Gauging the Gouging

Political posturing or petroleum profits?

Published in CSP Daily News

WALL, N.J. -- An ABC News report said many lawmakers and angry drivers suspected price gouging when gasoline spiked past $3 a gallon in the wake of Hurricanes Katrina and Rita. But energy experts insist the urge to blame station owners is misplaced.

Right now, you could probably find a bunch of stations charging $3.50 or $3.60 per gallon that are barely breaking even, Tom Kloza of the Oil Price Information Services (OPIS), Wall, N.J., told ABC. The average retailer or distributor is making a margin of 4 to 5 cents per gallon above the wholesale price, [image-nocss] so it's probably wrong to focus inquiries on the marketers because a lot of them are struggling to make a living.

Kloza argues that wholesale prices are difficult to manipulate, because they are subject to intense supply-and-demand pressures. Although the average price of a gallon of gasoline is 89 cents higher than it was a year ago, crude oil prices have jumped about 33%.

The retailers most at risk when wholesale prices jump, he said, are those not affiliated with major oil companies. There are situations where you could have some retailers charging $3.60 and barely breaking even, while people in the same market charging $2.90 and making 30 cents per gallon profit, he said.

The bigger companies, Kloza said, have the luxury of scaling back on price spikes for fear of a backlash from consumers and potential litigation. Most major oil companies have enough sense to realize this is a PR nightmare. If they say prices are going to spike, they're going to get skewered both politically and with the public, he said. To combat this, Kloza said, the major companies sell gasoline to their retail distributors at prices lower than wholesale to avoid the type of gouging claims that many small dealers now face. But smaller, independent dealers are left at a competitive disadvantage.

Many political leaders and others, however, believe that there has been widespread price gouging, and many have called for investigations.

Some lawmakers cited a study by University of Wisconsin economist Don Nichols that found the price of gasoline was marked up to unusually high levels during September. Nichols said the markup from the price of a gallon of crude oil to a gallon of gasoline nearly doubled after Katrina. The normal markup had been about 80 cents, he said, but that number jumped to $1.40 per gallon in September, pushing prices at the pump above $3.

The price of gasoline, assuming a normal markup with crude oil trading at around $65 a barrel, should be about $2.40 per gallon, according to the Nichols study. That is sharply lower than the $2.80 national average this week. The temporary rise to levels above $3 early in the month, he said, represented a shift of billions of dollars from the pockets of consumers. Sure, there's always market fluctuation, but in the modern era that big of a markup is really unusual, Nichols said. That's sufficient to tell you that billions of dollars moved. The trick, he said, is determining whether the profits were funneled to the retailers or the oil companies that refine and sell gasoline at the wholesale level.

We know that oil companies are making tremendous profits, in some case much higher than they've made in the past, Pam Maiolo, spokesperson for AAA Mid-Atlantic, told ABC News.

As reported in CSP Daily News, New Jersey and Missouri have sued several oil companies and gas stations, and New Jersey officials allege some stations were raising prices multiple times during one 24-hour period, which is against state law. New Jersey Attorney General Peter Harvey has said that some were changing prices as many as three or four times daily after Katrina.

Kloza conceded that some retailers certainly might have pumped up prices too quickly and frequently, and that some stations overcharged when drivers were storming to the pumps in the wake of Katrina. But a few such incidents will not explain the price spikes of recent weeks. There can be great political hay made of speaking out against gouging. But going after a few stations in Missouri or New Jersey or wherever, is likeit's really just ludicrous, he told ABC.