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FTC: Gas price gouging minimal after Katrina

Democrats criticize the finding that the soaring prices were not part of an oil industry manipulation.

By ASSOCIATED PRESS
Published May 23, 2006

WASHINGTON - The Federal Trade Commission on Monday said a nine-month investigation revealed a smattering of gasoline price gouging after Hurricane Katrina, though not any widespread effort by the oil industry to manipulate the marketplace.

Industry officials lauded the report's findings, while Democratic members of Congress lambasted them and promised some tough questioning for FTC officials at a hearing today.

The agency sought to downplay the instances of post-hurricane price gouging by seven refiners, two wholesalers and six retailers, chalking up their soaring prices in September 2005 to "regional or local market trends."

"Based on well-established economic principles, the price increases were roughly in line with increases predicted by the standard supply and demand paradigm of a competitive market," the FTC said in a 200-plus-page report that noted the lack of a common legal definition of price gouging.

For the purpose of the report, and as mandated by Congress, the FTC defined price gouging as "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 FTC was first directed by the energy law passed last August - before Katrina - to investigate whether oil companies manipulated the price of gasoline in any way, including whether they intentionally held back refining capacity or inventories to keep supplies artificially tight. This part of the agency's inquiry, which analyzed market trends dating to the early 1990s, found "no instances of illegal market manipulation."

Congress demanded a separate investigation into the industry's pricing activities and its enormous profits after Hurricane Katrina, which severely disrupted the flow of oil and natural gas in the Gulf of Mexico and caused the shutdown of onshore refineries and pipelines.

In the week after the hurricane, retail gasoline prices leapt 46 cents to a record nationwide average of $3.07 per gallon.

Peter Beutel, president of energy-market consultancy Cameron Hanover Inc. in New Canaan, Conn., said the FTC's conclusions were reasonable in that they determined the U.S. gasoline market to be very competitive and at the same time vulnerable to a small number of participants behaving badly.

"Those people will get the book thrown at them and be fined heavily and rightly so," Beutel said.

At the peak of the Katrina-related supply disruptions, 13 percent of U.S. refining capacity was shut down and two major pipelines that deliver fuel from the Gulf Coast to the Northeast were not working due to power outages, decreasing the nationwide gasoline supply in September by almost 4 percent compared with the previous year, the report said.

Based on the assumption that the U.S. gasoline market is competitive, the FTC said it would have anticipated a price increase of almost 20 percent in the month after Katrina. Instead, the average September price of $2.95 a gallon was only 17 percent higher than in August. The muted impact was attributed to a surge in gasoline imports from Europe and an increase in productivity by refiners that were not damaged by the hurricane.

"The evidence indicates that suppliers responded quickly to the supply disruptions caused by the hurricanes," the report said.

Bob Slaughter, president of the National Petrochemical & Refiners Association, said the report "appears to vindicate the refining industry's actions post-Katrina."

But Sen. Chuck Schumer, D-N.Y., criticized the FTC for ignoring what he said was "the 800-pound gorilla in the room, namely that the oil companies engage in price leadership - setting prices higher than what real competition would merit." For example, Schumer said retail prices are jacked up quickly, then fall unnaturally slowly.

The FTC lawyers and economists who conducted the investigation found no evidence of malicious intent in 14 of the 15 instances of price gouging.

Rather, they concluded that local market conditions, ranging from pipeline outages to panic buying, created confusion among retailers about how to price their fuel. At the refinery level, the so-called gouging resulted from the fact that refiners whose plants were shut down by the storms were forced to buy gasoline on the open market and then resell it, which created higher pricing.

One retailer was determined to be taking advantage of the catastrophe for personal gain, according to Phill Broyles, assistant director of the agency's bureau of competition. None of the companies were named in the report.

[Last modified May 23, 2006, 05:26:04]