(Released Jun 2007)
As the summer driving season begins, consumer complaints and media hype over high gasoline prices have compelled political opportunists in the U.S. House of Representatives to pass the “Federal Price Gouging Prevention Act.” The Act would punish anyone found guilty of so-called “price gouging.” Regrettably, Congress’ latest attempt to solve an economic issue is at best shameless political grandstanding and at worst bad public policy that will only lead to higher gasoline prices and more consumer outrage.
The legislation seeks to address the symptom of high prices but not the underlying cause. Gasoline prices are high today because of high crude oil prices, government regulations and refinery limitations, not price gouging. According to the Energy Information Administration, there are approximately 149 refineries in the U.S. delivering gasoline to approximately 168,987 retail stations. Refineries have an enormous responsibility in meeting market demands for gasoline and have specific processes in place when crude oil is received, refined and delivered to retail.
Crude oil prices fluctuate depending on supply interruptions caused by international events, pipeline leaks, natural disasters and, now that summer is approaching, the switchover that many regions must undergo from using gasoline formulated for winter to special “boutique” summer blends in order to comply with environmental regulations. The U.S. hasn’t built any new refineries in over 30 years, and existing refineries are running at full capacity. While refineries operate under inflexible capacity limitations, they must also shut down for routine maintenance. This all affects crude oil refining schedules and the available supply of gasoline for retail outlets. The basic law of supply and demand cannot be ignored.
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Rather than address these problems, the Act seeks to frighten service station owners into limiting the price they charge their customers for gas, which in turn, could threaten the very ability of service stations to provide gasoline. Independent service station owners are small businessmen and women who incur significant expenses when paying for product and costs passed along by refineries, vendors and distributors, as well as rent, salaries, utility bills and taxes. When service station owners are unable to include a profit margin when setting prices, it can become impossible for them to stay in business. In fact, some service station owners recently refused to sell gasoline because doing so would be a losing proposition. Should the number of service stations decline, longer lines for scarcer product could commence, all leading to even higher gasoline prices.
This legislation slaps an absurdly arbitrary definition on “price gouging,” which, coupled with the threat of fines and jail time, could prevent service stations from properly responding to market conditions. Some in Congress and the media thrive on charged terms like “price gouging” that further incite disgruntled consumers, who unfortunately, see individual service stations as the problem.
Apparently, many congressmen want to ignore the findings of recent federal investigations into price gouging. Following the aftermath of hurricanes Katrina and Rita, gasoline prices remained high across the country, so the Federal Trade Commission investigated the issue. The agency found no evidence of price gouging, only the laws of supply and demand.
If Congress was serious about keeping prices low, it would do everything in its power to expand supply (or at least stop choking it off) and permit oil exploration in ANWR, the Outer Continental Shelf and other promising reserves. It would also promote the expansion of refinery capacity to process more crude oil and to allow the free market to determine the price consumers are willing to pay for gasoline. In essence, help by getting out of the way.
Crude oil prices, seasonality, refinery capacity and consumer demand determine the price at the pump. “Price gouging” is a political term used by elected officials to appeal to the public and increase government power over the private sector. Price gouging legislation only fuels politicians’ need for more control and publicity, leaving consumers with high gas prices and limited supplies.