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Price Gouging?

Proving that there is no end to the number of topics that he knows absolutely nothing about, Bill Frist wants the Senate to investigate gasoline price gouging by retailers.

First of all, there is actual competition at the retail level because of the number of retailers, so jacking up prices doesn’t work and doesn’t explain why the prices have spiked all over the nation.

Secondly, retailers are given their mark-up price by wholesalers, which is 10¢ or less per gallon. Retailers made their dime when it was $1.50/gallon, and are still making a dime at $3.00/gallon. Retailers make their money by selling more gallons, not by charging more for each gallon. The standard convenience store and gas station makes the majority of its money from the convenience store. When the price of gas goes up, people aren’t buying Slurpies. The owner makes as much or more on a liter bottle of Coke as 5 gallons of gasoline.

When the large oil companies merged, they shut down refineries. We have fewer refineries now than we had a decade ago, and we are at the limit of refinery capacity.

Last year Exxon spent $5 billion on oil exploration and $6 billion buying back stock to jack up the share price. So you can see where their priorities are. They aren’t interested in bringing down the price of oil; that would reduce their profits. They aren’t interested in building refineries; that would reduce their profits.

6 comments

1 Michael { 04.28.06 at 9:27 am }

While on the whole your analysis is sound, Bryan, there have been proven cases of price gouging in Illinois (where our attorney general launched a probe after the post-Katrina spikes last year). It would not surprise me in the least to learn that similar tricks were being pulled now, or elsewhere across this country.

However, I also think it’s difficult to say that gasoline retailers do not engage in practices that would get other companies busted for fraud. Virtually without exception, retailers charge exactly the same price for their product. If one of them raises the price, it’s usually less than a day later that they all have–and to exactly the same level.

2 Bryan { 04.28.06 at 11:12 am }

You must still have truly independent retailers up there, Michael. Down here they get run out of business quickly. There are a half dozen convenience store with gas chains, and then Exxon and Shell have gas stations with convenience stores. There aren’t any gas stations with auto repair left, and the pure gas stations have been gone for years.

This happened when the fuel tanks had to be upgraded to the new, anti-leak variety. Essentially the little guys couldn’t afford to install the new tanks and went under.

There were a couple of gas stations nailed for gouging after Katrina, but the also got nailed by their corporate owners when the state was finished, because the money was being kept by the local operator – a result of the computer monitors being off-line due to power outages.

3 Michael { 04.28.06 at 12:16 pm }

Most are franchisees of the big boys, but we do still have a few indies. And there’s one Shell station in town that still has a garage, does auto service, and will pump gas for customers that want that service. (Also virtually the only place in town I know of where the air pump is still free.) Except for that station, I think every place that sells gas in our little metro area has at least a small convenience store, though I almost never shop there for anything except maybe a bottle of water if I’m starting out on a long trip, and even that I’m more likely to grab on one of my regular shopping trips and just bring along. But apparently one of the managers’ jobs each morning is to drive by their competitors’ places and take down the prices they’re displaying. When they get to their shop, they phone or e-mail those in to a central clearinghouse, and they’re then told what their offering price for that day is supposed to be. That sounds an awful lot like price-fixing to me.

4 Bryan { 04.28.06 at 12:39 pm }

A full-service gas station! That’s pretty amazing. I have to watch my Mother’s gas gauge and and take it to a gas station for her, because we don’t have any down here.

The morning check thing must be what’s going on down here, because I know when my local station gets its fuel delivery, so the price shouldn’t change during the week, but it does.

It isn’t legally price-fixing unless they have some type of formal agreement at an upper level, although what you describe is the equivalent as far as I’m concerned.

5 Michael { 04.28.06 at 9:18 pm }

Apparently, at least according to NPR this morning, both New Jersey and Oregon prohibit self-serve gas stations. New Jersey’s Democratic governor is considering lifting the ban on a trial basis along the Jersey Turnpike, to see if it helps ease the sticker shock a little. If the fuel prices drop, he’ll consider revoking the ban altogether, or at least trying to get the Assembly to do it for him.

6 Bryan { 04.28.06 at 11:30 pm }

Self-serve is a problem for older people down here, especially during the summer, but they didn’t support the people who tried to continue the tradition.