March 8, 2005 — This week's report by the Energy Dept. --
forecasting MSNBC.com answers your questions on business, personal finance
-- has a lot of Answer Desk readers steamed. Barry in Birmingham is among those who are wondering: when is someone going to do something about "price gouging" at the pump?
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I have a friend that works for a convenience store chain (approximately 300-400 stores) in the Midwest and she works in their fuel accounting department. According to her, fuel prices are high because of speculation on the part of carriers and suppliers –- not so much because of the high cost per barrel of oil. According to my friend, these people are anticipating the cost of fuel processing will climb and they are trying to stay ahead, which is gouging the public.
I do not mind paying a higher fuel cost if it is justified, but what suppliers are doing right now is wrong and I wish everyone knew so we, the public would make it known we cannot stand for unnecessary increases! — Barry B., Birmingham, Ala.
If you’re looking for the “smoking gun” behind rising gasoline prices, it’s hard to ignore the jump in the price of crude oil -– which is trading in the mid-$50s at this writing. At this time last year, oil was selling for $35. If refiners have to pay more for crude, you have to pay more at the pump.
But there's no doubt that at least some of that price rise is due to investors betting that tight supplies will keep oil prices high. That's what investors do. If they're right, they make money. If they're wrong, they get burned.
There’s also no question that gasoline refiners and distributors do everything they can to maximize their profits. With demand rising and no new refineries being built, this has become easier to do. That’s especially true for the major “branded” retailers, as mergers have left fewer of them standing and reduced competition.
The problem is that there is no law specifically barring a company from doing whatever it can to maximize profits. Price fixing is clearly illegal, but a very thorough 2003 Senate investigation of gasoline pricing practices found no evidence of any laws being broken.
The investigation did identify marketing practices called “zone pricing” and “redlining” in which gasoline distributors tightly control prices at their own outlets. With zone pricing, distributors dictate price changes -– sometimes block by block. Redlining refers to restrictions by suppliers on where independents can sell their gasoline. (A year ago, Oregon Democratic Sen. Ron Wyden introduced a bill to ban these practices, but it never made it out of the Judiciary Committee for a vote.)
But setting retail prices at your own outlets and price-fixing are not the same thing. Wal-Mart sets prices every day in thousands of stores and no one complains. Price-fixing happens when you call your competitor and work out a deal not to undercut each other. That's illegal.
State attorneys general have undertaken their own searches for illegal gasoline pricing practices. (It would be extremely popular politically these days to sue a gasoline refiner or retailer for price fixing.) Some states have even passed laws banning price gouging. But these cases are few and far between because it’s been difficult to define “gouging.”
Here's the problem: it’s not unlike the run on milk and batteries at your friend’s convenience store when a hurricane is coming. She probably doesn't jack up prices when a storm is on the way -- because that's "gouging." The result is empty shelves if you don’t get there early.
When demand rises and supply doesn’t keep up fast enough, there are only two options: you either let prices rise -- or you keep prices fixed below that market price and try to help people cope with the resulting shortages, usually by rationing.
So the real question is whether we need new laws to set limits on gas prices. In 1971, the government did just that, when the Nixon administration set price limits on wages and prices to try to fight inflation. When gasoline supplies got tight, the result was shortages: essentially, rationing in the form of long gas lines. Eventually, gas stations began enforcing "even-odd" sales: you could only buy on odd dates if the last digit of your license plate was an odd number, and vice versa for even dates. If you didn't plan ahead, you were out of luck.
Capping retail gas prices -- or refiner profits -- wouldn’t help expand production and might even have the opposite effect. In a market economy, you can’t force a gasoline refiner to make gasoline any more than you can force a baker to make more bread. And with refineries already running at 90+ percent capacity, there's no evidence that refiners are deliberately holding back production. At these prices, why would they?
For now, most people can still afford to fill up their tanks, so they’re not in the mood for rationing. But at $4 or $5 a gallon that might change.
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