Accusations Of Price Gouging Are Not Rare

Whenever oil prices have rocketed up during times when one or both houses of congress are controlled by the Democrats - as in 2008, pictured below, for example - executives from the integrated oil companies which make up what we like to call “Big Oil” are summoned to Washington, DC to testify in committee hearings in which they are generally bludgeoned by politicians looking to create headlines. It’s just part of the job.

It would take a while to total up the number of times such hearings have ended with congressional referrals to the Department of Justice to investigate “Big Oil” in a search for prosecutable examples of such price gouging criminal activity. But over the half century which has passed since President Carter assumed office in January 1977, those investigations have failed to turn up a single provable example of such behavior.

That reality doesn’t stop the politicians from levelling the accusation, though. We saw that this week when President Donald Trump overturned the normal political equation and became the rare Republican to level the same “price gouging charge” at “Big Oil.”

President Trump Joins The Price Gouging Parade

In a June 23 post on Truth Social, the President railed that "The big oil companies are not dropping their price at the pump commensurate with the sharply lower prices they are paying for oil," adding, “In other words, customers are being “gouged.” Mr. Trump went onto direct the Justice Department to mount an immediate investigation, warning that "Gasoline prices better start going down a lot faster than what I’m seeing!"

During a press availability later the same day, Trump added his estimate that the price for gasoline “should be in my opinion at $2.25 right now at the pump,” though he provided no supporting details for that estimate. It all makes for great political theater, though, which might well have been the President’s main motivation.

It is probably safe to say that every U.S. driver of an internal combustion vehicle shares President Trump’s frustration related to gasoline prices, which have been elevated since the disruption of tanker traffic through the Strait of Hormuz began on March 1. No one - myself included - enjoys paying higher prices for gas at the pump, nor should we. The fact that drivers constitute a classic captive market - having no choice but to buy gas or diesel to fill up our tanks if we want to get where we need to go - only heightens the resentment we already feel.

That said, if the Justice Department does mount the investigation the President is demanding, it’s a safe bet the investigators will find what all their predecessors have found in all the previous efforts since 1977: That no grand conspiracy exists to price gouge drivers related to gasoline.

A Functioning Market Is Not Price Gouging

The fact is that the market is working as it has always worked in the United States. In that market system, a number of factors combine to create a lag between downward pressure on crude oil prices being fully reflected at the pump.

Here are some of those factors:

• First, "Big Oil" doesn’t own the gas stations. The vast majority of those stations are owned by independent entrepreneurs who price their gasoline based on the cost of the latest tanker delivery they’ve received. The major oil companies realized back in the 1990s that the retail market is only marginally profitable at best and sold off the vast majority of their company-owned stations long ago.
• It takes days - most often, well over a week - for movements in oil prices to filter all the way to the retail outlets. The president has correctly boasted in recent days about the big volumes of crude now coming through the Strait of Hormuz. But it will take weeks before those slow-moving oil tankers arrive in ports around the world with their lower-priced cargoes.
• "Big Oil" does own the refineries, but refineries are price-takers on the market, not price-makers. They pay market prices for the cargoes delivered to them via oil tankers or pipelines.
• Right now, the tanker cargoes coming into U.S. refineries were loaded two weeks ago, when the Brent crude price was $94/bbl, $20/bbl higher than today.
• Due to dangerously low domestic inventories at central distribution hubs like Cushing, Oklahoma caused by the war, U.S. refiners are having to import a higher percentage of crude right now on tankers because domestic pipeline supplies are constrained.
• Even with all this disruption and upset in the system, the U.S. average price for regular has dropped by 60 cents in a month according to AAA and will keep dropping in the weeks to come as long as the Strait of Hormuz remains open.

Many drivers are also frustrated by the memory that prices at the pump shot up quickly after the Hormuz disruption took place, comparing that to the gradual reduction now that the crude price has dropped. This also seems to be the central point in President Trump’s accusations.

But, as Tom Pyle, President of the Institute for Energy Research, describes in a piece published this week, this is also how the market has always functioned.

When crude prices shoot up as they did in the days following the advent of the Iran Conflict, Pyle notes, retailers “anticipate higher replacement costs for future inventory and begin raising prices to protect margins. Consumer demand also plays a role, as drivers often accelerate purchases when prices are expected to rise, thereby tightening near-term supply.”

Pyle correctly points out this market dynamic is unique to gasoline, and that “similar inventory lags appear in many commodity markets with long production and distribution chains, from coffee to steel.”

Then he hits on the key point: “The difference with fuel is its visibility at every corner station, and thus, the price is more politically sensitive.”

That is it, exactly. No other commodity on earth advertises its price so prominently and constantly than gasoline. In most U.S. cities, drivers would be hard pressed to travel more than a mile from home without seeing at least one huge roadside sign displaying the price for gas at that location.

When you combine that with the reality that, unlike most other commodities and products, drivers have no choice but to buy gasoline - most often several times every month - it is easy to see where the sense of resentment arises.

But resentment does not equate to the crime of price gouging under federal or state laws. Every Justice Department investigation in the last half century has run headlong into that reality, and there is little reason to expect a different outcome in this second Trump presidency.