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FTC Blames Oil Demand for U.S. Gasoline Price Rise

The rapid rise in U.S. gasoline prices since last year is due mostly to increasing worldwide demand for crude oil rather than collusion or consolidation in the oil industry, U.S. antitrust regulators concluded in a report issued on Tuesday.

Reuters reports that the Federal Trade Commission blamed the gas price hikes on soaring worldwide demand for crude oil and said prices are a reflection of "producers' costs and consumers' willingness to pay" for the fuel.

"The vast majority of the FTC's investigations have revealed market factors to be the primary drivers of both price increases and price spikes," the agency said in a report on gasoline costs.

Critics in Congress have blamed rising gas prices on oil industry price-gouging and mergers that they say have reduced competition.

The average U.S. retail price for gasoline increased from $1.56 per gallon in 2003 to $2.04 in the first five months of 2005, the FTC said. U.S. oil prices have steadily gained in recent months, topping $60 per barrel in trading on Tuesday.

In its report, the FTC brushed aside claims of industry misconduct and said the rising cost of crude accounts for 85 percent of the price changes in the U.S. market for gasoline.

Prices had stayed relatively low between 1984 and 2004 -- despite rising U.S. appetite for gasoline -- because supply kept pace with demand, the FTC said.

Between 1985 and 2004, U.S. refineries increased their total capacity to process crude oil by 7.8 percent, from 15.7 million barrels per day in 1985 to 16.9 million barrels per day as of May 2004, the FTC said.

But oil producers were unprepared in 2004 for the sharp increase in world demand, much of it driven by the fast-growing economies of China and India, the FTC said.

The agency added that it was "difficult, if not impossible, to predict whether this sharper rate of (demand) increase represents the beginning of a longer-term trend."

The report said that despite some cracks in OPEC, the cartel "still produces a large enough share of world crude oil to exert market power and strongly influence the price of crude oil when OPEC members adhere to their assigned production quotas."

The agency conceded that oil industry profits have been "high" of late. But it said profits were not excessive over the long run and were a "necessary and important (role) in a well-functioning market economy."

"If high prices and high profits are expected to continue, they may draw greater investments over time into the oil industry, in particular to crude exploration and production,” the FTC said.

The agency said regional regulations and environmental requirements for specially formulated fuels in states like California can also increase prices by limiting substitute gasoline supplies.

In a related report, congressional investigators said while cleaner-burning gasoline blends have helped improve U.S. air quality, they have also raised pump costs for consumers and increased the possibility for supply disruptions.

The roughly four dozen gasoline blends approved by the government can be expensive for refiners to produce, and those costs are passed on to drivers, according to the Government Accountability Office.

"The increasing numbers of special gasoline blends have made it more complicated and costly to supply gasoline, elevating the risk of localized supply disruptions," the GAO said in a report.

Refineries have to modify their equipment to make the special gasoline blends. For example, the GAO pointed out that one California refinery said it could make 12 percent more conventional gasoline rather than cleaner-burning fuel.
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