Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Gas gouging ... and political posturing

Critics say high prices act to limit demand, and oil companies might withhold supply if they're afraid of a big fine.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Lawmakers may mean well by making it a federal crime for gasoline companies to gouge consumers at the pump, but critics say the rule could disrupt the free market and lead to gas shortages.

"This legislation is emotional, it's not thought out," said Phil Flynn, a senior market analyst at Alaron Trading in Chicago.

Gasoline in-depth
With prices at record high, demand and refining problems could push them much higher. Any relief in sight? (more)
When gasoline prices surge, a lack of refining capacity is often blamed. What's being done, and is it enough? (more)
From a big fat tax to more efficiency to boosting production, there are ways to do it - but which really stand a chance? (more)
Instead of ensuring that we use less gas, politicians and consumers take the easy way out, says Fortune's Alex Taylor. (more)

On Wednesday the House of Representatives passed a bill giving the Federal Trade Commission authority to investigate instances of gasoline gouging, which was previously left up to the states.

First off, by "gas gouging" they don't mean simply charging high prices.

They mean charging prices that are much higher than everyone else, like what was seen to a limited extent in some Gulf Coast areas following Hurricane Katrina in 2005.

The bill states offenders could be fined up to $3 million per day if they charge prices that "grossly exceeds the average price...[that] was offered for sale by that person during the 30 days prior" or "grossly exceeds the price at which the same or similar gasoline...was readily obtainable in the same area from other competing sellers."

"The FTC examined gas prices after Hurricane Katrina and found several instances where it appears that consumers had been cheated," Congressman Bart Stupak (D-MI), the bill's author, said in a statement.

The legislation, if made a law, would only take effect when the President declares a national energy emergency. It also instructs the FTC to target firms with over $500 million in annual sales - in other words, Big Oil, not mom and pop.

American Petroleum Institute president Red Cavaney described the bill in a statement as "capping prices" and "a cousin of the disastrous 1970s price and allocation controls, which created product shortages and put consumers in gasoline lines."

Indeed, pricing flexibility lies at the center of critics' arguments.

Flynn said if a hurricane or other disaster shut down a refinery or refineries and wholesalers didn't raise prices for fear of running afoul with the law, "people wouldn't change their driving habits, and [the suppliers] would run out of gasoline.

"The high prices ensure we have enough supply," he said.

Brian Perrone, a market analyst with South River Consulting, an energy consulting firm, agreed.

"If you're afraid of getting caught for gouging, you'd just say 'we're out' and sell it the next week when prices cooled off," he said.

But high prices limiting demand was a "red herring," according to Judy Dugan, research director at the Center of Taxpayer and Consumer Rights.

"There's a limit to how much conservation consumers can do on a short term basis," said Dugan, who supports the bill along with enacting a windfall profits tax and raising vehicle efficiency standards.

And lower prices are "not going to send people out on a gasoline splurge", she said.

Perrone did say the law might stop some of the "irrational behavior" that can grip oil and gasoline traders - and hence prices - prior to or during a disaster event, much like how Wall Street suspends trading when the Dow takes a big plunge.

But he said its overall effect is probably limited.

"I never seen an instance where price gouging has lasted more than a couple of days," he said. "Things like this are probably more political posturing more than anything else."

The legislation still has to pass the Senate and then be signed by the President to become law.  Top of page

Sponsors