White House and trade groups criticize Senate energy bill

Anti-price-gouging language in a version of the energy bill passed by the U.S. Senate met with blunt criticism from the Petroleum Marketers Association of America.mp2

“President Bush has said on multiple occasions now that he will veto any energy bill that has these gouging provisions,” Dan Gilligan, president of the Petroleum Marketers Association of America, told NPN MarketPulse.

The Senate passed the bill on June 21 by a vote of 65-27. The House has not yet voted on its version.

“We’re fighting for every change we can get between now and when the bill is ultimately passed – which we hope is never,” Gilligan added. The PMAA lobbied for a provision in the Senate bill that would have restrained Attorneys General from announcing that investigations of alleged price-gouging are to be conducted. The association proposed that AGs instead be permitted to make an announcement only if an investigation has concluded with a decision to prosecute. Currently, AGs announce that an investigation will be conducted “and the retailer is savaged in the press before the investigation is complete,” Gilligan said. The association intends to continue pressing for such a provision.

The Petroleum Marketers Association is a federation of 45 state and regional trade associations representing approximately 8,000 independent petroleum marketers nationwide.

Another trade group, the National Petrochemical & Refiners Association (NPRA) also attacked the bill – on a number of grounds.

“From price gouging provisions to the expanded renewable fuels standard, this legislation is fraught with trouble for the American consumer,” NPRA Executive Vice President Charles T. Drevna said. “Economists across the country, as well as the Federal Trade Commission, have loudly proclaimed their opposition to federal price controls. Food producers and livestock owners have stated for the record that government mandates for significantly expanded ethanol production will result in dire consequences for their businesses, and ultimately higher food prices for Americans.

NPRA “supports the integration of alternative fuels into the marketplace based on market principles and demands,” the group said in its statement. NPRA’s members number more than 450 companies, including virtually all U.S. refiners and petrochemical manufacturers.

“NPRA strongly rejects the need for legislation to address ‘price gouging,’” the association said in a June 22 press release posted on its Web site. “Investigation after investigation has failed to show evidence of market manipulation or ‘price gouging’ on the part of the oil and gas industry.

One day before the Senate bill was passed, the Bush administration’s Council of Economic Advisors issued a paper opposing the price-gouging provision. The CEA statement, titled, “A White Paper on The Economic Consequences of Gasoline “Price Gouging” Legislation, was posted on the White House Web site. Following is the text, slightly edited:

The Nation’s drivers, the Administration, and Members of Congress are rightfully concerned about high gasoline prices and the burden high prices impose on families and businesses, particularly on those low-income households least able to adjust to high prices. All policymakers firmly oppose any anticompetitive practices perpetrated by firms. Any instances of illegal collective anticompetitive action can and should be vigorously fought by the Federal Trade Commission and, if criminal conduct is involved, by the Department of Justice.

The problem with this legislation is that terms like “price gouging” and “unconscionable” have no economic definition. As such, there is no economic evidence that can establish or refute claims of gouging or unconscionable behavior. We agree with FTC Chairman Deborah Platt Majoras: the legislation “likely will do consumers more harm than good.”

Legislation like the “Petroleum Consumer Price Gouging Protection Act” as part of S.1419 or H.R. 1252, the “Federal Price Gouging Prevention Act,” will harm the economy generally and specifically will harm drivers – the very people the bills are intended to protect. The approach contradicts standard economic principles.

Such legislation is harmful for primarily two reasons:

  • “Price gouging” legislation that effectively places controls on prices exacerbates shortages and potentially increases lines at gasoline stations.
  • The difficulty in defining “price gouging” would create an unnecessary regulatory regime with potentially high litigation costs and great uncertainty for sellers, enforcement agencies, and the courts. These added costs and uncertainties would deter investment in new supply, increasing prices in the long run.
“Price gouging” legislation would reduce incentives to supply areas facing a fuel shortage. For example, in the days after natural disasters, such as hurricanes, price increases induce domestic refineries outside the affected region and foreign suppliers to rapidly ship additional gasoline to affected areas. If this legislation were implemented, it could deter retailers from increasing prices and it might not be worthwhile for suppliers to divert their shipments. Retailers in the affected region would have even less gasoline and drivers would face additional hardship. With gasoline prices kept below market levels, there would be shortages. Consumers would be forced to line up at gas stations, but gasoline would run out before satisfying demand and many would be forced to do without.

Without the flexibility for prices to increase, supply disruptions last longer than they would otherwise. By disrupting the price mechanism, price controls make lines longer during emergencies, misallocate the available supply, and prevent those with the greatest need for gasoline from getting access. Also, by making it illegal for prices to increase when supplies are tight, price gouging legislation makes retailers reluctant to lower prices when supplies are readily available, for fear of not being able to adjust to future supply changes.

It is useful to compare the experiences of the 1970s to the present day. In the 1970s, when price controls were in effect, oil price increases were accompanied by long lines at the pump and economic recession. In recent years with flexible prices, oil price increases of similar magnitude have been accompanied by gasoline availability and strong economic growth.

The legislation would create an unnecessary and costly enforcement regime. Competition between suppliers ensures that they cannot take advantage of consumers by setting prices that are out of line with their cost and ensures that gasoline goes to consumers who need it most.

Existing antitrust law based on economic principles already ensures healthy competition by protecting against anticompetitive business practices both generally and during an emergency. Antitrust law prohibits sellers from explicitly colluding to impose higher prices. Retailers and refiners are prohibited from taking exclusionary actions that would create monopoly power (See the appendix for additional details).

Enforcement of and compliance with price gouging legislation, on the other hand, is costly because price gouging is not well-defined. Firms and regulators therefore would face a great deal of uncertainty, potentially leading to costly and unnecessary litigation. These added uncertainties and costs could deter future investment and increase prices in the long run.

For all of these reasons, “price gouging” legislation should be opposed. Excessive legislation such as this is effectively a price control and would set a bad precedent for the government’s involvement in the market. A wide variety of economists have found with both empirical research and practical experience that these policies do not work. Long experience has shown that allowing the market to set prices—the principle that forms the basis of our Nation’s free-market system—is the most efficient and effective method to allocate scarce resources.

Appendix: Existing Laws already prevent anticompetitive behavior by firms

Competition policy already makes it illegal for participants in the gasoline production and distribution network to conspire to restrict supply or raise prices after a disaster. The antitrust laws, as enforced by the Department of Justice’s Antitrust Division and the Federal Trade Commission, prohibit actions such as the following.

  • Gasoline retailers exploiting the reduced availability of gasoline by explicitly colluding on higher price levels than otherwise would have prevailed.
  • Explicit collusion among refineries and wholesalers to designate exclusive territories, allowing them to charge monopolistic prices in those areas.
  • Unlawful monopolization or attempts to monopolize by gasoline retailers in a relevant retail geographic market.
  • The imposition of some retail price maintenance schemes in which gasoline is made available to retailers only on the condition that the retailer charges a price higher than a pre-set minimum.