Evidence of gasoline price gouging is very hard to find
The U.S. House of Representatives recently passed a bill to solve a problem that many economists say doesn’t exist
Oil company profits are way up, but gas station profits have declined in 2022 as prices soared, according to a study published in Barron’s.
Against the bluster from politicians about price gouging at the pump, former Treasury Secretary Larry Summers called the idea “dangerous nonsense” last month in an interview televised by Bloomberg.
“The ‘price gouging at the pump’ stuff … is to economic science what President Trump’s remarks about disinfectant in your veins were to medical science,” he said.
Rather than solve high prices, Summers, who was President Clinton’s treasury secretary and director of President Obama’s National Economic Council, warned that anti-gouging legislation could lead to shortages.
Such warnings haven’t stopped Democrats from rolling out new bills, investigations and even letters to the heads of the oil companies. “Profit margins well above normal being passed directly onto American families are not acceptable,” President Joe Biden wrote in letters made public on Wednesday.
As many economists see it, however, the industry could be riding a wave more than creating it.
Oil prices account for about 55% of the retail cost of gasoline, but most large oil producers such as Exxon have virtually no control over Americans’ pump prices and indeed no ability to set prices in general.
They typically sell crude oil to the highest bidder in a global market, which might be a domestic refinery or an overseas processor or one of many international financial institutions that trade oil contracts.
Far from being a monopoly, Exxon owns less than 1% of the world’s oil reserves and produces less than 3% of its daily oil supply, so it has little if any power to influence global commodity prices. In addition — and perhaps surprisingly — Exxon frequently buys more crude oil than it produces for its refining operations. In 2010 the company spent $198 billion buying crude oil on the open market.
Although the U.S. is the world’s largest oil producer, all U.S. companies together account for only 14.5% of global oil production and thus even if they all somehow worked together they would have a very limited ability to sway global markets. The 13 OPEC countries, by contrast, produce a combined 44% of the world’s oil. Russia accounts for 13.1%, and Canada produces 5.8%, according to the U.S. Energy Information Administration.
Since oil prices are the result of supply and demand in the global market, when prices spike, oil companies can rake in huge profits, as is happening now. But when oil prices tumble — as they did during the pandemic due to dramatically weaker demand — producers can also register enormous losses. Exxon lost a staggering $22.4 billion in 2020.
At the other end of the supply chain are gas stations, which do control pump prices. Operators of the country’s 150,000 gas stations are generally independent retailers; although a station may use the logo of a big oil company, only about 0.4% are actually owned by one, according to the National Association of Convenience Stores.
“Basically nobody’s vertically integrated anymore,” said Patrick De Haan, head of petroleum analysis at GasBuddy, a website that tracks gas prices. “The big oil companies got out of retail a long time ago. There’s hardly any profit so why stay in the industry?”
Station owners set prices based on what they expect to pay for the next delivery and typically have very small margins; in fact most of their profits come from selling snacks, sunglasses and similar items, De Haan said. Because people buy less gas when the price goes up, most gas stations are actually far more profitable when prices are low.
Jason Furman, who chaired President Obama’s Council of Economic Advisors, dismissed claims that corporate greed was responsible for high prices as “just political ranting.”
It’s coming from “politicians who want to deflect blame,” De Haan said.
Courthouse News reached out of the offices of five lawmakers who co-sponsored the Consumer Fuel Price Gouging Prevention Act, which passed the U.S. House of Representatives last month.
Not one agreed to respond to questions on the record about how exactly the oil companies were accomplishing the alleged gouging.
So what’s really causing gas to be so expensive?
Oil producers around the world cut back drastically during the pandemic and laid off thousands of workers, owing to reduced demand as well as supply chain problems, and it’s hard to ramp up quickly. De Haan notes that a number of refineries closed permanently due to the slowdown.
World inventories are now at seven-year lows, according to Forbes. As Covid receded, however, demand bounced back more dramatically than expected while at the same time sanctions on Russia further crimped supply.
Some critics — including Biden — have cited as evidence of gouging the fact that gas station prices didn’t come down in March when oil prices temporarily dipped. But pump prices historically rise quickly when oil does and come back to earth more slowly. One reason is that gas station operators are often burned when wholesale prices rise faster than anticipated and try to make up their losses later.
