Economic Populism:
The seasonal increase in gasoline prices
15 May 2007 in Regulatory Economics, Regulatory Policy
We've all noticed that gasoline prices are rising. What's going on ?
The Washington Post seems to have the lead this spring in running stories on rising gasoline prices. The Post article is particularly interesting because it includes a photograph of a gasoline pump with
prices exceeding $4 per gallon attributed to an unidentified retailer in the San Francisco area. The Post helpfully prints a chart showing that crude oil prices have been steady or declining recently. None of the news stories we've seen has mentioned that federal regulatory requirements for summertime fuel were effective on May 1.
Several US senators say price gouging by oil companies is to blame:
Standing in front of an Exxon station near the Capitol on Wednesday with the posted $3.05-a-gallon price for unleaded regular in the background, half a dozen senators railed against the oil industry.
Sen. Charles E. Schumer (D-N.Y.) said Congress would look into breaking up the giant companies. Sen. Maria Cantwell (D-Wash.) promoted her anti-price-gouging bill, which the Senate Commerce Committee adopted on Tuesday. And Sen. Bernard Sanders (I-Vt.) backed a windfall profits tax, pointing to $440 billion in profits over the past six years for the nation's five biggest oil companies.
"I think it's time to say to these people, 'Stop ripping off the American people,' " Sanders said.
Sen. Charles E. Schumer (D-N.Y.) said Congress would look into breaking up the giant companies. Sen. Maria Cantwell (D-Wash.) promoted her anti-price-gouging bill, which the Senate Commerce Committee adopted on Tuesday. And Sen. Bernard Sanders (I-Vt.) backed a windfall profits tax, pointing to $440 billion in profits over the past six years for the nation's five biggest oil companies.
"I think it's time to say to these people, 'Stop ripping off the American people,' " Sanders said.
Cantwell's bill (S. 1263) would define "price gouging" as "the charging of an unconscionably excessive price by a supplier in an affected area."
The term "affected area" means an "area covered by a Presidential declaration of energy emergency." The language authorizing this exercise of presidential power appears quite sweeping. He can make a "declaration of energy emergency" by finding
that the health, safety, welfare, or economic well-being of the citizens of the United States is at risk because of a shortage or imminent shortage of adequate supplies of crude oil, gasoline, or petroleum distillates due to a disruption in the national distribution system for crude oil, gasoline, or petroleum distillates
Such a finding can be based on a "major disaster" or "significant pricing anomalies in national energy markets for crude oil, gasoline, or petroleum distillates," though the latter language is not defined. For the term "major disaster," S. 1263 picks up existing statutory language in which an event qualifies as "major" and a "disaster" if the president says it is::any natural catastrophe (including any hurricane, tornado, storm, high water, winddriven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the United States, which in the determination of the President causes damage of sufficient severity and magnitude to warrant major disaster assistance under this chapter to supplement the efforts and available resources of States, local governments, and disaster relief organizations in alleviating the damage, loss, hardship, or suffering caused thereby.
See 42 U.S.C. 5122(2).
The term "unconscionably excessive" would be defined as
a price charged in an affected area for crude oil, gasoline, or petroleum distillates that--
The Federal Trade Commission would be empowered to legislate by regulation definitions for such ambiguities as "gross disparity," "usual course" of business, "grossly exceeds," "same or similar," "readily obtainable," and what constitutes "an exercise of unfair leverage or unconscionable means." Note that the definition of "unconscionably excessive" includes the word "unconscionable."- represents a gross disparity between the price at which it was offered for sale in the usual course of the supplier's business immediately prior to the President's declaration of an energy emergency;
- grossly exceeds the price at which the same or similar crude oil, gasoline, or petroleum distillate was readily obtainable by other purchasers in the affected area; or
- represents an exercise of unfair leverage or unconscionable means on the part of the supplier, during a period of declared energy emergency; and
- is not attributable to increased wholesale or operational costs outside the control of the supplier, incurred in connection with the sale of crude oil, gasoline, or petroleum distillates.
The FTC has previously reported to Congress that price gouging in the gasoline market either does not occur or occurs only in highly localized cases, and if it occurs market forces quickly eliminate it. So it's possible that the FTC could write rules that mean it would never have to divine the technical workings of the market, which it would have to be able to do to implement paragraph (B). This outcome depends on the FTC choosing not to expand the scope of its regulatory authority and enforcement discretion.
We've posted on price gouging several times -- for example, see here for a general discussion, here for an application to air fares, and here for a comparative application to oil and gold. Populist association of price-gouging with the oil business seems legendary. It's also rare to find price-gouging associated with any markets in which sellers have popular appeal, such as real estate in hot housing markets. We have previously written:
The more price inelastic the short-term market demand is for the good or service, the more likely it is that sellers will be accused of price gouging.
In short, price gouging occurs anywhere and everywhere that buyers are willing to pay market prices for petroleum-based products but they're really unhappy about it. The term doesn't apply to markets for anything else, and it never applies to buyers who extract unconscionably good deals from sellers.
