Surging gasoline prices drive debate at pumps
- Published Tuesday, February 25, 2003, in the Los Angeles Times
Surging Gasoline Prices Drive Debate at Pumps
Is it gouging, war jitters or the market at work? Experts blame oil
prices, but they also say some firms may be padding profits.
By Nancy Rivera Brooks and Elizabeth Douglass
Times Staff Writers
With gasoline prices drifting over $2 a gallon in many places, the
talk at the pumps is turning ugly.
"I think someone is taking advantage of the situation," said John
Schmidt of La Verne, filling up his minivan with $2.04-a-gallon mid-
grade gasoline at a station near downtown Los Angeles.
"They're just gouging us here," agreed Richard Holloway, who was
filling his big Dodge van. "They're overdoing it."
As gasoline prices climb higher, accusations of price gouging are
never far behind. The normally staid motorist club AAA raised the
specter of gouging two weeks ago, and Democratic presidential
candidate Sen. Joseph I. Lieberman (D-Conn.) on Monday called on
Energy Secretary Spencer Abraham to investigate the situation.
But industry experts say surging gasoline prices are largely tied to
the higher cost of crude oil in a tight market. Some believe that oil
companies and station owners also may be making additional profit
amid the rising tide of prices, but assessing profit margins is
largely guesswork because gasoline sales are not regulated. And in a
market economy where motorists are free to drive down the road in
search of a better deal, proving suspicions of profiteering is a tall
"It's a fine line," said Jeremy I. Bulow, a former chief economist
with the Federal Trade Commission who studied gasoline price spikes
in the Midwest three years ago and now teaches at Stanford University.
"If you go skiing in the Sierras during a holiday weekend, you're
going to pay more than if you go the next weekend or the weekend
before. Is that gouging? I think most people would say no," said
Bulow, whose study blamed the price hikes on production and supply
problems stemming from different regional fuel specifications, not
"What makes gas prices such a big deal," he added, "is you pay them
every week and they're posted at the side of the road."
During previous price run-ups, some state officials have succeeded in
wrangling refunds or cash settlements from gasoline retailers accused
of price gouging under extraordinary circumstances. But in those
cases, accusers generally were armed with broad state consumer
protection statutes, an official state of emergency and legions of
The Florida Department of Agriculture and Consumer Services, for
example, won price-gouging settlements from about 60 gas stations
after the Sept. 11 terror attacks, reaping about $101,000 in fines.
The stations were accused of boosting prices by as much as 50 cents a
gallon in the hours after the attacks.
Florida had the advantage of a law, passed after Hurricane Andrew
slammed the state in 1992, that forbids profiteering in times of
emergency. California has a similar law, which requires a formal
declaration of emergency by the governor.
Industry experts say the current price rise is being driven by a
variety of factors, including the labor turmoil that has hobbled
Venezuelan oil exports and jitters from the anticipated war in the
Gas prices now average $1.658 a gallon nationwide and $1.922 in
California -- up 17 cents here in the last two weeks, according to
the latest federal survey Monday. California typically has the
loftiest gasoline prices in the country in large part because of
strict air-quality standards.
In his letter to the Energy secretary, Lieberman called on the Bush
administration to "assure the American people ... that the prices
that they are paying at the gas pump and for their fuel oil are not
the result of price manipulation or gouging."
Crude oil, which accounts for nearly half of the cost of a gallon of
gasoline, has risen about 25% since December, while AAA figures show
that gasoline costs nationally have risen 45%. AAA asserted Feb. 11
that "nothing fully justifies" the recent jump in prices, an implicit
reference to gouging.
"The way prices are going up, it's getting uncomfortably close to
that, but we're not saying it is gouging," said Mantill Williams, a
spokesman for the Orlando, Fla.-based association.
"We're asking refiners and wholesalers to show some restraint,"
Williams said. "We would support any kind of government action if we
found they were trying to take advantage of the situation."
John Felmy, the American Petroleum Institute's chief economist, said
the AAA's warning was "inappropriate, unfair and untrue."
In addition to war worries and the oil strike in Venezuela, Felmy
said, high prices are being driven by abnormally cold weather in the
U.S. and Europe, which diverted crude to produce heating oil. He also
cited the potential strike in Nigeria, a significant U.S. supplier.
Energy Department spokeswoman Jeanne Lopatto agreed, saying, "The
combination of world events, our growing economy and the cold winter
are now having an impact. We continue to monitor energy sector
developments and their impact on the energy markets very closely."
FTC spokesman Mitchell Katz said the agency also was monitoring
gasoline prices but not yet investigating. "Gouging to one person
might not be gouging to another," Katz said.
Indeed, proving price gouging, at either the wholesale or the retail
level, is difficult for a commodity such as gasoline that is bought
and sold in relatively competitive markets.
Timothy Cohelan, a class- action attorney in San Diego, said he and
his partners "were the first ones stupid enough to bring a case,"
accusing oil companies of conspiring to manipulate gasoline prices in
The 1996 lawsuit took on nine major oil companies and claimed that
together they intentionally drove up fuel prices that year by
limiting the supply of California's new, cleaner-burning fuel.
The class-action case dragged on for four years and cost his law
firm, Cohelan & Khoury, more than $2.5 million. At the three-year
mark, Union Oil paid Cohelan's side $3 million to be rid of the suit.
But in 2001, the California Supreme Court dismissed the case, saying
that the evidence of conspiracy "was, at best, ambiguous."
Despite the challenges of such cases, Cohelan hasn't given up. He has
a similar case pending in federal court.
State Atty. Gen. Bill Lockyer also has accused oil companies of
cartel-like action in California. But his office has found no grounds
In fact, a study released by Lockyer in 2000 found that price spikes
are not unusual in California, because only six refiners control more
than 90% of the market for the state's clean-burning gasoline.
A gas-price task force convened by Lockyer recommended that the state
consider ways to cushion price shocks, including possibly creating a
strategic gasoline reserve or developing plans for supply pipelines.
But the state has taken no action except to study the proposals,
Lockyer spokesman Tom Dresslar said.
Felmy of the American Petroleum Institute noted "there has never been
any convictions for collusion or anything like conspiracy" on the
part of the major oil companies for price fixing.
"It's never been anything but exoneration for the companies," he said.
Charles Langley of the San Diego-based Utility Consumers' Action
Network said he had no doubt that today's retail prices are providing
a larger-than-usual profit margin for someone.
But he and others have yet to find a smoking gun.
Mark Mahoney, who follows West Coast gas prices for Oil Price
Information Service of Lakewood, N.J., thinks refiners and gas
station owners are simply taking advantage of momentum. Motorists are
already prepared to pay more because of rising crude prices, the
logic goes, so why not add a few pennies of extra profit to the mix?
"There's no law against making money," Mahoney said.
Yet Tom Schmachtenberger, who owns a 76 station in Santa Monica,
rejects the notion that gas stations are picking up extra money at
customers' expense. He said the price spikes simply reflect the
higher cost he has to pay for his product.
"The dealer's margin is almost always the same," he said. "I think
people are sophisticated enough to know that we're not the ones who
are pocketing the money. We're just the waitress that brought you the
Schmachtenberger says he has been "out on the islands" talking to
customers and acknowledges apologizing to half a dozen upset
motorists in the last week. The station was charging $2.03 a gallon
for regular on Friday.
"I hate to be in this position," Schmachtenberger said. "I've never
sold gas for this much money in my life."
Times staff writer Richard Simon in Washington contributed to this