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**RSC Policy Brief:**

**"Price Gouging" in Oil and Gasoline Markets**

*May 2007*

**In light of increasing gasoline prices and mounting pressure for
lawmakers to "do something" about such increases, this information on
the leading Democrat solution might be helpful.**

**[Democrat Proposal]{.underline}**: In the House, Rep. Bart Stupak
(D-MI) has introduced the Federal Price Gouging Prevention Act (H.R.
1252), which currently has 86 Democrat co-sponsors and three Republican
co-sponsors. H.R. 1252 would make it a [federal crime]{.underline} for
any person to "sell crude oil, gasoline, natural gas, or petroleum
distillates at a price that is unconscionably excessive or indicates the
seller is taking unfair advantage \[of\] unusual market conditions
(whether real or perceived) or the circumstances of an emergency to
increase prices unreasonably."

In determining whether such a violation has occurred, the following
factors would have to be considered:

-   "whether the amount charged represents a gross disparity between the
    price of the crude oil, gasoline, natural gas, or petroleum
    distillate sold and the average price at which it was offered for
    sale by the seller during the preceding 30 days; or

-   "whether the amount charged grossly exceeds the price at which the
    same or similar crude oil, gasoline, natural gas, or petroleum
    distillate was readily obtainable by other purchasers in the same
    geographical area.

As a mitigating factor, it would have to be considered "whether the
price at which the crude oil, gasoline, natural gas, or petroleum
distillate was sold reasonably reflects additional costs, not within the
control of the seller, that were paid or incurred by the seller."

[Note]{.underline}: Nowhere in the legislation are the operative terms
"unconscionably excessive," "unfair advantage," "unreasonably," "gross
disparity," "grossly exceeds," or "reasonably reflects" defined
explicitly.

H.R. 1252 would also make it a [federal crime]{.underline} for any
person to report information related to the wholesale price of crude
oil, gasoline, natural gas, or petroleum distillates to the Federal
Trade Commission (FTC) if:

-   "that person knew, or reasonably should have known, the information
    to be false or misleading;

-   "the information was required by law to be reported; and

-   "the person intended the false or misleading data to affect data
    compiled by that department or agency for statistical or analytical
    purposes with respect to the market for crude oil, gasoline, natural
    gas, or petroleum distillates."

Furthermore, H.R. 1252 would make it a [federal crime]{.underline} for
any person, "directly or indirectly, to use or employ, in connection
with the purchase or sale of crude oil, gasoline, natural gas, or
petroleum distillates at wholesale, any manipulative or deceptive device
or contrivance, in contravention of such rules and regulations as the
Federal Trade Commission may prescribe as necessary or appropriate in
the public interest or for the protection of United States citizens."

The FTC would be tasked with promulgating and enforcing the provisions
above. Specifically, the FTC would have to enforce violations of the
above provisions as unfair or deceptive trade practices, [with a
particular emphasis on companies with total U.S. wholesale or retail
sales of crude oil, gasoline, or petroleum distillates above \$500
million per year]{.underline}.

The penalties for violations would be as follows:

[Civil (per **day**)]{.underline} [Criminal]{.underline}

Unconscionable pricing Up to \$3 million or Up to \$150 million (for

up to 3 times the excess corporations); up to

> profits \$2 million and/or 10 years

in prison (for non-corps.)

False price reporting Up to \$1 million Up to \$150 million (for

corporations); up to

\$2 million and/or 10 years in prison (for non-corps.)

Market manipulation Up to \$1 million Up to \$150 million (for

corporations); up to

\$2 million and/or 10 years in prison (for non-corps.)

A state attorney general could bring a civil action under H.R. 1252 (in
a U.S. district court) on behalf of the residents of his state, if he
feels that "the interests of the residents of the State have been or are
being threatened or adversely affected" by violation of this
legislation. The civil action could seek to either compel compliance
with this legislation or to impose the civil penalties authorized by
this legislation, and the FTC could intervene in any such state action.

