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Is the stage set for gas price gouging?

The terror attacks of Sept. 11 touched off gasoline price gouging in parts of the U.S. Has the recent terror alert set the stage for another round? By John W. Schoen.
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There are lots of reasons why gas prices have jumped more than a dime in the past week — from the recent shutdown of refineries in Venezuela to the rising price of crude oil as the world braces for war. But there’s another age-old reason for the rising prices that may soon rear its ugly head. Consumer groups are warning that it’s time, once again, to watch out for price gouging at the pump.

FROM MAINE to Hawaii, gasoline prices have risen sharply in the past four weeks. The biggest jump at the pumps was in the Midwest, where retail prices rose 15.5 cents to $1.587 per gallon, according to the American Automobile Association. Other regions have seen similar increases.

With the nation on increased terrorism alert and apparently about to go to war, fears have also risen that some unscrupulous gasoline dealers may seize the opportunity to raise prices even further.

“We see an environment that seems perilous for the U.S. consumer,” said Geoff Sundstrom, a spokesman for AAA. “When you see period of very rapid increase in fuel prices, it creates an environment in which some business owners can take undue advantage of consumers.”

State regulators are also on alert. Indiana Attorney General Steve Carter Wednesday urged consumers in his state to call his office or e-mail his Web site to report excessive gasoline price increases.


Industry analysts cite a number of reasons for the jump in gasoline prices. For starters, the price of crude oil has surged due to tighter production levels and worries that supplies could be hurt by a war with Iraq. From early last year to December, the benchmark price of West Texas Intermediate spot crude oil rose from about $20 per barrel to about $27 per barrel, according to the Deprtment of Energy.

On Thursday, crude-oil prices topped $36 a barrel. That was the highest prices since October 2000.

A strike in Venezuela cut production further in early December; as global crude oil supplies dipped further, prices soared past $30 a barrel. A severe cold snap has also increased demand for heating oil, further tightening supplies. As of late January, crude oil inventories had fallen to their lowest level since October, 1975.

War worries — and the government’s decision last week to put the U.S. on a higher terror alert — sent consumers to the pumps to top off their tanks, according to Thomas L. Osborne a spokesman for the Society of Independent Gasoline Marketers of America.

And when supplies get tight, said Osborne, prices rise, which helps slow demand and keeps stations from running dry. So what looks like price gouging to consumers is just market forces at work, he said.

“The available storage in the empty part of the gas tank of all the cars in America is greater than the amount of gasoline stored in all the gas station in America,” he said. “If everybody filled up on the same day, we would run out of gas.”

Gasoline retailers also note that consumers — and the press — pay little attention when gasoline prices fall. While gas prices have been volatile over the past few decades, the overall rise in gasoline prices has been fairly tame. Since gasoline prices bottomed at 82 cents a gallon in November, 1986, prices have risen about in line with the Consumer Price Index.

But even Osborne concedes that in times of a crisis, price hikes can get out of hand. The last major outbreak of price gouging came shortly after the Sept. 11 terror attacks. In Indiana, for example, prices surged as high as $5 to $6 a gallon, according to Carter.

“I think the vast majority of the time (price spikes) are related to market factors,” he said. “But when we had the terorrist attacks, and you had American blood being shed — for consumers to be taken advantage of, above and beyond the dealer’s cost increase, that was something nobody could accept.”

Carter says his office gathered reports of gouging at about 125 of the more than 3,200 gas stations throughout Indiana. Further investigation found that only 58 of those had boosted prices high enough to be considered gouging.

So just where do you draw the line between sharp increases due to market forces and outright price gouging? Gasoline dealers are a bigger target for consumer outrage than other retailers because changes in prices are much more visible, said Osborne.

“We are about the only industry that posts their prices in great big letters on the street — so people are much more sensitive to the changes,” he said.

So some states have set specific guidelines for price increases. After Sept. 11, Indiana passed a law that uses an average price over the previous seven days to determine if an individual dealer is gouging. The law is triggered by an emergency declaration by the governor.

Market forces may yet push prices even higher. Recent price spikes in some regions of the country have been stoked by shortages of cleaner-burning “reformulated” blends of gasoline required in certain states. Refineries will soon begin ramping up production of those summer blends and the additives used to cut pollution during the warmer summer months.

“If we don’t get a better handle on the price of crude oil,” said AAA’s Sundstrom, “and we go into the March-April period requiring a switching over to the summer blends, then it’s likely that U.S. consumers are going to feel even more pain at the gas pumps.”

What can you do to cope with higher prices? The first and most obvious defense is to shop around. Even when supplies are tight, some convenience stores keep gas prices lower than the competition to generate traffic for other, more profitable items. If you live near a neighboring state, check out prices across the border — gas taxes vary widely from state to state.

If you think you’re being gouged, contact your state’s Attorney General or consumer affairs department. And, whenever possible, pay with a credit card. That way, if the dealer you bought from is found to be gouging, it’ll be much easier to get a refund.