Proof of price gouging is harder to find than Bigfoot

The concept of “price gouging” is a lot like Bigfoot. Lots of people think it exists and have been chasing it for decades. Yet actual proof of its existence remains stubbornly elusive.

Vice President and Democratic presidential nominee Kamala Harris has vowed to crack down on the alleged price gouging retailers are inflicting on consumers. She should acquaint herself with the last time that Congress went on a similar crusade: going after alleged oil industry greed after Hurricane Katrina hit the southern states in 2005. The average retail price of gas, just $1.10 a gallon in 2002, rose to $2.50 by August 2005. The culprit turned out to be usual suspects: supply and demand.

Lawmakers initially scoffed at that explanation. They knew better, alleging that the companies had manipulated their production levels and rigged the refinery system to create artificial shortages to jack up prices.

“We are greatly concerned that in the current oil market, where supplies have been tight and prices at the pump have risen dramatically, that the current over-concentration of market power in the oil industry may provide oil companies with ample opportunities to exploit market power to gouge consumers,” 53 Democratic lawmakers wrote in a June 2004 letter to the Justice Department and the Federal Trade Commission.

The FTC gave them their report the following spring. It examined every allegation of how the industry manipulated prices and found no evidence to support any of them.

The federal agency started off by pointing out that “price gouging” has no precise definition, legal or otherwise: “It is neither a well-defined term of art in economics, nor does any federal statue identify price gouging as a legal violation.”

The FTC nevertheless investigated what caused the post-Katrina price spikes. It had a wealth of data available. Since 2002, the FTC has tracked retail prices of gas and diesel at 360 cities. On top of that, the FTC issued 99 subpoenas to energy companies for financial records and had industry actors sit for sworn depositions. The investigation coordinated with state and local regulators, including state attorneys general.

The agency found no evidence that companies manipulated refinery operations to create artificial shortages. They instead determined that companies operated the refineries at “full sustainable utilization rates” throughout the crisis. Downtime for maintenance was scheduled for when demand was at its lowest. “Internal company documents suggested that refinery downtime is costly, particularly when demand and prices are high.” In other words, the companies wanted to sell more when demand was high because that was more profitable for them.

Another theory, that energy companies were exporting more to create domestic shortages, also had no basis in fact, the FTC found. Exports were relatively low compared to domestic sales, most of what was exported was based on pre-Katrina supply contracts and the bulk of those exports was oil that was unacceptable for sale in the U.S. due to emissions standards. “Furthermore, our investigation indicated that an attempt to manipulate gasoline prices by exporting products… would likely result in more imports to the domestic market,” the agency said. Foreign competitors would use that as an opportunity to sell in America.

Pipeline companies were not manipulating the market either, the report found. They couldn’t. The Federal Energy Regulatory Commission sets the maximum rates that they can charge.

The FTC found that while inventory levels of gas had declined since the 1980s, this was attributed to companies being more efficient about anticipating demand levels. Maintaining inventories is itself expensive. What wasn’t anticipated was the extent of the damage that the hurricanes caused.

“In light of the amount of crude oil production and refining capacity knocked out by Katrina and Rita, the sizes of the post-hurricane prices increases were approximately what would be predicted by the standard supply and demand paradigm that presumes a market is performing competitively,” the FTC determined.

In short, the lawmakers were wrong. No price gouging was happening.

That was the energy industry in the late aughts. The food industry today is different, obviously. But it is still an industry that is subject to the same forces of supply and demand. The lesson of the supposed energy industry gouging of the aughts is that sometimes markets will cause prices to rise without any sinister conspiracies involved. Lawmakers should take note.