ACCF: Price-gouging Legislation Could Be Costly

Oil and Gas Journal
June 13, 2007
By Paula Dittrick

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Legislation calling for price controls on gasoline could have counterproductive and costly consequences if passed by US Congress, a spokeswoman for the American Council for Capital Formation told reporters in Houston June 13.

"If price controls like current legislative proposals had been in effect in 2005 during Hurricanes Katrina and Rita, losses to households and business would have totaled $1.9 billion," said Margo Thorning, ACCF senior vice-president and chief economist.

Thorning cited the results of an ACCF-commissioned study entitled "Potential Effects of Proposed Price-gouging Legislation on the Cost and Severity of Supply Interruptions." Consultant CRA International Inc. of Washington, DC, prepared that study.

Thorning said price controls on refined products discourage refining expansion and discourage energy investment. Several pieces of legislation are being discussed on the subject of price-gouging. A US House bill proposed by Rep. Bart Stupak (D-Mich.) would make "price-gouging" a criminal offense.

Stupak's bill outlines that during an emergency declared by the US president, it would be illegal for anyone to sell oil products at a price that was "unconscionably excessive" and that indicated the seller was "taking unfair advantage of the circumstances related to an energy emergency to increase prices unreasonably" (OGJ, June 4, 2007, p. 28.)

In the US Senate, Sen. Maria Cantwell (D-Wash.) added a price-gouging amendment to legislation that would raise Corporate Average Fuel Economy (OGJ, May 14, 2007, p. 27.)

Hurricane scenarios

Thorning said price controls are likely to exacerbate potential gasoline shortages during hurricanes. The CRA study estimated losses from imposing price controls would have totaled $1.9 billion for September-October 2005.

"Additionally, under price controls, losses would have been much more localized in the regions that lost supplies, like Louisiana and Mississippi because there would have been no incentive to increase imports (of either crude oil or refined products)," the report said.

Thorning said price controls can worsen shortages by reducing supplies available to consumers. In addition, the overall post-crisis economic losses increase when consumers find themselves waiting in long lines for gasoline instead of working, she said.

"Imposing criminal charges for price increases would discourage suppliers from seeking replacement supplies (which might cost more), therefore limiting consumers' access to gasoline supply," Thorning said.

The expectation of price controls tends to discourage US refinery investment, resulting in tight capacity at all times, she added.

"This type of legislation will have exactly the opposite effect that was intended," Thorning said. "This type of legislation will tend to make supply shrink."

She cited gasoline price controls of the 1970-80s, noting that those controls did not work. Instead, she believes that existing laws already prevent market manipulation by refiners.

The Federal Trade Commission has investigated gasoline market performance during numerous supply interruptions, including the Katrina disruption. FTC never has concluded market manipulation was behind any gasoline price increase.