FTC finds no post-Katrina gasoline 'price-gouging'

May 22, 2006
The US Federal Trade Commission found no instances of illegal market manipulation to increase gasoline prices in the weeks following Hurricane Katrina late last summer, the federal agency said in a report issued May 22.

Nick Snow
Washington Correspondent

WASHINGTON, DC, May 22 -- The US Federal Trade Commission found no instances of illegal market manipulation to increase gasoline prices in the weeks following Hurricane Katrina late last summer, the federal agency said in a report issued May 22.

While it cited 15 examples of pricing at the refining, wholesale, and retail level that fit the definition of "price-gouging" under the FTC's fiscal 2006 appropriation, the report also said regional or local market trends and other factors apparently explained the unusual pricing.

It also reiterated FTC's opposition to federal price-gouging legislation, which it said would be difficult to enforce and could cause more problems for consumers than it solves. Competitive market forces should determine the retail price for gasoline, it said.

Oil industry groups reacted quickly. National Petrochemical and Refiners Association Pres. Bob Slaughter said that the group was still reviewing the full text of FTC's 222-page report but that the agency's statement as it issued the report confirms NPRA's previous statements and written testimony.

"This investigation, like so many others conducted at the state and federal level, appears to vindicate the refining industry's actions post-Katrina, as well as in other areas that were the subject of the study," Slaughter said.

The American Petroleum Institute also issued a statement citing the report's findings, saying the US oil and gas industry worked hard under extraordinarily difficult conditions following last year's two big hurricanes to continue supplying consumers.

FTC pointed out that Section 632 of its fiscal 2006 appropriation directed it to identify "price-gouging" as "any finding that the average price of gasoline available for sale to the public in September 2005, or thereafter in a market area located in an area designated as a state or national disaster area because of Hurricane Katrina, or in any other area where price-gouging complaints have been filed because of Hurricane Katrina with a federal or state consumer protection agency, exceeded the average price of such gasoline in that area for the month of August 2005."

It excluded situations where FTC found substantial evidence that the increase was due to production, transportation, or delivery costs; national or international market trends; or other operating factors.

Findings
Concerning weeks following Hurricane Katrina, FTC said it found:

-- No evidence to suggest refiners manipulated prices through any means, including running refineries below full productive capacity to restrict supply, altering refinery output to produce less gasoline, or diverting gasoline from markets in the US to less-lucrative foreign markets. In fact, FTC said, refiners produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products.

-- No evidence to suggest refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity growth resulted from competitive market forces.

-- No evidence to suggest petroleum pipeline companies made rate or expansion decisions in order to manipulate gasoline prices.

-- No evidence to suggest oil companies reduced inventory to increase or manipulate prices or exacerbate price spikes generally, or due to hurricane-related supply disruptions in particular. Inventory levels have declined, but the decline represents a decades-long trend to lower costs consistent with other manufacturing industries. In setting inventory levels, companies try to plan for unexpected supply disruptions by examining supply needs from past disruptions.

-- No situations that might allow one firm—or a small collusive group—to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.

FTC said it also determined that, in light of the amount of gasoline production and pipeline capacity eliminated by Hurricanes Katrina and Rita and the typical inelastic response of consumer demand to gasoline price changes, the post-hurricane gasoline price increases at the national and regional levels were about what would be predicted by the standard supply-demand model of a market performing competitively.

It found the conduct of refiners in response to the supply shocks from the hurricanes was consistent with competition. "In particular, firms diverted supply from lower-priced areas to higher priced areas, firms drew down their inventories, refineries not affected by the hurricanes increased output, and gasoline imports increased," it said.

The report also said that in 15 instances involving seven refiners, two wholesalers, and six retailers, there were cases that fit the definition of "price-gouging" under Section 632 of its annual appropriation because higher prices were charged that could not be directly attributed to either higher costs or to national or international market trends. "Additional analyses, however, showed that other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases," FTC said.

Slaughter noted that the Senate Commerce Committee was scheduled to hear testimony about FTC's report at a May 23 hearing at which NPRA also is scheduled to appear.

Contact Nick Snow at [email protected].