Released on March 12, 2003
(Next Release on March 19, 2003)

Do Current High Petroleum Product Prices Reflect Price Gouging?
As of Monday, March 10, EIA’s weekly survey of retail gasoline prices showed the U.S. average price for regular grade at $1.712 per gallon, only a tenth of a cent below the highest nominal (not inflation-adjusted) national average price on record. On the same day, EIA’s weekly retail diesel fuel price survey reported a national average of $1.771 per gallon, setting a new record price (in the history of this survey, which dates from 1994) for the fourth consecutive week. Residential prices for heating oil and propane are also near record levels. With prices this high, and tight supplies and the possibility of war in Iraq raising fears that they may go still higher, some have raised the question of whether price gouging is occurring.

“Price gouging” is a term laden with emotion, and is in fact difficult to define objectively. In a technical sense, it refers to a situation where a seller attempts to extract a higher price (and profit) than would normally result from underlying supply and demand fundamentals. It is that last phrase, however, that makes gouging so hard to define, because in a free market, when supply and demand are out of balance, prices change to restore equilibrium. What consumers seem to expect is that no matter how much demand may exceed supply in the short run, prices should not rise to more than an “acceptable” level, which may leave sellers unable to cover their own increased costs, or fail to provide sufficient incentive to bring increased supplies into the market.

So do current prices for petroleum products, particularly gasoline, reflect gouging? In EIA’s estimation, the answer is “no.” EIA continually monitors and analyzes data and trends in the U.S. petroleum markets. Gasoline prices are currently elevated largely due to high crude oil prices, and to a lesser extent, strong refining margins. Distribution and marketing margins are not unusually high, and there is no evidence of price gouging at any level. There are a number of factors driving gasoline prices higher:

At $1.712 cents per gallon as of March 10, 2003, the U.S. average retail price of regular gasoline is at its highest level ever at this time of year, and 49 cents higher than a year ago. However, it should be noted that West Texas Intermediate crude oil is up about $13 per barrel (31 cents per gallon) over the same period, and average spot gasoline prices are up 38 cents. Thus, about two-thirds of the year-over-year increase in gasoline prices can be ascribed to crude oil, while refining margins are up about 7 cents over year-ago and distribution/marketing margins are up 11 cents (from unusually low levels in March 2002).

The Energy Information Administration has found that retail gasoline and diesel fuel prices are almost entirely driven by changes in spot prices over the previous few weeks, to such an extent that near-term retail prices can be predicted with accuracy. (See Gasoline Price Pass-Through and Diesel Fuel Price Pass-Through.) Price gouging, when it occurs (which is rare), is usually a very localized phenomenon, and only at the retail level. As long as retail prices conform to the predicted pattern of pass-through, it can be assumed that no significant gouging is occurring.

Unfortunately, incidents of apparent gasoline price gouging have been seen, most recently in the wake of the terrorist attacks of September 11, 2001. In that case, a few local marketers quickly raised retail prices to exorbitant levels, apparently fearing that supplies would be interrupted, and/or that wholesale prices would rise dramatically, making replacement supplies much more expensive. Reassurances by major suppliers, that they would hold the line on prices, quickly stabilized the markets, and reportedly some of those marketers that had briefly raised prices granted refunds to customers who had bought during that period. A number of States now have anti-gouging laws and enforcement programs in place to prevent this type of problem. Unfortunately, the greater test would come if there were indeed a major global, national, or even regional supply interruption. While anti-gouging laws, if enforceable, might keep prices under control, they cannot assure continuity of supply.

The Department of Energy maintains a toll-free hotline for consumers to report suspected gasoline price gouging, at (800) 244-3301.

U.S. Retail Gasoline Price Continues To Climb
The U.S. average retail price for regular gasoline rose last week for the twelfth time in thirteen weeks, increasing by 2.6 cents per gallon as of March 10 to reach 171.2 cents per gallon, which, as noted above, is 48.9 cents per gallon higher than a year ago. This price is only 0.1 cent lower per gallon than the highest price in nominal dollars since EIA began recording this data in August 1990. While the outlook could go either way, strong gasoline demand ahead of the normal seasonal increase, extensive refinery maintenance, and still tight crude oil supply, may be pointing to added price pressure in the months ahead. Prices were up throughout the country, with the largest increase occurring in California, where prices rose 7.2 cents to end at 208.4 cents per gallon, the highest price ever in our survey, which for California goes back to May 2000. This is the second week in a row that California prices have been above $2 per gallon. Prices for all of the West Coast are on the brink of that $2 mark, hitting 199.3 cents per gallon on March 10, and prices in PADD 5 appear to be an important driver in the increase of national prices.

Retail diesel fuel prices increased for the eighth straight week, rising 1.8 cents per gallon to a national average of 177.1 cents per gallon as of March 10. This is the highest diesel price since EIA began recording this data in March 1994, and the fourth week in a row that diesel fuel has topped its previous record price. Retail diesel prices were up throughout most the country, with the largest price increase occurring on the West Coast, where prices rose 8.1 cents per gallon to end at 188.6 cents per gallon. Prices in New England rose again, by 4.7 cents to reach 200.1 cents per gallon, the highest price in the nation. The Gulf Coast was the only region that saw a price decrease, with prices falling by 0.3 cent to end at 169.7 cents per gallon.

Heating Oil Price Shows Slight Increase While Propane Price Begins to Decline
Residential heating oil prices increased 1.6 cents per gallon for the week ending March 10, 2003, averaging 185.4 cents per gallon, and are 68.6 cents per gallon higher than last year at this time. Meanwhile, wholesale heating oil prices decreased 2.3 cents per gallon this past week, reaching 127.0 cents per gallon.

Residential propane prices decreased 6.9 cents per gallon for the week ending March 10, 2003 to reach 165.3 cents per gallon, but are still 53.2 cents higher than one year ago. Wholesale propane prices decreased 34.4 cents per gallon, from 114.8 cents per gallon to 80.4 cents per gallon, reversing the increase seen in the previous week.

Propane Inventories Continue Lower
Continued bouts of cold weather in some areas of the nation contributed to last week’s robust stock draw that positioned U.S. inventories of propane as of the week ending March 7, 2003 at an estimated 18.9 million barrels, just 0.4 million barrels above the Lower Operational Inventory (LOI) for propane. While not implying shortages or operational problems, an inventory level below the LOI is indicative of a situation where supply flexibility could be constrained. Since March stockdraws typically average about 3 million barrels during the month, last week’s relatively hefty 2.1 million barrel stockdraw accounted for about 70 percent of the average monthly total, perhaps setting the stage for yet another record monthly draw following those reached during January and February 2003. But with inventories at or near historical lows in most regions, the March record of 7.4 million barrels reached during 1999, may not occur as the industry struggles to overcome sporadic operational and/or distribution problems associated with inventories at these low levels. Nevertheless, the severe winter of 2002-03 may prove to be the new benchmark against which future winters will be gauged.

Note: Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.