“There were days when the wholesale price of diesel went up by 75 cents a gallon,” De Haan said. “When wholesale prices are climbing, you’re losing money because you can’t raise your prices until other station owners do. Then you try to recoup your lost margin. And you’re reluctant to immediately pass along decreases because the wholesale price could spike the next day.”
Even Doug Henwood, a socialist economist and editor at The Nation who advocates abolishing fossil fuel businesses, published an analysis defending the industry on this point against criticisms such as Biden’s. Using data going back to 1975, he noted that, while gas prices don’t drop immediately when oil prices do, they don’t rise immediately when oil prices rise — and to almost exactly the same degree.
A more significant allegation is that U.S. oil drillers are taking advantage of the situation by limiting their production to keep prices high. Instead of plowing profits back into drilling, Exxon, Chevron, BP and Shell spent more than $44 billion on stock buybacks and dividends in 2021 and have pledged up to $30 billion or more in buybacks this year, two Democratic House members complained.
“It is extremely frustrating to see that there’s not a full-on return to production at the moment of crisis,” Energy Secretary Jennifer Granholm said.
“Why aren’t they drilling?” Biden asked at a press conference last week. “Because they make more money not producing more oil — the price goes up.”
But according to economists at the Dallas Fed, “even under the most optimistic view, U.S. production increases would likely add only a few hundred thousand barrels per day above current forecasts. This amounts to a proverbial drop in the bucket in the 100-million-barrel-per-day global oil market, especially relative to a looming reduction in Russian oil exports due to war-related sanctions that could easily reach 3 million barrels per day.”
The real reason that oil companies aren’t madly drilling, the Dallas Fed says, is because shareholders don’t want them to. After years of aggressively expanding operations that produced boom-and-bust cycles — including enormous losses during the pandemic when oil prices briefly turned negative — shareholders are demanding that energy companies focus on highly profitable assets rather than speculative new ones. And even though prices have spiked recently, especially after the Ukraine invasion, new drilling is time-consuming, and it’s not clear how long the current cycle will last.
In addition, with trillions of dollars flowing into socially conscious ESG (environmental, social and governance) mutual funds, investors are signaling that they want companies to move away from fossil fuels.
“So far — and I am on the front lines, I see this every day — there is no interest to go in this space,” said Jeffrey Currie, global head of commodities research at Goldman Sachs.
On the regulatory front, although the Biden administration claims that it’s not holding producers back, environmental and other regulations have made it “nearly impossible to build a new refinery in the United States,” said Jay Hatfield, CEO of Infrastructure Capital Management.
Republicans like to blame Biden’s pipeline shutdowns and other green policies, but those policies have actually had a very small effect on prices in the short term, De Haan said. “But their effect grows every day, and in a couple years, if nothing changes, he’ll be more at fault,” he added.
Price gouging in general is a difficult concept because it’s seldom clear when a price is “excessive.” Some 42 states have price-gouging laws, but they generally apply only to charging outrageous prices for basic survival necessities during a declared emergency such as a flood or earthquake.
The bill that passed the House doesn’t define “unconscionably excessive” prices and says it applies if the president declares an emergency but doesn’t define what constitutes an emergency.
A recent gas-related emergency occurred in May 2021 when a ransomware attack shut down the Colonial pipeline and caused temporary but severe gas shortages in the southeastern U.S., prompting several governors to issue state-of-emergency declarations.
A study conducted afterward found that the supply shortage raised gas prices by about 4 cents a gallon. Two gas stations in northern Virginia were accused of price gouging, however, after they raised prices by more than 30%; they eventually settled with the state for a combined $10,000.
Many economists worry that laws that limit prices when supplies run low encourage hoarding and shortages and discourage manufacturers from ramping up supply to solve the problem. In one survey by the Initiative on Global Markets, only 8% of economists supported such legislation.
In one famous story, a Kentucky man bought 19 generators after Hurricane Katrina, rented a U-Haul, drove 600 miles to Mississippi and tried to sell them for twice their cost, which residents were happy to pay. But police arrested him for price gouging, threw him in jail and confiscated the generators as evidence, with the result that they were never used to help the hurricane victims.