Will Price Gouging Bill Help Lower Prices At The Pump?

The House of Representatives passes the Consumer Fuel Price Gouging Prevention Act aimed directly at gas prices. If it passes in the Senate, will it provide some relief?

By Nate Griffin – June 4th, 2022

Gas prices at the pump have been rising rapidly and are at record levels throughout the country.

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In response to Russia's invasion of Ukraine, the US banned imports of Russian oil on March 8th and on May 30th, the 27 member countries of the European Union agreed to a deal to phase out about 90 percent of Russian oil imports by the end of the year.

Since then, energy markets have been heavily disrupted. As a result, the market price for oil has risen by 47 percent since the beginning of the year and is now over $120 per barrel.

Prices at the pump have been rising throughout the country too. The national average price for gasoline was $4.59 per gallon as of May 23rd, up $1.57 from this time last year. The West Coast saw the highest prices, averaging $5.49 per gallon.

The price of diesel, which plays a vital role in transporting goods, rose to an average of $5.61 per gallon and reached over $6.00 in some parts of the country. Rising fuel costs are contributing significantly to the inflation woes that have been troubling the Biden administration since last year.

Trying to quell the tide of rising of prices, Rep. Schrier (D-WA) introduced H.R.7688, known as the Consumer Fuel Price Gouging Prevention Act. The bill attempts to ensure that energy producers, distributors, refineries and retail establishments are not engaging in price gouging or unfair practices.

But will this proposed policy be effective at lowering gas prices?

Democrats increasingly view inflation as a problem of corporate profiteering. In a passionate address to the House of Representatives, Rep. Frank Pallone (D), the Energy and Commerce Committee Chair, rails against "Big Oil" by saying:

"This legislation is necessary right now because big oil companies are ripping off the American people. At a time when Americans are paying record high prices for gas, Big Oil is taking advantage of the instability caused by Russia's unjust war in Ukraine and our ongoing recovery from the COVID-19 pandemic to rake in record profits. The largest 4 big oil companies collectively made 27 billion in profits during the 1st quarter of this year. And some of these were record highs; others were the highest profits in over a decade."

Opposing the bill, Rep. Buddy Carter (R) claimed that the democrats are "attempting to deflect blame onto oil companies, casting them as price makers instead of what they really are, price takers." He continues, "This is not the first time government price controls on oil and gas have been tried. It was the 1970's and it lead to decreased production, massive shortages in rationing and mile long lines at the gas pumps."

Unsurprisingly, this was a deeply partisan issue. The bill passed on May 19th in the House with 217 votes for and 205 against. No republican voted for the bill and only four democrats voted against. The bill was placed on the Senate Legislative Calendar for review.

Details of The Bill

The new bill aims a addressing fuel prices in three key ways:

1. National Emergencies & Price Gouging —

This first portion of the bill takes aim directly at price gouging during a national emergency:

Sec 2.1 – It shall be unlawful for any person to sell a consumer fuel, at wholesale or retail, in an area and during a period of an energy emergency covered by a proclamation issued under paragraph (2) at a price that—

(A) is unconscionably excessive; and (B) indicates the seller is exploiting the circumstances related to an energy emergency to increase prices unreasonably.

But the bill does not define the meaning of an "unconscionably excessive" price. To some, any increase in prices during an emergency could be defined as excessive. This ambiguous language would make it difficult for retailers who experience rising costs, but want to avoid legal trouble.

The bill would also only go into effect if the president were to call a national emergency, though it's not clear if high gas prices could constitute a national emergency.

2. FTC Investigation —

The next part of this bill gives the FTC the ability to investigate oil refineries or oil producers for manipulating the market.

Sec 5.1 – The Federal Trade Commission shall conduct an investigation to determine if the price of gasoline is being manipulated by reducing refinery capacity or by any other form of market manipulation or artificially increased by price gouging practices.

Any form of market manipulation would, of course, be anti competitive and unfair to consumers. But the FTC already has the power to enforce the law written in section 5 of the Federal Trade Commission Act which bans "unfair methods of competition".

Generally, it is already illegal for companies to engage in price fixing or an individual company to attempt to create a monopoly by excluding competitors.

The bill also amends the Energy Independence and Security Act of 2007, increasing the penalties for manipulation of energy markets from $1 million to $2 million.

