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Are oil and gas companies price gouging consumers at the pump?

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·5 min read
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With gasoline prices poised to reach a new all-time high within days, President Joe Biden recently issued a stern warning to the nation’s oil producers and gas retailers.

“American oil and gas companies should not – should not exploit this moment to hike their prices to raise profits,” Biden said in a speech.

Are they, in fact, illegally price-gouging Americans at the pump or in the oil fields?

Most analysts say the short answer is no, but oil executives sometimes get close to crossing the line of anticompetitive behavior in their public comments.

“Oil companies don’t get to decide what to sell their oil at,” says Patrick De Haan, head of petroleum analysis at the fuel-savings app GasBuddy. “Oil prices are decided by (global) buyers and sellers.”

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Why are gas prices rising?

Both oil and gas prices have been rocketing at a breathtaking pace as Russia’s invasion of Ukraine’s intensifies a price spike triggered by surging consumer demand as the pandemic eases and global crude supplies remain limited. West Texas Intermediate, the U.S. benchmark, closed up nearly $4 at about $120 a barrel Monday, up about 30% the past month and 85% the past year.

The national average price for unleaded gasoline hit $4.10 a gallon Monday, compared with $3.61 a week ago and $3.44 a month ago, according to AAA.

Pump prices are almost certainly headed higher. Top officials in Congress reached agreement Monday on legislation that would ban Russian oil imports to the U.S. and end Russia’s permanent normal trade relation status in response to the intensifying war in Ukraine.

How high are gas prices going to get?

Both oil and pump prices are set to top the previous records of $4.11 a gallon and $145 a barrel, set in July 2008, says AAA spokesman Devin Gladden.

Biden’s beef with the energy industry isn’t new.

In November, the president, under growing criticism for contributing to inflation that’s been hovering at a 40-year high, asked the Federal Trade Commission to investigate “mounting evidence of anti-consumer behavior by oil and gas companies.”

“The bottom line is this: gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining,” Biden said in a letter to FTC Chair Lina Kahn.

Gas prices are advertised at over five dollars a gallon Monday, Feb. 28, 2022, in Los Angeles.
Gas prices are advertised at over five dollars a gallon Monday, Feb. 28, 2022, in Los Angeles.

Biden noted that the price of unfinished gasoline – which hasn’t been blended with other liquids – was down more than 5% versus the previous month while gas prices had gone up 3% over the same period.

Do gas stations price gouge?

The FTC hasn’t completed its probe. But Tom Kloza, chief global analyst with the Oil Price Information Service, suggested it’s unlikely gas retailers are doing anything illegal. Rather, he says, retailers, such as convenience stores, are grappling with fast-rising employee wages and other costs and so are raising pump prices to maintain their profit margins.

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More broadly, the retail gasoline market is fragmented despite consolidation that has left some companies owning multiple stations. If a gas station jacked up its pump price too sharply, it would lose business to rivals, says Phil Verleger, an industry analyst and economist and a senior fellow at the Niskanen Institute.

Because of that kind of competition, it isn’t illegal for a company to raise its prices well above the rest of the market to fatten its profit margin.

“There’s no such thing as price gouging,” Verleger says.

Have there been price-gouging probes?

On the other hand, it would be a violation of antitrust laws for many gas retailers to collude and agree to jointly lift their prices at the same time, he says.

Over the past 30 years, there have been more than 100 investigations and lawsuits brought by consumers, the FTC and states attorneys general alleging such conspiracies in the gasoline market.

“They all flopped,” Verleger says.

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Gas retailers, however, do have some leeway in how swiftly they raise or lower prices in response to movements in oil and wholesale gas prices. When crude prices are rising quickly, as they are now, gas stations respond but can’t boost prices quite as swiftly because consumers won’t accept such jarring hikes, Kloza says.

For example, the average pump price would be at $4.25 a gallon if it mirrored gains in the U.S. benchmark oil price, Kloza says. Instead, it's $4.10.

Conversely, when oil prices fall, gasoline dealers can lower prices more slowly because motorists are accustomed to the higher costs. That means retailers can actually reap higher margins when prices are tumbling, Kloza says.

In many markets, Costco, the low-price leader, sets an area's rock-bottom price and other stations sell a bit above that, Verleger says.

Will oil producers increase production?

Oil producers theoretically also could collude by scaling back production to keep prices high. Yet most big oil companies will likely increase output to take advantage of the lofty prices, not cut back, Kloza says.

Yet over the past couple of years, some producers have suggested they’re not planning to invest more capital to raise output and other players should do the same. Such comments raise the specter of collusion, Verleger says, though no investigations have been launched.

Frank Macchiarola, a senior vice president of policy, economics and regulatory affairs at the American Petroleum Institute, an oil industry trade group, said: “This is a distraction from the fundamental drivers behind rising energy prices. The Russian invasion of Ukraine has placed additional pressure and uncertainty on the market where demand continues to outpace supply."

He added, "Rather than questioning the integrity of markets that are tightly regulated and closely monitored, the administration should be promoting policies that incentivize U.S. production and send a clear message that America is open for energy investment."

Contributing: Elisabeth Buchwald in New York and the Associated Press.

This article originally appeared on USA TODAY: Gas prices gouging: Are oil companies taking advantage of buyers?