Gas Prices Not Manipulated After Katrina, FTC Says

By Steven Mufson
Washington Post Staff Writer
Tuesday, May 23, 2006

The Federal Trade Commission said yesterday that it found no evidence that the oil industry manipulated gasoline prices in the wake of hurricanes Katrina and Rita and that 15 instances that fit a definition of price gouging set by Congress last year could be explained by market conditions.

The report pleased the oil industry but drew fire from those who believe that oil companies have intentionally created a refinery shortage to jack up profit margins and that companies took advantage of the hurricane emergencies last year to make excessive profits as prices soared to more than $3 a gallon.

Jon Leibowitz, one of the five FTC commissioners, while concurring on the report noted in a separate comment that a handful of refiners studied had "more than doubled their operating margins in ways not attributable to increased costs"; that other refiners' wide margins were "equally troubling"; and that "the behavior of many market participants, on balance, leaves much to be desired."

Members of Congress promised tough questions for FTC officials due to testify at a Senate hearing today.

Tasked by Congress last September with investigating the sharp increase in gasoline prices, the FTC said its eight-month study showed that companies had not restricted supplies or altered their product mix to raise prices after the hurricanes last year.

While many industry critics say companies have held back on refinery investments to widen margins between crude oil and wholesale prices, the commission also said that there was "no evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices." Instead, the FTC added, refineries had responded to "competitive market forces."

Congress last year instructed the FTC to consider as price gouging "any finding" that the average price of gasoline in designated disaster areas in September 2005 was higher than in August 2005 for reasons other than rising production or transportation costs, or national or international market trends. The 200-page report released yesterday said price increases by seven of the 30 refiners examined, two wholesalers and six independent retailers met that definition.

But the report added that "the conduct of firms in response to the supply shocks from the hurricanes was consistent with competition."

"Asking the FTC to determine when firms have exercised market power is not likely to yield anything very definitive, and this study hasn't," said Severin Borenstein, a professor the University of California at Berkeley and director of the university's energy institute. "It's not that they've concluded with certainty that firms have not exercised market power, only that that is no evidence of it. It is hard to distinguish in this industry between real scarcity and artificial scarcity created by the firms."

Representatives of the oil industry said the FTC report cleared them of wrongdoing. "We do look upon it as a vindication," said Bob Slaughter, president of the National Petrochemical and Refiners Association. He said the report showed that "in both cases -- after Katrina and with regard to the industry's investment policy over the past 20 years -- the industry was responding to market conditions."

The report did little to mollify the industry's critics. "Our evidence and common sense suggest a vastly different picture of unconscionable profiteering by Big Oil," said Connecticut's attorney general, Richard Blumenthal. Blumenthal has reached price-gouging settlements with eight gasoline retail stations this year. "The FTC has barely found the tip of the iceberg," he said.

A House measure passed earlier this month would raise penalties for price gouging and order the FTC to define the term. But the commission's report yesterday said that a federal law on gouging could "run counter to consumers' best interest." The commission said price gouging "is neither a well-defined term of art in economics, nor does any federal statute identify price gouging as a legal violation."

Leibowitz said the FTC report showed that "price gouging is a phenomenon that is hard to nail down." But he compared it to obscenity: "difficult to define in theory but easily recognized."

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