It's likely that by the time this column appears, some local or national politician will have charged that dramatically higher oil product prices following Hurricane and Tropical Storm Harvey's memorable visit in Texas and Louisiana reflect heartless gouging of consumers by no-good, lowdown scoundrels.
We've heard it all before. They're politicians, after all, and will say nearly anything to get some news coverage. As the song from the musical "Showboat" goes, "Fish gotta swim, birds gotta fly."
These politicians would rather see refiners, marketers, and retailers sell current product inventories at cost, with a general price markup, and wait to raise prices until the current inventories are gone, observed Lawrence J. Goldstein, Special Projects Director at the Energy Policy Research Foundation (EPRINC) in Washington.
"But the only sensible way to price oil products is at their replacement value," Goldstein said. If there's a sudden disruption in the supply chain and product prices have gone up when there's only one retailer in town who runs a full-cash operation, that retailer would have only enough money to buy 75% of what he had before, he said.
Another reality that shouldn't be avoided is the admission that when there is a sudden supply disruption and prices jump, there inevitably is a windfall profit. "The question in that situation is who should get the windfall: the consumer who took no risk and was given the wrong price signal, or the business owner who took the inventory risk," Goldstein said.
"Replacement costs are the only sensible way to price petroleum products. They send the proper signal that supply and demand are out of balance," he said. "Price signals are absolutely essential for the market to operate as efficiently as possible. They dampen demand and encourage conservation."
What constitutes gouging
"Generally speaking, price-gouging occurs when a seller increases the price of essential goods and services during an emergency to a level that is higher than what is considered 'reasonable,'" the American Fuel & Petrochemical Manufacturers' Legal Department said in a Sept. 1 Petroleum Primer.
"There is wide variability in state price-gouging laws, but typically a 10-25% increase in an essential commodity's price, compared to the price charged during the month prior to the emergency, triggers scrutiny under the law," it noted.
AFPM said that most state anti-price gouging laws focus on (1) a price deemed unfairly high; (2) an emergency situation; and (3) a product that is essential or useful in responding to the emergency. Many state laws permit high wholesale costs to be passed through while price gouging laws are in effect, as long as the seller's margins do not increase, it said.
