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Higgins Sounds Alarm as Local Gas Retailers Rake in Record Profits

Dec 8, 2008
Press Release

In a letter to the Federal Trade Commission (FTC), Congressman Higgins details the disturbing profit margin figures for Western New York gas retailers made available through the Oil Price Information Service (OPIS).  While industry sources indicate that it takes about 11 to 13 cents per gallon of gas to profitably operate a gas station, the current average national profit margin is 23.6 cents per gallon, attributable to what some in the industry call the “sticky down.”    Disturbingly, when examining local profit margins Congressman Higgins’ office found local profits to be more than double the national average at 55.1 cents per gallon in Buffalo-Niagara region and an astonishing 71 cents per gallon in Jamestown, New York, the city rated the most “profitable” market in the nation.

“After thorough, independent research by my office we are certainly able to limit the scope of what may be impacting gas prices and what we see at this point is alarming,” said Congressman Higgins.  “It’s clear that taxes and supply issues do not set us apart or sufficiently explain the vast discrepancy.”

In another telephone conversation this week with high level officials at the FTC the Congressman dismissed several theories for the high WNY gas prices and asked for a swift analysis and outcome report on the situation with a new targeted focus at the retail level.  Higgins outlines his concerns and backs it up with data in a new letter to the FTC Chairman (below).

“Every extra penny in gas prices paid by Western New York consumers has an enormous ripple effect on an already distressed economy,” said Congressman Higgins.  “This region must again stand up for ourselves and demand justice on this matter.”

Text of letter below:

December 4, 2008

The Honorable William Kovacic
Chairman, Federal Trade Commission
600 Pennsylvania Ave, Suite 444
Washington DC, 20580

Re: Disturbing new gas price data

Dear Chairman Kovacic:

In furtherance of my correspondence of October 22, 2008, I write to make you aware of some very disturbing petroleum industry data.  This data, from the Oil Price Information Service (OPIS), an independent industry observer, helps to answer the question posed by the Buffalo News in their November 2nd front page headline “WNY’s gas price mystery: Why so high?”

You will recall that the problem I identified in my October 22nd correspondence was the dramatic increase in the difference between the average retail cost of gasoline in Western New York and other, similarly situated communities.  This problem persists this week, as the price per gallon of gas in the Western New York cities of Buffalo and Jamestown is $2.29 and $2.24 per gallon, respectively.  Meanwhile the price of gas in the upstate New York communities of Albany and Syracuse is $2.07 and $2.03 per gallon, respectively.  

There has been debate as to whether the cause of the relatively high prices here has been the result of the tax structure, the physical layout of the pipeline system, the distribution network, the structure of the retail market or other factors.  The OPIS data clearly shows that the origin of the discrepancy is aggressive profit-taking at the retail level.  To wit:

  • The average profit margin nationally in the most recent week for which data is available was 23.6¢. per gallon of gas.
  • Jamestown, NY was the most “profitable” market for gasoline retailers in the most recent week for which data is available.  The average margin per gallon in Jamestown was 71¢.. 
  • Buffalo, NY was the fifth most “profitable” market for gasoline retailers in the most recent week for which data is available.  The average margin per gallon in Buffalo was 55.1.¢.

Multiple industry sources have confirmed the existence of a phenomenon called a “sticky down” – this means that as crude oil prices rise, the retail price of gasoline rises accordingly but as crude falls, gasoline falls more slowly as retailers and perhaps others take profits.  This helps to explain why the national average margin is currently 23.6¢ while industry sources indicate that it takes about 11-13¢ to profitably operate a gas station.

The fact that our “sticky down” is so much more pronounced than the national average suggests a dramatic inefficiency in the local marketplace.  This may not be surprising, as 52% of the gas pumps in Erie County are controlled by just three companies, and 70% are controlled by just six companies.   While the concentrated ownership of pumps does not, in itself, suggest an uncompetitive marketplace, the extremely high margin data from OPIS certainly does.

I hope this data helps your ongoing inquiry and again, I urge you to proceed with the inquiry with all haste.  Every week in which Western New York continues to suffer a price disparity of 30¢ compared to other, similarly situated communities causes real and substantial damage to one of the nation’s most struggling economies.

Sincerely,

Brian Higgins
Member of Congress