FTC Provides Joint Senate Committee Testimony on Gasoline Prices and Competition in the U.S. Petroleum Industry

Federal Trade Commission Chairman Deborah Platt Majoras today testified before a joint Senate hearing of the Committee on Commerce, Science and Transportation and the Committee on Energy and Natural Resources, detailing the FTC’s extensive experience in enforcing the nation’s antitrust laws regarding the petroleum industry and saying that federal price gouging legislation now being considered “would unnecessarily hurt consumers.”

The Chairman began the testimony by citing the critical role the energy industry plays in the U.S. economy, saying that “[n]o other industry’s performance is more deeply felt, and no other industry is so carefully scrutinized by the FTC.” She then discussed the impacts of hurricanes Katrina and Rita on the United States’ petroleum production and transportation infrastructure, and how more than two-thirds of crude oil production in the affected Gulf Coast region remained shut down as of a week ago. “It is important to remember,” she said, “that Katrina and Rita damaged significant parts of the energy infrastructure in the Gulf Coast region, including oil and natural gas production and refining and processing facilities. Some adverse effect on energy prices may persist until the infrastructure recovers fully – a process that could take months.”

Still, the Commission is committed to determining whether any anticompetitive conduct by the petroleum industry may have contributed to the recent gasoline price increases seen nationwide. Accordingly, the Chairman said, as required by Section 1809 of the recently enacted Energy Policy Act, the FTC is currently investigating “if the price of gasoline is being artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices.”

Regarding concerns about price gouging, the Chairman said that, “In an economy in which producers are generally free to determine their own prices and buyers are free to reduce their purchases, it is unusual when many parties call for some sort of price caps on gasoline.” The FTC “is keenly aware of the importance to American consumers of free and open markets,” she said, “and intends faithfully to fulfill its obligation to search for and stop illegal conduct, which undermines the market’s consumer benefits.”

She cautioned, however, “that a full understanding of pricing practices before and since Katrina may not lead to a conclusion that a federal prohibition on ‘price gouging’ is appropriate.” Consumers understandably are upset when they face dramatic price increase within a short period of time, especially during a disaster, the Chairman said. “But price gouging laws that have the effect of controlling prices likely will do consumers more harm than good . . . While no consumers like price increases, in fact, price increases lower demand and help make the shortage shorter-lived than it otherwise would have been.”

She continued by saying that even if Congress were to outlaw gasoline price gouging, such laws would be difficult to enforce fairly, based on the difficulty of defining the term “price gouging” and determining when such laws should be put into effect. “For all of these reasons,” the Chairman said, “the Commission remains persuaded that federal price gouging legislation would unnecessarily hurt consumers. Enforcement of the antitrust laws is the better way to protect consumers.”

At least 28 states currently have statutes that address short-term price spikes in the aftermath of a disaster, according to the testimony, and if Congress mandates anti-“gouging” enforcement – despite the associated enforcement problems – such enforcement should be left up to the states, based on their proximity to retail outlets and their ability to react quickly to consumer complaints on the local level.

Continuing the FTC’s testimony, the Chairman discussed activities to maintain and promote competition in the petroleum industry. First, she said, through a program begun in 2002, the Commission closely monitors the price of gasoline and diesel fuel in approximately 360 retail areas and 20 wholesale regions nationwide. The monitoring initiative’s goal is to identify “unusual” price movements and examine whether any such movements might be the result of illegal anticompetitive conduct. The staff also monitors complaints received from the Department of Energy’s gasoline price hotline and other sources, investigating prices fluctuations when appropriate.

Next, the Chairman detailed the FTC’s active role in merger enforcement related to the petroleum industry, presenting data showing that the Commission has brought more merger cases at lower concentration levels in this industry than in others. Further, unlike in other industries, the Commission has obtained merger relief in moderately concentrated petroleum markets.

The testimony continued by examining the Commission’s recent nonmerger investigations into gasoline pricing, highlighted by the consent agreement reached with Unocal Corp., settling charges that the company deceived the California Air Resources Board (CARB) in connection with regulatory proceedings to develop the reformulated gasoline standards that CARD adopted. Under the agreement, Unocal (and Chevron, which acquired it earlier this year) agreed to give up its claims to the relevant CARB gas patents, potentially saving California consumers more than $500 million in gasoline costs annually.

Finally, the Chairman presented the results of a Commission report on the factors influencing gasoline prices nationwide. According to the report, worldwide supply, demand, and competition for crude oil are the most important factors in the national average price of a gallon of gas in the United States. In addition, gasoline supply, demand, and competition produced relatively low and stable prices from 1984 to 2004, despite substantial increases in the United States’s gasoline consumption. Other factors, as well, such as retail station density, new retail formats, and state and local regulations, can affect retail gasoline prices.

“FTC studies indicate that higher retail prices [for gasoline] are generally not caused by excess oil company profits,” the Chairman said. “Although recent oil company profits may be high in absolute terms, industry profits have varied widely over time, as well as over industry segments and among firms.”

The Chairman concluded the testimony by saying that the FTC has an aggressive program in place to enforce antitrust laws in the petroleum industry and that the Commission has taken action whenever a merger or nonmerger conduct has violated the law and threatened the welfare of consumers or competition in the industry. “The Commission continues to search for appropriate targets of antitrust law enforcement,” she said, “to monitor retail and wholesale gasoline and diesel prices closely, and to study this industry in detail.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 3-0, with Commissioner Jon Leibowitz abstaining.

Copies of the Commission’s testimony are available on the FTC’s Web site at http://www.ftc.gov. The FTC’s Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published “Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws,” which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. P052103)