High gas prices raise questions of gouging

Katrina and Rita are factors, but some critics blame oil companies for exploiting the market.

By tearing through the engine room of the US economy, two hurricanes have pushed gas prices to record highs and stirred a different kind of storm: populist anger at alleged price gouging.

State and federal agencies are probing thousands of consumer complaints. And some lawmakers are urging a tax on the oil industry's "windfall profits."

Though hurricane Rita didn't pack Katrina's punch, some analysts say the aftershocks could be enough to keep gasoline prices high for a while.

The recent $3 peak virtually matched the inflation-adjusted high reached in 1981. One economist reckons that gasoline shouldn't cost that much until oil nears $100 per barrel - about $35 higher than it is today.

So where is that money going? Are profiteers manipulating the market? Economists say oil producers and refiners, not gas stations, are reaping a windfall. Judging by history and laws of the market, it will be very hard to find evidence of impropriety. Mindful of growing public anger, President Bush Monday pledged to tap federal reserves if needed.

Besides spurring official investigations, that ire could prompt the federal government to revisit debates over energy policy and to give closer scrutiny to the question of whether mergers have stifled competition in the energy market.

"We're getting to the point where we have to seriously think about any further concentration in the industry," says Jim Bushnell, research director at the University of California Energy Institute in Berkeley, which studies oil and gas markets.

This may be the nub of the high-octane debate over pump prices.

Many states have laws that ban "price gouging," but experts say it's hard to define the practice. A law may target unconscionable, dramatic, or unjustified price hikes - particularly after a natural disaster. But distinguishing this from ordinary laws of supply and demand isn't easy for prosecutors.

Gas stations, for example, needed to cover a spike in wholesale costs as Katrina hit. And with rivals often right across the street, setting arbitrarily high prices isn't a good business plan.

But the refining business has a different profile. The top 10 refiners of gasoline together control 83 percent of the US market. Critics say the combination of few suppliers, tight refinery capacity, and varying regional formulas for gasoline have made this an unusually profitable marketplace. Although the industry was overbuilt 30 years ago, they say profit margins have soared thanks to a wave of mergers that regulators approved with little scrutiny.

"They are making out like bandits right now, at a time when I'm not sure that the economy can sustain these high prices," says Tyson Slocum, a researcher with the consumer group Public Citizen.

The five largest refineries - ExxonMobil, Valero, ConocoPhillips, Shell, and BP - have recorded $228 billion in profits since 2001, he testified recently at a congressional hearing.

Not all that cash comes from the US gasoline market, but he says that profits from US refineries are now at record highs. In 1999, refiners reaped 23 cents for every gallon they processed. As of 2004, they made 41 cents per gallon, he says, citing Department of Energy data.

Economist Don Nichols at the University of Wisconsin cites other data suggesting today's gasoline prices may be out of line. Even if oil reaches $70 a barrel again, he reckons the cost of regular gasoline should be $2.44 a gallon ($1.59 for the crude oil, plus a typical markup of 85 cents for refining, distribution, and taxes).

The industry responds that prices are following the predictable laws of the marketplace. Supply was already tight before Katrina hit. Three weeks later, 4 percent of US refining capacity and 9 percent of crude-oil production was still sidelined.

"In a market economy you can't have demand higher than supply," says Lawrence Goldstein, an economist at the Petroleum Industry Research Association in New York. When supplies run short, "the price has to continue to go up" until the imbalance is corrected.

That is exactly what has happened in recent weeks, he says. Prices initially rose above $3 a gallon. But undamaged refineries worked overtime, consumers conserved, and other nations pledged to ship gasoline to the US. By the time hurricane Rita struck, regular was selling for $2.75.

Rita means another, perhaps milder, shock through the system. Gulf refineries had to shut down temporarily during the storm, and at least one will remain offline for a few weeks due to damage.

"There's a windfall" for oil companies, Mr. Goldstein says. "But that's not evil."

Economists say a price spike sends a signal to boost energy supply and lower demand that helps the market adjust.

But for now, in a nation that will spend more than $200 billion at gas pumps this year, today's prices fan populist fires. For many low-income families, gas now burns through 10 percent of household income.

Recent polls show Americans blame major oil companies for high oil prices, and they aren't happy with President Bush on the issue either. This is putting pressure on politicians to act.

States, for their part, are pursuing allegations of price gouging. The Federal Trade Commission is probing whether gas prices were illegally increased after Katrina, and whether oil companies have kept refinery capacity low to boost prices.

Beyond that, some economists say there is a time to keep an eye on gas station practices: when prices drop. Stations, they say, often reduce their prices slower than the wholesale prices fall.

Energy experts say America may need to focus most on how to develop other sources of energy to replace increasingly expensive fossil fuels.

"We've got to be working on alternatives," says Tom Mast, an author and energy expert in Austin, Texas. "And we've got to be conserving."

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