Price Controls and Price Gouging
The industry does not condone price gouging. No one supports anyone taking advantage of people dealing with an inter/national crisis. Often the proposed cure for high prices – anti-price gouging legislation – is worse than the problem it seeks to solve. Such proposals seek only to influence price while ignoring the fundamentals of supply and demand that drive where product is needed. The price that a consumer pays for gasoline is determined by more than just the cost of supplying it. It is also driven by factors such as our dependence on foreign oil and the rising worldwide demand. Repeated in-depth investigations by the FTC have shown that changes in gasoline prices are based on market factors and not due to illegal behavior. State investigators have repeatedly found that price increases are the result of market forces. History has demonstrated that price controls and allocations simply do not work
Why Price Controls are a Problem
Price controls distort market price signals that act to efficiently allocate fuel. Under market forces, supplies flow to where prices are the highest. Price controls have caused “gasoline lines, made shortages worse, and generally made consumers worse off.” Past attempts to regulate prices have also led to reduced domestic production and misallocation of fuel across regions. Price controls prevent additional supplies from entering a market if those supplies would cost more than the price control but less than the market clearing price. In a disruption, like during a hurricane or in crude supplies due to geopolitical issues, these additional but costlier supplies can be critical to recovery and market rebalancing. In the past, additional imports from international markets may have cost more, but they helped restore fuel production and delivery systems to operation in a time of great need. During this unprecedented time of Russian aggression, it is critical to develop U.S. crude oil production, pipeline infrastructure, and refining as well as to advance our engagement with stable countries such as Canada and Mexico.
Price controls prevent the allocation of supplies in a manner that equates their marginal value with marginal cost. Price controls will motivate suppliers not to seek additional supplies whenever their estimate of the allowable controlled price is less than their marginal cost of additional supply. For example, one could see hurricane-related lines at gas stations because suppliers would have no motivation to source additional higher priced supplies for their customers. With inefficient allocation, issues like lines at gasoline stations cause significant economic loss due to the time spent waiting in line and/or searching for retail stations with shorter lines.
FTC Has Found No Evidence of Price Gouging
Repeated in-depth investigations by the FTC have shown that changes in gasoline prices are based on market factors and not due to illegal behavior. State investigators have repeatedly found that price increases are the result of market forces. Following Hurricanes Katrina and Rita, the FTC stated in its report to Congress that that in the wake of the storms, refiners actually deferred scheduled maintenance to keep their refineries operating, companies drew down existing inventories to help meet the shortfall in supply, and the regions of the country that experienced the largest price increases were those that normally receive supply from areas affected by the hurricanes. The FTC also reiterated its view that federal price gouging legislation would be difficult to enforce and cause more problems than it solves. Specifically, it has previously noted that "if prices are constrained at an artificial level for any reason, then the economy will work inefficiently, and consumers will suffer. [Price controls] are bad for consumers, and the deleterious effect extends far beyond strictly fixed prices."
Price Controls are a Tried and Failed Policy
Proponents argue that legislation is necessary to give the President the authority to take immediate action in the face of skyrocketing gas prices. History has demonstrated that price controls and allocations simply do not work. Price controls on crude oil and petroleum products were in effect from 1971 to 1981. The policy was a failure—leading to the Jimmy Carter-era gasoline supply disruptions and higher consumer prices. They established price ceilings on domestically produced crude oil and refined products, keeping them artificially below world prices. This resulted in decreased domestic crude production while domestic demand of crude and refined products increased, leading to a worsening of shortages and increased oil imports.
Price control legislation could hamper efficient supply responses, yielding a stark choice between long lines at the pump and "no gas today" signs, versus the situation we have enjoyed since deregulation and the law's expiration in 1981. Price controls have proven to be a failed energy policy. There is additional irony, if not irrationality, in that the root of the current elevated prices has been a lack of supply, relative to before the pandemic, that shifted the U.S. from being a petroleum net exporter in 2020 to a net importer today. Price control legislation would not help solve the problem and could make the situation worse.
How Market Pricing for Gasoline and Petroleum Products Work
There is no central authority or group of people who decides each day what gasoline is going to cost. The process that influences the cost of a gallon of gasoline at a particular station on any given day is dependent on decisions made by thousands of independent suppliers, refiners, wholesalers and marketers who supply the different grades of gasolines to retailers. Oil, gasoline, and other petroleum products are traded in a global market and are subject to the change in prices that occur in competitive markets. Ultimately, prices are set by supply and demand and may be influenced by perceptions about future supply and demand. Increased diversity in U.S. oil and natural gas production helps make U.S. markets more stable.
In addition to broad supply-and-demand influences, other market factors figure into the price of gasoline and diesel fuel, including added taxes, blended biofuels, the cost to manufacture and transport product where it’s needed and the cost to store the product before it’s delivered to its final destination. Each refiner, the wholesale marketer and retailer may have its own views and information - and employ different criteria to make their decisions on product prices. Point-of-sale prices are set by the owner of each retail station and historically these prices have been closely linked to the prices they pay at the terminal that was supplied by the refinery. Retailers set prices to be competitive in their local market. Retailers also must factor the need to pay associated operating and related costs as well as the cost for the next delivery of gasoline (i.e., replacement costs) into the price they set. If supply is seen as dropping relative to demand, this can place upward pressure on prices and can be factored into the retailer’s pricing decision.