The Federal Trade Commission today issued a report entitled “Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases.” The report details the results of an intensive, Congressionally-mandated Commission investigation into whether gasoline prices nationwide were “artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices” and into gasoline pricing by refiners, large wholesalers, and retailers in the aftermath of Hurricane Katrina.
In its investigation, the FTC found no instances of illegal market manipulation that led to higher prices during the relevant time periods but found 15 examples of pricing at the refining, wholesale, or retail level that fit the relevant legislation’s definition of evidence of “price gouging.” Other factors such as regional or local market trends, however, appeared to explain these firms’ prices in nearly all cases. Further, the report reiterated the FTC’s position that federal gasoline price gouging legislation, in addition to being difficult to enforce, could cause more problems for consumers than it solves, and that competitive market forces should be allowed to determine the price of gasoline drivers pay at the pump.
The Commission’s findings are divided into two categories in the report – those related to market manipulation and other types of illegal anticompetitive conduct, as required by the Energy Policy Act of 2005, and those related to “price gouging,” as defined by Section 632 of the Commission’s appropriations legislation for fiscal year 2006.
Section 632 directed the FTC 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.” This excludes situations where the FTC finds substantial evidence that the increase is due to other causes, including costs related to production, transportation, or delivery costs, or national or international market trends.
During the time period examined, the Commission found:
The Commission also determined that, in light of the amount of gasoline production and pipeline capacity eliminated by Hurricanes Katrina and Rita – which is detailed in the report – 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 approximately what would be predicted by the standard supply-and-demand model of a market performing competitively. The conduct of firms 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.
As directed by Section 632, the Commission also examined gasoline prices after the hurricanes to search for any instances of price gouging as defined by that legislation. In its examination of price-gouging evidence, the report analyzed financial data for 30 refiners, 23 wholesalers, and 24 single-location retailers. The report found that 15 of these firms – seven refiners, two wholesalers and six retailers – had higher average gasoline prices in September 2005 compared to August, and that these higher prices were not substantially attributable to either higher costs or to national or international market trends. Accordingly, there was evidence of price gouging, as defined by Section 632, for these firms. 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.
The final section of the report discusses policy implications and recommendations generated by the Commission’s investigation. The report discusses the important role of the antitrust laws in protecting consumers by ensuring they are offered competitive market prices. It describes the roles of the FTC and Department of Justice in maintaining competitive markets through antitrust enforcement, including actions to investigate and prevent collusive conduct. The report also presents the Commission’s merger enforcement work related to crude oil and gasoline, as well as its law enforcement actions involving conduct by market participants such as Union Oil Company of California (Unocal).
The report also examines state and federal perspectives on price gouging, describing investigative activities by particular states and the effects of state price gouging laws on gasoline retailers. It concludes by presenting the FTC’s views on calls for federal gasoline price gouging legislation, describing the challenges of crafting a price gouging statute and the difficulty of distinguishing “gougers” from those who are reacting in an economically rational manner to the temporary gasoline shortages resulting from an emergency such as a hurricane. After discussing the critical role of prices in market-based economies, the policy section concludes that if natural price signals are distorted by price controls, consumers ultimately might be worse off, as gasoline shortages could result.
The report begins with an introduction and executive summary describing its structure and primary findings. Part I examines refinery production and the transportation of bulk supplies of gasoline, along with inventory practices and other issues related to potential gasoline price manipulation. Part II focuses on the effects of Hurricanes Katrina and Rita on the United States’ gasoline markets, describes the wholesale and retail price increases seen in the wake of these storms, and assesses whether price gouging, as defined, occurred. Finally, Part III addresses a number of important policy issues arising from the investigation and presents Commission recommendations related to this issue.
The vote to release the report, which is available now on the FTC’s Web site, was 5-0, with Commissioner Jon Leibowitz issuing a separate concurring statement. The investigation resulting in the report was mandated by Section 1809 of the Energy Policy Act of 2005 and Section 632 of the FTC’s fiscal year 2006 appropriations legislation.
Copies of "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases" are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.
John H. Seesel
Associate General Counsel for Energy
(FTC File No. 051-0243)