issue guide: Price Gouging at the Pump

The Skinny

see also pro & con, the FTC take

With gas prices touching another two-year high in the summer of 2006 (only the first weeks after Hurricane Katrina saw higher US gasoline prices at the pump), “gas price gouging” is on the lips of drivers, politicians, and reporters. But what exactly is gas price gouging?

What is the debate about?

When it comes to gas prices, there are really two debates - one broad and one narrow. The broad debate concerns American dependency on the (predominately foreign) gas and oil industry, and the potential for energy policy to weaken American foreign and domestic policy. That’s looking at gas pricing in the broadest terms; we’ll touch on that a bit here, but you’ll find a lot more on our general page on gas prices.

This issue brief looks at the narrower question of price gouging, including price gouging bills in Congress. Price gouging is tricky to define, but it is basically the alleged attempt by gas companies to tack on a few extra cents per gallon during times when gas is most needed. In a nutshell, the current policy debates about price gouging (if it occurs) is whether to leave it to current law or to add more stringent laws that could, debatably, have negative effects?

A special case of supply and demand – or greedy gas pushers?

Gas prices occasionally spike in a way that prices for most other things do not. That’s because, as economics professors agree, the supply and demand of gas react to changes in prices less than other items react to changes in price. Usually, if the supply of an item goes down, the price of the item will go up, and so the demand will go down too—that is, some people who would have purchased the item at the original price will say, “No, thanks” at the new price [you can learn all about the economics of supply and demand inelasticity]. Because of this increase in price, demand usually shrinks with supply and the two balance out again.

But in the case of gas, the demand to fill tanks won’t budge much when the price goes up. People will still want gas. So the price has to go way, way up to get supply and demand to balance. That skyrocketing price leads to profits. Generally speaking, everyone agrees that some of the increase in gas prices is caused by increased costs of supplying gas and some is caused by increased gas company profits (oil that is bought at pre-shock prices is suddenly being sold at post-shock prices).

Some argue that when everyone is running to the gas pumps after a supply shock, folks in the oil industry take advantage of the frenzy to fill ‘er up by adding a nickel here and a dime there. But others say that oil companies are just charging fair market value for a rare commodity when there is a real risk of shortage. Is the oil industry gouging consumers or is gas simply more expensive?

What’s doing in DC and in state law

A House bill, HR 1252, that could make it to the floor in late May, leaves “price gouging” undefined, leaving that bit of wordsmithery to the Federal Trade Commission (FTC) after the bill gets passed. Many states already have anti-gouging laws that apply to gas station retailers. The federal bill wouldn’t trump the state laws, but, unlike the state laws, would apply to wholesalers and refiners as well as retailers. (cJ’s pro & con pages only look at the debate on price gouging by oil wholesalers and refiners, but if you’re interested in state laws, we suggest you read Illinois’s description of state gouging laws as a representative sample and learn more about state pricing regulations in this Slate article).

Updated May 14, 2007

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