Sifting Through the Gas Gouging Charges

Sept. 30, 2005 — -- Many lawmakers and angry drivers suspected price gouging when gasoline spiked past $3 a gallon in the wake of Hurricanes Katrina and Rita. But one energy expert insists the urge to blame gas station owners is misplaced.

"Right now, you could probably find a bunch of stations charging $3.50 or $3.60 per gallon that are barely breaking even," said Tom Koza of the Oil Price Information Services.

"The average retailer or distributor is making a margin of 4 to 5 cents per gallon above the wholesale price, so it's probably wrong to focus inquiries on the marketers because a lot of them are struggling to make a living."

Some Stations Charge More, But Profit Less

Koza argues that wholesale prices are difficult to manipulate, because they are subject to intense supply and demand pressures. Although the average price of a gallon of gasoline is 89 cents higher than it was a year ago, crude oil prices have jumped about 33 percent.

The retailers most at risk when wholesale prices jump, he says, are those not affiliated with major oil companies.

"There are situations where you could have some retailers charging $3.60 and barely breaking even, while people in the same market charging $2.90 and making 30 cents per gallon profit."

The bigger companies, Koza says, have the luxury of scaling back on price spikes for fear of a backlash from consumers and potential litigation.

"Most major oil companies have enough sense to realize this is a PR nightmare. If they say prices are going to spike, they're going to get skewered both politically and with the public," he said. To combat this, Koza said the major companies sell gasoline to their retail distributors at prices lower than wholesale to avoid the type of gouging claims that many small dealers now face. But smaller, independent dealers are left at a competitive disadvantage.

Political Outcry Over Prices at the Pump

Many political leaders, however, suspect there has been widespread price gouging, and several Democratic senators and governors have called for investigations. Some lawmakers cited a study by University of Wisconsin economist Don Nichols that found the price of gasoline was marked up to unusually high levels during September.

Nichols said the markup from the price of a gallon of crude oil to a gallon of gas nearly doubled after Katrina. The normal markup had been about 80 cents, he said, but that number jumped to $1.40 per gallon in September, pushing prices at the pump above $3.

The price of gas, assuming a normal markup with crude oil trading at around $65 a barrel, should be about $2.40 per gallon, according to the Nichols study. That's sharply lower than the $2.80 national average this week. The temporary rise to levels above $3 early in the month, he said, represented a shift of billions of dollars from the pockets of consumers.

"Sure, there's always market fluctuation, but in the modern era that big of a markup is really unusual," Nichols said. "That's sufficient to tell you that billions of dollars moved."

The trick, he said, is determining whether the profits were funneled to the retailers or the oil companies that refine and sell gasoline at the wholesale level.

"We know that oil companies are making tremendous profits, in some case much higher than they've made in the past," said Pam Maiolo, spokesperson for AAA Mid-Atlantic.

The State of New Jersey has sued three oil companies – Hess, Motiva Shell and Sunoco – as well as several gas stations for gouging. The companies named in the suits have said they price their products fairly, and Sunoco spokesman Gerald Davis said the company is cooperating with government investigations into price gouging allegations. Calls to the other two companies requesting a comment were not returned.

Some individual gas stations have also faced legal allegations.

In Missouri, the state attorney general filed suit against 10 gas stations, including one accused of increasing its profit margin on gas by more than 400 percent in the days after Katrina. Nine other Missouri stations voluntarily agreed to pay $6,750 in fines to settle the disputes.

"When retailers take advantage of a situation like these natural disasters and their actions prevent consumers from making rational buying decisions, it is appropriate for the attorney general to act," Missouri Attorney General Jay Nixon said in a statement announcing the legal action.

New Jersey officials allege some stations were raising prices multiple times during one 24-hour period, which is against state law. New Jersey Attorney General Peter C. Harvey has said that some were changing prices as many as three or four times daily after Katrina.

Koza conceded that some retailers certainly might have pumped up prices too quickly and frequently, and that some stations overcharged when drivers were storming to the pumps in the wake of Katrina. But a few such incidents won't explain the price spikes of recent weeks.

"There can be great political hay made of speaking out against gouging. But going after a few stations in Missouri or New Jersey or wherever, is like … it's really just ludicrous."

For consumers, it probably doesn't matter whether it's the retailers or the oil companies that are to blame; the fact remains that gas prices are about 72 percent higher than a year ago.

"From our point of view, we are concerned with consumers, and not pointing fingers," said AAA's Maiolo. "The bottom line is that prices have certainly not come down as quickly as they shot up."