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Gas gouging -- FAQ
It's not easy to tell legitimate price increases from gouging ... but if you're suspicious, complain
September 7, 2005: 3:52 PM EDT
By Rob Kelley, CNN/Money Staff Writer

NEW YORK (CNN/Money) - When posted gas prices all look like highway robbery compared to several years ago, how can a consumer tell what's fair and what's profiteering?

1. How do stations typically price gas?

Gas station attendants shouldn't be your main target of grief, and station owners deserve a mite of mercy as well. "Stations have a lesser role in pricing than most consumers realize," said Sean Comey of AAA Northern California. He cites four factors that make up what you pay at the pump: crude oil prices, gas refining costs, taxes and retail markup. "Retail markup is not necessarily the largest component of price," he said. "The lion's share of profit comes from gasoline refining and crude oil."

Gas stations are making their money on volume, and the markup is a lot smaller than you might imagine. In 2004, the national average for markup on a gallon of gas was 12.7 cents, according to Jeff Lenard of the National Association of Convenience Stores. And that's before the costs of operating a station. So when gas prices cross the dreaded $3 mark (or perhaps even the dreaded $4 mark), it's likely the producers and refiners -- not retailers, who operate in an incredibly competitive market -- are making the bulk of the profit.

Also, state and federal taxes made up 27 percent of the price of a gallon in 2003, according to the Department of Energy (DOE). Local county and city taxes can add even more.

2. Why do prices at my local station vary so much from the national average?

There are a host of state-specific factors that gas prices depend on, including taxes and gas distribution networks. Gulf Coast states have lower average costs for gasoline because of their proximity to the Gulf of Mexico, which is the source of nearly half the gasoline produced in the United States. That dependence means that these states will be hit with much greater increases as Gulf production has stalled.

Ben Brockwell, director of pricing at Oil Price Information Service (OPIS), says the Northeast will see prices climb as well because of its dependence on Gulf oil (full story). The Colonial Pipeline, shut down temporarily this week due to Katrina-related power outages, pumps 100 million gallons of fuel products each day from facilities in Texas and Louisiana to Georgia, the Carolinas and on to New York (full story). The pipeline returned to operation on Wednesday night.

But station to station variations are more likely caused by differences in suppliers. Oil companies with gas station chains, like Shell, Chevron and Exxon Mobil, have long-term supply deals with their stations. That means that their stations aren't able to get the cheapest prices when wholesale prices drop. Conversely, they can offer relatively lower prices when the general market spikes.

On the other hand, most independent stations get their oil from spot markets -- where gas is exchanged on commodities markets -- which means they can regularly shop for the lowest price, but are also a lot more vulnerable to supply shortages. Consumers are likely to see especially high prices at independent retailers now that, as Brockwell observes, wholesale gas has pushed above $3 a gallon. (Full story)

3. How do you tell if a station is price-gouging?

Most parties agree that it's tough for a consumer to make a definitive judgment beyond registering shock at the prices. "It's a very loaded term," said AAA's Comey. "The actual definition is determined by state governments, who define what taking 'unfair advantage' of a crisis is. Attorneys general monitor these situations closely."

Gouging is distinct, by definition, from price fixing, which is the collusion of multiple gas stations to set prices. Gouging is the act of an individual station taking advantage of supply problems (or even perceived supply problems).

AAA offers the Daily Fuel Gauge Report, which allows consumers to see both national and regional averages for gas prices. If you see prices at a station that far exceed your regional average, that's when to take note, save your receipt, and get in touch with your state Attorney General's office. (The National Association of Attorneys General has a complete state-by-state list of contact information available here.) You should also take down the prices of all the varieties of gasoline available at the station, from regular to high grade.

Some states saw price gouging following 9/11. Denise Bode, of Oklahoma's Corporation Commission, said in a statement, "We must avoid the kinds of behavior we saw immediately following 9/11, when some service station owners drastically increased the pump price because of unfounded supply fears, and some motorists engaged in panic buying."

Bode emphasized that the spike in world oil prices, however, would undoubtedly be reflected in prices. According to Energy Department statistics, the price of crude accounted for 44 percent of the cost of a gallon of gas in 2004.

4. What are authorities doing to stem gouging practices? Who do you complain to?

State attorneys general are keeping their collective eyes on pricing practices. Twenty-three states have anti-gouging laws on the books, according to Mitch Katz of the Federal Trade Commission. But the laws vary in their definitions of gouging, and there is no federal law on the matter.

The DOE has a web site called the Gas Price Watch Hotline, where consumers can alert them to stations where prices stand out. It is located at http://gaswatch.energy.gov/

President Bush spoke out Thursday against price gouging, especially at the gas pump. (Story here).

Though it may not feel like the quickest route to resolution, the best move is to call your state attorney general with your concerns, making sure to document the gas station name, location and full range of gasoline prices.

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Read more on Bush's "zero tolerance" policy toward gouging.

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