2007-08 Final Report Head Researcher: Dr. Keith Leffler, University of Washington

1. 2007-08 Final Report Head Researcher: Dr. Keith Leffler, University of Washington Oversight: Attorney General’s Office Technical Expertise: CTED Energy Policy Division

2. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average gasoline prices reached a record high this week of $3.56 per gallon (4/15/08). • This is the 4th highest of the 50 states. • Excluding taxes, Washington prices rank 8th.

3. MOTOR FUEL PRICES IN WASHINGTON

4. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average gasoline prices reached a record high this week of $3.56 per gallon (4/15/08). • This is the 4th highest of the 50 states Excluding taxes, Washington prices rank 8th. • Why the ranking difference? • State gas tax = 36¢ per gallon, highest in the nation. Fuel taxes fund highway maintenance and construction.

5. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average gasoline prices reached a record high this week of $3.56 per gallon. • Washington (and West Coast) recent prices have increased compared to the rest of the nation. Washington has moved from the 16th highest during the first half of 2007 to the 4th highest at present. (From 26th to 8th net of taxes).

6. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average gasoline prices have increased by over 230 percent since 2003.

7. MOTOR FUEL PRICES IN WASHINGTON

8. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average diesel prices reached a record high this week of $4.31 per gallon (4/15/08). • This is the 5th highest of any state - 12th highest net of taxes.

9. MOTOR FUEL PRICES IN WASHINGTON

10. MOTOR FUEL PRICES IN WASHINGTON • Washington’s average diesel prices gasoline prices have increased by nearly 300 percent since 2003.

11. MOTOR FUEL PRICES IN WASHINGTON

12. MOTOR FUEL PRICES IN WASHINGTON • Gasoline and diesel prices generally track each other • Relative diesel prices have increased in recent years

13. MOTOR FUEL PRICES IN WASHINGTON

14. MOTOR FUEL PRICES IN WASHINGTON • Increased Relative Cost of Diesel is Due To: • Increased diesel demand compared to gasoline demand.

15. MOTOR FUEL PRICES IN WASHINGTON

16. MOTOR FUEL PRICES IN WASHINGTON • Increased Relative Cost of Diesel is Due To: • Increased diesel demand compared to gasoline demand. • Increased cost of producing environmentally cleaner low sulfur diesel.

17. MOTOR FUEL PRICES IN WASHINGTON • Components of Motor Fuel Costs • Crude Oil • Refining • Transportation • Taxes • Retailing

18. MOTOR FUEL PRICES IN WASHINGTON

19. MOTOR FUEL PRICES IN WASHINGTON • Major cost of motor fuels – crude oil. • Crude oil prices have increased nearly 500percentsince 2003.

20. MOTOR FUEL PRICES IN WASHINGTON

21. MOTOR FUEL PRICES IN WASHINGTON • Major cost of motor fuels – crude oil. • Crude oil prices have increased nearly 500percentsince 2003. • Crude oil prices have almost doubled since spring 2007. • Adding about $1 per gallon to the costs of motor fuels.

22. MOTOR FUEL PRICES IN WASHINGTON

23. MOTOR FUEL PRICES IN WASHINGTON • Major cost of motor fuels – crude oil. • Crude oil prices have increased nearly 500percentsince 2003. • Taxes, transportation and retailing costs have been relatively constant. • Refining differentials have been quite volatile. • Refining differential = price of gasoline at wholesale less the cost of crude oil

24. MOTOR FUEL PRICES IN WASHINGTON

25. MOTOR FUEL PRICES IN WASHINGTON

26. REFINERY DIFFERENTIALS • Important Economic Factor Explaining Unstable Refinery Margins: • Washington is in a West Coast marketplace dominated by California.

27. REFINERY DIFFERENTIALS

28. REFINERY DIFFERENTIALS • Unstable refining differentials • Washington is in a West Coast marketplace dominated by California. • Because of limited refining capacity, marginal West Coast supply is increasingly from out of area, including foreign imports.

