Yet Another Federal Investigation Of Gasoline Price Spikes

Okay, let’s review. In the last two weeks of August we had

1. a burst pipeline in Arizona
2. six refineries out of service for up to a week because of the blackout
3. an impending Labor Day holiday

So the increase in gasoline prices was the result of price gouging, right? At least that’s the contention of many politicians, who are only too happy to spend our tax dollars on yet another federal agency investigation into retail gasoline prices. This time Congress has requested that the Department of Energy investigate, in conjunction with the Federal Trade Commission, which I believe has performed up to 21 investigations of retail gasoline prices in the past decade in response to Congressional requests.

First, how does one define price gouging? Is it charging what consumers are willing to pay? If so, then what is the alternative that the politicians propose — price caps? The consequences of price caps are well known, and I pose the following question to our representatives: would you prefer the ire of constituents who have to pay more for gasoline, or the ire of constituents who have to stand in line for an hour to buy gasoline because there isn’t enough available at the capped price? You face a choice, and history has shown us repeatedly that using price to prioritize higher-value uses of goods and services is a far more efficient, flexible, and I would argue fair way of doing things than through political regulation motivated by populist demagoguery.

DOE official Kyle McSlarrow said they would investigate to see if anyone took advantage of the situation to manipulate markets, but he and the DOE should also factor in this question when considering that issue: can you manipulate markets when consumers can choose not to drive? With national average prices pushing $2/gallon (still not high historically), consumers are autonomous and can choose whether or not it’s still worth it to them to drive to wherever they were going to drive over the holiday.

Consumers are not automata, are not victims at the mercy of the rapacious whims of petroleum companies (which, by the way, operate in very competitive wholesale and retail markets). Consumers are automomous individual agents who can make choices based on their preferences. They have the power to say NO, to choose not to buy gasoline. Prices will move to reflect that choice.

One of the myriad reports on gasoline price spikes is this interim FTC report from summer 2000, which was then finalized in March 2001. An academic article on this report also appeared in the most recent volume of The Energy Journal. This quote from the FTC report summarizes their findings:

The completed investigation uncovered no evidence of collusion or any other antitrust violation. In fact, the varying responses of industry participants to the price spike suggests that the firms were engaged in individual, not coordinated, conduct. Prices rose both because of factors beyond the industry’s immediate control and because of conscious (but independent) choices by industry participants.

Over, and over, and over again, reports and research find that the industry is actually behaving in a competitive manner, notwithstanding the increasing concentration and decreasing number of firms. Furthermore, they are doing so in the face of fragmented markets that are the consequence of regulatory fuel formula mandates that make gasoline less substitutable across markets, increasing price volatility and seasonality.

So, please, stop throwing our tax money at populist investigations of the consequences of a bizarre concatenation of circumstances. If Congress wants to do something to reduce the volatility of price spikes in retail gasoline markets, they would better serve us by revising the federal oxygenate requirement to be outcome and performance-based instead of input-based, which is a root cause of all this mess.