The state action could be brought in a judicial district in which the
defendant operates, was authorized to do business, **[or]{.underline}**
is physically found. Furthermore, process could be served in such state
action "without regard to the territorial limits of the district or of
the state in which the civil action is instituted," and "person who
participated with the defendant in an alleged violation that is being
litigated in the civil action may be joined in the civil action without
regard to the residence of the person."

No state action could be brought while an already-initiated FTC action
is pending. This legislation would prevent a state attorney general from
taking state-only actions in state courts.

Revenues collected from violations of this legislation would be diverted
to the Low Income Home Energy Assistance Program (LIHEAP), via a newly
established fund in the U.S. Treasury: the Consumer Relief Trust Fund.

H.R. 1252 would also direct the FTC to "facilitate price transparency in
markets for the sale of crude oil and essential petroleum products at
wholesale, having due regard for the public interest, the integrity of
those markets, fair competition, and the protection of consumers."
Specifically, the FTC would have to publicly disseminate, "on a timely
basis" and using existing private-sector disseminators as much as
possible, information about the availability and prices of wholesale
crude oil, gasoline, and petroleum distillates. Such dissemination would
have to be implemented to maximize consumer protection from
"anticompetitive activity" and to minimize any detriments to markets and
security.

H.R. 1252 has been referred to the House Energy & Commerce and Education
& Labor Committees, neither of which have taken subsequent action on it.

In the Senate this year, Senator Ted Stevens (R-AK) has introduced
related anti-price-gouging legislation (S. 94), and Majority Leader
Harry Reid (D-NV) has introduced a sense of Congress (S. 6) that would,
among other things, encourage the passing of laws to "enhance the
security of the United States by reducing the dependence of the United
States on foreign and unsustainable energy sources and the risks of
global warming by...preventing energy price gouging, profiteering, and
market manipulation."

[Recent Legislative History]{.underline}: In the 109^th^ Congress, a
variety of bills were introduced to address gasoline "price gouging,"
most of them by Democrats. The House passed, but the Senate never
considered, H.R. 5253, a bill to "prohibit price gouging in the sale of
gasoline, diesel fuel, crude oil, and home heating oil," sponsored by
Rep. Heather Wilson (R-NM). The bill, which is similar to H.R. 1252 in
the 110^th^ Congress, passed
[**389-34**](http://clerk.house.gov/evs/2006/roll115.xml). Of the 34 no
votes, 33 were Republicans, and the vast majority of those Republicans
were RSC Members.

In the 109^th^ Congress, there was also some price-gouging language
contained in the GAS Act (H.R. 3893) that the House passed on October 7,
2005, by a vote of
[212-210](http://clerk.house.gov/evs/2005/roll519.xml). To read the RSC
Legislative Bulletin on the GAS Act, visit this webpage and scroll down
to page 5:

[http://www.house.gov/hensarling/rsc/doc/LB%2010-07-05\--GAS%20Act.pdf](http://www.house.gov/hensarling/rsc/doc/LB 10-07-05--GAS Act.pdf).

**[Additional Background]{.underline}**: Gasoline prices naturally vary
from region to region, state to state, locality to locality, and even
block to block, for a variety of reasons, among those are:

-   state and local taxes variations;

-   proximity of supply;

-   supply disruptions;

-   competition in local markets;

-   environmental requirements; and

-   operating costs.

While gas prices may be approaching record highs in nominal terms, they
remain below past gas prices in relative terms. In other words, in
various decades, such as the 1930s, 1940s, and 1970s, the average price
of gas was more hurtful to the average American's pocketbook than is the
average price of gas today.
<http://www.factsonfuel.org/gasoline/index.html#us_pump_prices_in>

According to the American Petroleum Institute, the nationwide average
tax on gasoline is 45.8 cents per gallon as of March 2007, up 0.3 cents
from October 2006.  The federal tax on gasoline is 18.4 cents per
gallon.  The average state gasoline excise tax remained consistent at
18.2 cents per gallon.  Other taxes add 9.15 cents per gallon to the
average tax on gasoline.  These other taxes include applicable sales
taxes, gross receipts taxes, oil inspection fees, underground storage
tank fees, and other miscellaneous environmental fees. 
<http://www.factsonfuel.org/gasoline/index.html#howdotaxesaffect>

The FTC, as cited by the Heritage Foundation, has itself asserted that
price gouging is difficult to define and thus difficult to enforce.
Furthermore, the FTC found that price gouging did NOT occur in the
Hurricane Katrina aftermath, contrary to what many politicians had
assumed.

