Federal Trade Commission: Public Conference
Factors That Affect Prices of Refined Petroleum Products
August 2, 2001
Comments by Larry Chretien, Massachusetts Energy Consumers Alliance (Mass Energy)
Mass Energy is a nonprofit organization with a dual mission of energy affordability and environmental sustainability. Began in 1982 with 200 members, today we have almost 7000 throughout eastern and central Massachusetts. Our largest program is heating oil - we negotiate contracts with sixteen retail heating oil dealers. Last winter, our members saved 28 cents per gallon compared to the state's average (saving members $200-$400 for the year). Our contracts are cost plus, meaning wholesale plus a fixed "margin over rack".
Mass Energy is concerned about heating oil, not gasoline. But experiences across the nation indicate that there can be regional differences with respect to gasoline that cannot be explained by supply and demand alone. Midwestern congressman who cared little about our heating oil spike in 2000 cared a lot about gasoline a few months later. California saw gasoline spikes too. New England is now experiencing higher gasoline prices than the rest of the country for reasons that EIA cannot yet explain (Boston Globe, July 22, 2001).
The retail oil heating industry is very competitive in Massachusetts with many sellers. There are about 1 million oil heat households in MA, but very few dealers have more than 10,000 customers, most have less than 5000. Wide range in price and business pra ctices - something for everyone. State officials should be able to address illegal retail activity. But see point #6 below.
In January 2000, wholesale prices in New England skyrocketed, even though we had experienced almost record warmth until mid-January. Every penny of increase in the retail price for distillates (heating oil and diesel) was attributed to the wholesale price spike. Retail margins actually fell and crude prices were stable for several months before and after. Weather was a factor, but not enough. The distillate inventory drew down because wholesalers did not adequately purchase oil in anticipation of winter in New England - a "phenomenon" that we have experienced more than once.
In the last several years however, heating oil supplies and prices have become far more volatile - manifested in the wholesale price of heating oil, which is NOT as competitive as the retail end - fewer suppliers, smaller price range, similar practices, etc. Actually, the wholesale price is reflective of refining costs, trading costs, transportation to Boston, and the wholesaler's margin. FTC should focus on these actors in the supply chain.
The industry has shifted to more of "just in time" production schedule - meaning that they are not carrying the risk of having too much refined inventory - they are passing that risk onto consumers. This is causing the volatility that we are now seeing. Is this an issue for FTC? It is an issue for consumers.
Wholesale price volatility might be a factor that is now affecting retail competitiveness.
Consumers cannot get good, clear price signals. Trade journals are showing dealers how to make dealers less price sensitive - move customers to automatic delivery, budget plans, fixed price programs, price caps, etc. All of those programs can be offered fairly, but we have seen retail margins rise more than 10 cents in the last two years. To be competitive, consumers must have good information as well as many sellers.
With heating oil and diesel fuel, during peak periods we can see problems similar to what we have seen with electricity and natural gas. The system might be able to function for most of the year, but suppliers have gained too much market power, particularly during peak periods. Some remedies:
FTC oversight and remediation.
Energy efficiency and load management, not just for home heating. Winter-time peaks for electricity and natural gas affect the distillate market greatly. Shave peaks for power and natural gas and affect heating oil markets too (see next point).
Look at the effect of interruptible users of natural gas that shift to distillates at the worst possible times.