29. REFINERY DIFFERENTIALS

30. REFINERY DIFFERENTIALS

31. Foreign imports are sometimes needed to balance supply and demand. Major sources of imported gasoline Saudi Arabia China & Taiwan South Korea Europe: Finland, France, UK Any supply disruptions require importation of additional product. Chevron refinery problem in Bay Area spring 2007 Expensive foreign supply to balance. REFINERY DIFFERENTIALS

32. MOTOR FUEL PRICES IN WASHINGTON

33. REFINERY DIFFERENTIALS • Washington is in a West Coast marketplace dominated by California. • Because of limited refining capacity, marginal West Coast supply is increasingly from out of area, including foreign imports. • Economic Lesson • Prices are determined by the cost of the marginalgallon. • Sometimes local - low differentials • Sometimes Finland- high differentials

34. STATE REGIONAL PRICE DIFFERENCES • Investigate economic reasons for differences in prices across cities.

35. STATE REGIONAL PRICE DIFFERENCES

36. STATE REGIONAL PRICE DIFFERENCES

37. AVERAGE ANNUAL RETAIL PRICES

38. RETAIL PRICE VARIANCES • Wholesale Price Differences • Supply source differences • Western Washington – • Washington refineries to I-5 terminals • Eastern Washington • Washington refineries – Portland – TriCities – Spokane • California refineries - Portland - TriCities - Spokane • Utah refineries - TriCities - Spokane – Moses Lake • Montana refineries - Spokane – Moses Lake Olympic Pipeline south of Olympia and Chevron Pipeline north of Boise are frequently at capacity.

39. RETAIL PRICE VARIANCES • Wholesale Price Differences • Supply source differences • Transportation costs from refineries to wholesale terminals

40. RETAIL PRICE VARIANCES • Transportation costs refinery to wholesale terminals • Refinery to Anacortes: 0.000¢ per gallon • Refinery to Seattle: 2.657¢ per gallon • MT refinery to Spokane: 5.023¢ per gallon • WA refinery to Spokane: 8.814¢ per gallon

41. RETAIL PRICE VARIANCES • Supply sources and transportation costs to terminals explain well the wholesale price differences but only a small part of retail price differences • Price differences across cities are mainly a wholesale-retail differential phenomena.

42. RETAIL PRICE VARIANCES

43. RETAIL PRICE VARIANCES

44. ECONOMIC FACTORS INFLUENCING REGIONAL VARIANCES IN THE WHOLESALE -TO-RETAIL DIFFERENTIALS • Transportation costs terminal to stations. • Terminal in city (Seattle) 1.6¢ / gal • Tacoma to Port Angeles 5.0¢ / gal • Moses Lake to Yakima 4.5¢ / gal

45. ECONOMIC FACTORS INFLUENCING REGIONAL VARIANCES IN THE WHOLESALE -TO-RETAIL DIFFERENTIALS • Transportation costs terminal to stations. • Station density. • Vancouver fewest and largest stations per vehicle • TriCities most and smallest stations per vehicle

46. ECONOMIC FACTORS INFLUENCING REGIONAL VARIANCES IN THE WHOLESALE -TO-RETAIL DIFFERENTIALS • Transportation costs terminal to stations. • Station density. • Hyper-marketers. • Chain retailers offering gasoline e.g., Costco, WalMart, Safeway • 9.5percent of stations in Port Angeles • 1.6percent of stations in Aberdeen

47. ECONOMIC FACTORS INFLUENCING REGIONAL VARIANCES IN THE WHOLESALE -TO-RETAIL DIFFERENTIALS • Transportation costs terminal to stations. • Station density. • Hyper-marketers. • Land costs. • $250,000 Bellevue • $55,000 Aberdeen

48. ECONOMIC FACTORS INFLUENCING REGIONAL VARIANCES IN THE WHOLESALE -TO-RETAIL DIFFERENTIALS • Transportation costs terminal to stations. • Station density. • Hyper-marketers. • Land costs. • Wages • $1588 per month in Bellevue • $754 per month in Clarkston

49. REGRESSION ANALYSIS OF RACK-TO-RETAIL MARGINS • Statistical technique to test and quantify the relationship among variables

50. REGRESSION ANALYSIS OF RACK-TO-RETAIL MARGINS • Significant variables Value of Impact from Highest Region to Lowest: • Transportation cost differences +8.8¢ Port Angeles v. Seattle • Station density -4.1¢ Vancouver v. TriCities • Hyper-marketers -3.8¢ Port Angeles v. Aberdeen • Land costs +12.3¢ Bellevue v. Aberdeen • Wages +3.5¢ Seattle v. Clarkston