WASHINGTON -- The Federal Trade Commission (FTC) has issued a report entitled Investigation of Gasoline Price Manipulation & Post-Katrina Gasoline Price Increases, detailing the results of an intensive, congressionally mandated investigation into whether gasoline prices nationwide were artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices and into gasoline pricing by refiners, large wholesalers and retailers in the aftermath of Hurricane Katrina.
In its investigation, the FTC [image-nocss] found no instances of illegal market manipulation that led to higher prices during the relevant time periods, but found 15 examples of pricing at the refining, wholesale or retail level that fit the relevant legislation's definition of evidence of price gouging. Other factors such as regional or local market trends, however, appeared to explain these firms' prices in nearly all cases.
Further, the report reiterated the FTC's position that federal gasoline price gouging legislation, in addition to being difficult to enforce, could cause more problems for consumers than it solves, and that competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump.
The FTC's findings are divided into two categories in the reportthose related to market manipulation and other types of illegal anticompetitive conduct, as required by the Energy Policy Act of 2005, and those related to price gouging, as defined by Section 632 of the FTC's appropriations legislation for fiscal year 2006.
Section 632 directed the FTC to identify price gouging as any finding that the average price of gasoline available for sale to the public in September, 2005, or thereafter in a market area located in an area designated as a State or National disaster area because of Hurricane Katrina,or in any other area where price-gouging complaints have been filed because of Hurricane Katrina with a Federal or State consumer protection agency, exceeded the average price of such gasoline in that area for the month of August, 2005. This excludes situations where the FTC finds substantial evidence that the increase is due to other causes, including costs related to production, transportation or delivery costs, or national or international market trends.
During the time period examined, the FTC found:
No evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply, altering their refinery output to produce less gasoline or diverting gasoline from markets in the United States to less lucrative foreign markets. The evidence indicated that these firms produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products. No evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity growth resulted from competitive market forces. No evidence to suggest that petroleum pipeline companies made rate or expansion decisions in order to manipulate gasoline prices. No evidence to suggest that oil companies reduced inventory to increase or manipulate prices or exacerbate the effects of price spikes generally, or due to hurricane-related supply disruptions in particular. Inventory levels have declined, but the decline represents a decades-long trend to lower costs that is consistent with other manufacturing industries. In setting inventory levels, companies try to plan for unexpected supply disruptions by examining supply needs from past disruptions. No situations that might allow one firmor a small collusive groupto manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.The FTC also determined that, in light of the amount of gasoline production and pipeline capacity eliminated by Hurricanes Katrina and Ritawhich is detailed in the reportand the typical inelastic response of consumer demand to gasoline price changes, the post-hurricane gasoline price increases at the national and regional levels were approximately what would be predicted by the standard supply-and-demand model of a market performing competitively. The conduct of firms in response to the supply shocks from the hurricanes was consistent with competition. In particular, firms diverted supply from lower-priced areas to higher-priced areas, firms drew down their inventories, refineries not affected by the hurricanes increased output and gasoline imports increased.
As directed by Section 632, the FTC also examined gasoline prices after the hurricanes to search for any instances of price gouging as defined by that legislation. In its examination of price-gouging evidence, the report analyzed financial data for 30 refiners, 23 wholesalers and 24 single-location retailers. The report found that 15 of these firmsseven refiners, two wholesalers and six retailershad higher average gasoline prices in September 2005 compared to August, and that these higher prices were not substantially attributable to either higher costs or to national or international market trends. Accordingly, there was evidence of price gouging, as defined by Section 632, for these firms. Additional analyses, however, showed that other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases.
The report also examines state and federal perspectives on price gouging, describing investigative activities by particular states and the effects of state price gouging laws on gasoline retailers. It concludes by presenting the FTC's views on calls for federal gasoline price gouging legislation, describing the challenges of crafting a price gouging statute and the difficulty of distinguishing gougers from those who are reacting in an economically rational manner to the temporary gasoline shortages resulting from an emergency such as a hurricane. After discussing the critical role of prices in market-based economies, the policy section concludes that if natural price signals are distorted by price controls, consumers ultimately might be worse off, as gasoline shortages could result.
Click here to view the full report.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.