GAO: SPOT PRICES DETERMINE
GASOLINE PRICES AT THE PUMP

(October 2006) Gasoline prices at the pump have declined in recent weeks, reversing price increases earlier this year that led some Arkansas politicians to search for a scapegoat. They should review a report from the U.S. Government Accountability Office (GAO), which found "crude oil prices are the major determinant of gasoline prices."

Prices for crude oil are set on spot markets, i.e., they are determined by forces of supply and demand. Prices are influenced by various factors including geopolitical events that are beyond the control of oil companies, wholesalers and service station operators.

The GAO, in its report entitled, 'Factors Contributing to Higher Gasoline Prices,' also found a "number of other factors also affect gasoline prices" at the pump. These include:

" 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;

" 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;

" 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."

The GAO found another factor is "the structure of the gasoline market " including mergers which firms may influence in some instances.

In testimony before a U.S. Senate Committee, Jm Wells, GAO Director, Natural Resources and Environment, observed, "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."

Online: http://www.gao.gov/new.items/d06412t.pdf.