Unsound interpretation makes a mess out of numbers. The American Automobile Association comprehensively reports gasoline prices in the US. But its interpretive skill doesn't measure up to the richness of the data it provides. Its interpretation, in fact, is messy.
The oil industry has reason to regret this deficiency. Because AAA has become an authority on gasoline prices, general news organizations naturally ask the group for explanations when prices rise. Here's a sample of what they get:
"This looks uncomfortably close to price gouging."
A Feb. 11 Reuters report attributed that observation to a spokesman of AAA. "The fundamentals," the spokesman went on, "do not justify US drivers paying the highest gasoline price on record for the month of February."
Increasing prices
Asked by OGJ for confirmation, the spokesman said he made those statements in response to questions from reporters. In response to a question from OGJ about the meaning of his terms, he said: "Price gouging is the practice of increasing prices suddenly and dramatically without apparent justification."
With gasoline, of course, accusation of price gouging amounts to stern condemnation, whether or not it's happening. In fact, in the intensely competitive and transparent US gasoline market, gouging is nearly impossible. Conditions in that market provide excellent reasons for gasoline prices to be high—reasons that have nothing to do with gouging and that AAA should be able to see.
Like anyone in business, sellers of gasoline and its precursors always try to sell their products at the highest obtainable prices. This is so even when they're discounting, which is most of the time. Pursuit by sellers of an optimum price isn't gouging. It's rational business practice.
Only in periods of shortage can prices rise as sharply as they have done recently. That the oil market has been short at least since Dec. 2, when a nationwide labor strike halted exports of crude oil and products from Venezuela, is beyond question.
When the Venezuela disruption occurred, commercial oil inventories in most of the industrialized world already were below normal and falling. The threat of war already jeopardized exports from Iraq and possibly its neighbors. And an unusually cold winter was under way in major heating oil markets. Those conditions persist.
Since the Venezuelan disruption, US refiners have had to trim runs for lack of crude oil, stocks of which have fallen below minimum operating levels. They're draining distillate storage to meet demand for heating oil. Gasoline stocks, which should be building this time of year, have slumped below their normal range.
This is a market under extraordinary stress on both sides: raw material and finished product. It's a market facing much more uncertainty than usual about future supply. Under these conditions, to see no "apparent justification" for prices to be zooming is to miss much.
But the damage is done. In the often-misinformed politics of gasoline, mere hints of gouging can create serious problems for refiners and marketers.
The AAA spokesman's insinuation about gouging, provoked as it was by reporters' questions, might not have been deliberately malicious. But it was careless. And the brush-off of "the fundamentals" as they relate to current gasoline prices was altogether perplexing. The market hasn't experienced fundamentals like these for many years. How can anyone commenting on current gasoline prices fail to acknowledge that? Until inventory pressures ease, a good question will be why prices haven't risen even more.
Showing restraint
AAA seems to suffer from the quaint but common belief that gasoline prices reflect the will of some central consciousness. It's implicit in the spokesman's definition of "gouging." And it appears in a prepared AAA statement appealing to gasoline wholesalers and retailers to "show restraint in the pricing of the product" and urging them "not to take advantage of the nation's heightened terrorist-alert status."
Pricing can't be orchestrated that way. Prices in a healthy market reflect myriad individual decisions by business people competing with one another. Besides, price restraint is precisely what a short market doesn't need. A short market needs more supply and less consumption, the quickest route to which is a cycle through price elevation. Manipulation—including any form of imposed "restraint"—can only prolong the current distress. Authorities on gasoline prices should know that.
