Governors pile on the “price gouging” bandwagon

Lynne Kiesling

Many thanks to jeffrey.d for alerting me to the letter signed by eight governors asking for a federal gasoline pricing probe, and possible refunds of “excess profits” (remind me to add that to the list of economic non-concepts, right behind “price gouging” and “windfall profits”).

The WaPo article mentions a study by Don Nichols at the University of Wisconsin, but because I could not find any such study online I cannot comment on it. I can comment on what the WaPo article says, though:

Historically, Nichols said, the markup between the price of a gallon of crude and a gallon of gasoline is about 85 to 90 cents a gallon, including refining, distribution and taxes.

The study estimated that for pump prices to reach $3 a gallon, the price of crude oil would have to be about $95 a barrel, but crude prices have been holding around $65 a barrel, and Katrina has not caused a surge in crude oil prices.

“The disconnect between gasoline and crude oil prices is quite remarkable,” Nichols said.

On its face I find this statement naive. People who study this industry have known for the past seven or so years that increasingly the refining capacity in the US is a bottleneck. If you are analyzing price effects along a vertical supply chain, and you have a capacity bottleneck in the middle of that chain, how can you expect historic relationships between the price of the initial input and the price of the final product to persist? That is incredibly naive and reflects a lack of understanding of how vertical supply chains work.

Of course the price of crude oil and the price of gasoline are going to become more disconnected as your refining capacity becomes the binding constraint. Furthermore, when a natural disaster exacerbates that bottleneck, you should expect a further deviation from that historic relationship.

More work for the FTC, which routinely investigates claims of “price gouging” when one politician or another raises the populist hue and cry. The FTC has studies stretching back for almost two decades that show no evidence of anti-competitive outcomes in gasoline markets.

Is there sufficient political will to just deal with the fact that energy scarcity is going to be more binding? Is there political will to let prices do their jobs?


9 thoughts on “Governors pile on the “price gouging” bandwagon

  1. I wonder if the historical relationships Nichols studied included the period since the advent of boutique gasolines in the marketplace. The gasoline marketplace is very different today than it was “historically”.

    The important issue is that the rise in prices, for the most part, occurred quickly enough and broadly enough to avoid generalized shortages and gas lines.

    Also, several states have gasoline tax formulas which increase the state tax as wholesale gasoline prices increase. I guess these would be producing windfall tax revenues about now.

  2. Price gouging: The beat goes on

    Lynne Kiesling finds that this issue just will not go away. Many thanks to jeffrey.d for alerting me to the letter signed by eight governors asking for a federal gasoline pricing probe, and possible refunds of “excess profits” (remind me…

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