3. Creation of a New Monitoring "Unit" —

The bill would create a new unit to monitor fuel producers, wholesalers and retailers to ensure no market manipulation is occurring.

Sec 6.1 – The Commission shall establish within the Commission the Transportation Fuel Monitoring and Enforcement Unit (in this section referred to as the “Unit”).

(2) DUTIES OF THE UNIT.—

(A) PRIMARY RESPONSIBILITY.—The primary responsibility of the Unit shall be to assist the Commission in protecting the public interest by continuously and comprehensively collecting, monitoring, and analyzing crude oil and transportation fuel market data...

The bill goes on to say that this Unit would engage in "collecting, monitoring, and analyzing crude oil and transportation fuel market data" in order to support competitive markets, identify market manipulation and enforce penalties against those engaging in market manipulation.

By carefully monitoring energy companies, this unit could create more transparency in the energy markets and discourage unfair practices.

Price Gouging or Fair Market Pricing?

There is currently no federal price gouging law in place in the US, though 37 states have their own similar laws in place, according to the National Conference of State Legislatures. But, this bill could make it more challenging and costly for companies, requiring them to navigate both federal law and a myriad of state laws, especially during an emergency.

And while it is true that the many oil companies have taken in record levels of profits, it is not apparent that price gouging is the fundamental cause of the recent gas price increases.

In an analysis of ExxonMobil's 2021 financial report, Investopedia reports that its downstream business, which involves the production of retail products like fuels and lubricants, generated 79 percent of its operating revenue but only 8 percent of it's earnings.

The upstream business, which includes the drilling and production of oil and natural gas generated only 8 percent of its revenue but 61 percent of its earnings.

Further, Exxon made a $23 billion profit in 2021 when oil prices were high, but in 2020 took a $22.4 billion loss when oil prices were low.

This implies that the most profitable portion of Exxon's business is also highly variable and dependent upon oil prices.

Of course, predatory pricing is unfortunate and harmful to consumers. But major corporations tend to shy away from unnecessary price increases because it risks damaging their reputation and making their products uncompetitive.

But price gouging does exist and it often happens during natural disasters or other times when supply chains become stretched. For example, some parents have recently reported private re-sellers advertising baby formula for as much as 300 percent above the retail price.

Price ceilings, however, generally do nothing to reduce demand for a product and make it more difficult for suppliers to increase production, especially if costs for raw materials are rising. With the price ceiling in place, buyers want to purchase more of a good than suppliers are willing to produce at that price.

In the case of gas prices, if input costs rise in the form of higher oil prices, but producers are restricted from raising prices in turn, then they will likely opt to slow down production.

The 70's Oil Crisis – A Lesson For Today

After the second World War, the US had slowly been increasing it's dependence upon foreign oil, and by 1970, imports of oil made up about 17 percent of all consumption. On October 17th, 1973, members of OPEC agreed to cut back oil production in an effort to raise prices. Within the next two months, global production of oil fell by nearly 10 percent.

This decline in production wreaked havoc on the world oil markets. A barrel of oil, which had previously traded at $6.71 per barrel in October of '73 traded at about $19 just two months later. This oil price shock transferred approximately $70 billion ($456 billion in todays dollars) in wealth to OPEC countries.

The US, at the time, was the only OCED country to regulate domestic petroleum prices, an artifact of the Nixon era price controls. This meant that prices at the pump could not adjust to the new market equilibrium, and domestic drilling companies had little incentive to produce more oil.

The price ceiling lead directly to shortages and long lines across the US.

It's understandable that members of congress want to take action to lower gas prices – high fuel prices are making it more difficult for Americans who are already struggling to get by.

But this bill does not address root causes like rising oil prices caused by the war in Ukraine. \

Instead, it's mostly focused on preventing price hikes during a national emergency – like a hurricane or wildfire – which in turn actually risks creating fuel shortages.

While increasing transparency in the energy markets could help to decrease the risk of market manipulation in the long run, it's unlikely to help with the high gas prices we're seeing at the pump today.

Refences: Ikenberry, G. John. Reasons of State: Oil Politics and the Capacities of American Government. Cornell University Press, 1988. JSTOR, http://www.jstor.org/stable/10.7591/j.ctt207g7cv.