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Topic:  Gasoline Special Collection:  Hurricane Katrina

FTC Provides Senate Testimony on its Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases

Agency: Federal Trade Commission Date: 23 May 2006

Testifying today on behalf of the Federal Trade Commission before the U.S. Senate’s Committee on Commerce, Science, and Transportation, FTC Chairman Deborah Platt Majoras described the major issues addressed in the report released Monday entitled “Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases,” presented the Commission’s findings and discussed related policy implications, and offered recommendations for Congress to consider in its ongoing efforts to protect consumers in petroleum markets.

According to the testimony, the Commission’s findings are divided into two categories – 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.

The definition of price gouging was provided in Section 632, and included “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.”

In its investigation, the testimony reveals, 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 that drivers pay at the pump.

During the time period examined, the testimony states, the Commission found:

• No evidence to suggest that refiners manipulated prices through any means, including running their refineries below full productive capacity to restrict supply, altering their refinery output to produce less gasoline, or diverting gasoline from markets in the United States to less lucrative foreign markets. The evidence indicated that these firms produced as much gasoline as they economically could, using computer models to determine their most profitable slate of products.
  
• No evidence to suggest that 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 that petroleum pipeline companies made rate or expansion decisions in order to manipulate gasoline prices.
  
• No evidence to suggest that oil companies reduced inventory to increase or manipulate prices or exacerbate the effects of 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 that is 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.

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.

As described in the testimony, 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.

“A fresh examination of the costs and benefits of all forms of regulation – federal, state, and local – that impact the supply of gasoline may be warranted,” the testimony concludes. “Policies that influence demand also should be considered. A constructive debate among policymakers is what is needed, and the FTC stands ready to participate and add our expertise where appropriate.”

The Commission vote authorizing the presentation of the testimony and its inclusion in the formal record was 5-0.

Copies of the legal documents associated with these cases 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. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to thousands of civil and criminal law enforcement agencies in the U.S. and abroad.

Media Contact:

Mitchell J. Katz
Office of Public Affairs
202-326-2161