Energy Intelligence
Friday, Apr 1, 2022
Emily Meredith
On Apr. 6, executives from six oil companies will face questions from US lawmakers over high energy prices — and what, exactly, they plan to do about it.
Washington officials for months have accused the oil industry of price gouging as the market tightened, but the ability to directly act on those allegations is limited.
House Rep. Frank Pallone (D-New Jersey), who chairs the House Energy and Commerce Committee, alleged “the oil industry has not taken all actions within its power to lower domestic gasoline prices and alleviate Americans’ pain at the pump” in his letter asking executives to testify.
Representatives from BP, Chevron, Devon Energy, Exxon Mobil, Pioneer Natural Resources and Shell all plan to testify.
Political accusations of price gouging when energy prices are high are nothing new in Washington, on either side of the aisle. Both Democrat Barack Obama and Republican George W. Bush called for investigations into gouging when prices rose during their respective presidencies.
Gray Area
One problem for policymakers trying to rein in rapidly increasing fuel prices is that there is not a uniform definition of “gouging,” experts say.
“You can’t really define price gouging without, in essence, establishing a ceiling for price,” says Jeffrey Oliver, an antitrust attorney specializing in energy issues at the firm Baker Botts. “Nobody wants to be instituting a price ceiling in a market that looks competitive.”
That can complicate the task for regulators tasked with investigating alleged gouging. Congress directed the Federal Trade Commission (FTC) with investigating oil companies and service stations for possible gouging in the wake of Hurricane Katrina in 2005, when gasoline prices spiked to $3.05 per gallon.
That equates to about $4.35/gal today — roughly in line with prices that are currently causing consternation.
That investigation found several instances of sudden gasoline price increases, but concluded that those were caused by regional and local market trends.
“Market trends” are also how companies defend themselves, said Diana Moss, the president of the American Antitrust Institute.
“Companies that engage in price gouging will almost always defend such actions on the basis of shortages or disruptions,” said Moss.
The FTC, in its report on Hurricane Katrina, warned Congress off creating a price gouging statute, saying it was difficult to differentiate between gougers and companies “reacting in an economically rational manner to the temporary gasoline shortages.”
Maintaining Diversity
The FTC does have other tools to reach for, including blocking mergers it believes could lead to higher prices. Just last week, the commission said a merger between oil producers EnCap Energy and EP Energy Corp. could lead to higher prices for waxy crude for Salt Lake City refiners.
That’s not an attempt to deal with gouging, Moss said. But it is an effort to keep higher oil prices at bay in a market with fewer players. The FTC has also blocked a handful of mergers of companies with retail gasoline and diesel stations in the last year over concerns that the mergers would leave too few players in certain markets.
The FTC can “find ways to be aggressive and investigate,” Oliver said.
Hitting Profits
The problem for oil companies is that the high oil prices that lead to high profits come at the expense of consumers, who are having a harder time paying bills. That puts industry in the crosshairs.
Policymakers — particularly Democrats — are hitting out at those higher profits and say they should be deployed toward increased oil production that would eventually bring prices down for consumers.
“For US oil companies that are recording their largest profits in years, they have a choice,” US President Joe Biden said Thursday. “One, they can put those profits to productive use by producing more oil, restarting idle wells, or producing on the sites they already are leasing.”
“Or they can, as some of them are doing, exploit the situation: sit back, ship those profits to their investors.”
Biden is proposing new legislation that would curb executives’ ability to benefit from the stock buybacks used to return capital to shareholders. Separately, progressive lawmakers have proposed a new tax on windfall profits for the industry, but its not clear that any new taxes or financial controls could be passed in a divided Congress