<http://www.heritage.org/Press/Commentary/ed062706a.cfm>

To access a variety of statistics about gas prices, including the change
in gas prices over time and the factors behind gasoline production,
visit this webpage: <http://www.factsonfuel.org/gasoline/index.html>

**[Conservative Concerns]{.underline}**: Some conservatives might be
concerned that certain entities, such as *The Wall Street Journal* and
the Cato Institute, have described anti-price-gouging efforts as federal
interference in free-market pricing. Some free-marketeers have asserted
that there is no such thing as price-gouging, as long as the consumer
has reasonably accessible choices of products, services, and prices in
the open market. Anti-price-gouging legislation would effectively
mandate that certain private companies sell their products within a
price-range that is acceptable to the government.

Furthermore, government intervention in the price of gasoline and
petroleum products may stifle the natural market reactions to prices
that consumers find uncomfortably high: strategic innovation, increases
in supply, increased efficiencies in production, increased research into
alternative fuels, etc.

In H.R. 1252, conservatives may object to the lack of definitions of the
operative words in determining whether price gouging, false price
reporting, or market manipulation has occurred. There is considerable
reliance on FTC regulations---which the FTC says it does not want to
promulgate---and no guarantee that the FTC definitions will be any less
vague or subjective.

Some conservatives may also be concerned that, for states with
anti-price-gouging laws on the books, H.R. 1252 would add a federal
layer of anti-price-gouging law on top of the existing state
anti-price-gouging laws.

Some conservatives may regard H.R. 1252 as allowing venue shopping for
lawsuits. For example, if alleged price-gouging occurred in South
Carolina, but the involved gasoline company also sells gas in
California, a civil action could be brought in California. This could
lead to lawyers strategically picking districts in which to file their
actions that are more favorable to claims of price gouging.

Lastly, some conservatives may be concerned that the revenues collected
from violations of this legislation would be diverted to the Low Income
Home Energy Assistance Program (LIHEAP), which has been viewed by
conservatives as an expensive program, of questionable
constitutionality, and peppered with fraud and abuse.

**[Possible Conservative Solutions]{.underline}**: In recent years, many
conservative sources, in and out of Congress, have proposed
pro-free-market solutions to the uncomfortably high gas prices,
including:

-   Streamline the environmental hurdles to building new oil refineries.

-   Make it easier for small refineries to increase capacity.

-   Allow more offshore (e.g. Outer Continental Shelf) and inland (e.g.
    Arctic National Wildlife Refuge) oil drilling.

-   Temporarily suspend the gas tax.

-   Temporarily suspend the gas tax and temporarily suspend spending on
    all transportation earmarks in the most recent surface
    transportation reauthorization bill.

-   Permanently reduce the gas tax.

-   Waive or repeal gas formulation (e.g. oxygenation) requirements
    under the Clean Air Act and related regulations.

-   Encourage private-market projects to recover usable energy from oil
    shale and to otherwise increase production of renewable/alternative
    fuel sources.

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-   Strengthen the existing investment tax credit for Enhanced Oil
    Recovery (using modern technology improvements to extract oil from
    previously unavailable sources) in section 43 of the IRS Code.

-   Waive the tariff on imported ethanol and waive regulations that
    limit refined gasoline imports.

**[RSC Staff Contact]{.underline}**: Paul S. Teller,
<paul.teller@mail.house.gov>, (202) 226-9718