not support an allegation of a co-ordinated practice of anticompetitive acts.
From the US report (which is almost 200 pages long):
Based on well-established economic principles, the price increases were roughly in line with increases predicted by the standard supply and demand paradigm of a competitive market. The regions with the largest price increases were those where supply was most greatly affected by the hurricanes, and the regional price differences were consistent with both the reduction of supply to particular regions and the cost of diverting supply from one region to another. Inventory levels dropped as suppliers increased gasoline sales to the market. Capacity utilization went up as refiners deferred refinery maintenance. Imports increased as suppliers brought additional supplies to the United States. Moreover, the effects of the hurricanes on prices largely disappeared within four weeks after Rita. Staff found no evidence suggesting that the recovery should have occurred in a shorter timeframe; indeed, in light of the extent of the destruction, the evidence indicates that suppliers responded quickly to the supply disruptions caused by the hurricanes. p.62
I certainly understand the frustration when the price at the pump goes up. If you are looking for answers, there is no shortage of people prepared to step forward and offer one. We have been consistent in our efforts and explanations, as boring or complicated as they may be. Unfortunately, despite readily-available evidence to the contrary, the same people are still making the same accusations they made the last time.