What Is a Profiteer?

Jeff Bull

Between the governor joining with some of his gubernatorial colleagues in calling for a probe into oil-company profiteering and both Oregon senators either sponsoring or co-sponsoring legislation to check gouging, there's ample momentum to do something about what folks pay at the pump across the U.S. of A. Realistically, no politician dares risk doing nothing given the widespread surly mood about fuel prices.

But that doesn't say anything about the wisdom of taking action, or even about the wisdom of the specific actions proposed. For instance, the proposals forwarded or co-sponsored by Oregon's senators would do about the same thing: identify and punish anyone caught gouging consumers. Sounds reasonable enough, but there's a catch: to begin, there are the logistical limitations posed by the problem of defining "gouging" or "gross disparities" between crude prices and retail. These also appear to be reactive, which means that they'd do nothing – beyond acting as a deterrent for potential gougers – in terms of helping the victims of the crime.

Proving financial crimes is never easy. But, in digging for answers on this, I bumped into a heck of a primer on the complex path crude oil takes between leaving the ground and arriving in your pump, which suggests that proving crimes in this market would prove harder than most.

While I'd honestly recommend reading the entire thing (and hope like anything it's not full of holes; the source sounds reasonable, but I don't know it), this excerpt gets to the bottom line pretty well:

"My opinion is that the gouging, if any, is going on at a very local level, no higher up than the local gasoline distributors. The most opportunistic way to maximize your cash would be to buy this week's gasoline for $2.50 a gallon, and then if something (like high oil prices) allows you to, mark this shipment of $2.50 gas up to $3.00...The people who control the final price at the pump are the retailing companies or independent store owners. And these guys are more than happy to put it off on the oil companies, as they are very removed from them!"

In addition to that, it's worth remembering that there's some planning involved in setting these prices, something fairly well demonstrated by this analogy (please, however, ignore the "hotel room" side of this; that one didn't add up):

"...suppose you maintained a 10-pound inventory of coffee in your cupboard. When I ran out, you would occasionally sell me a pound for $2. Suppose there's a freeze in Brazil destroying much of the coffee crop, driving coffee prices to $5 a pound. Then I come around to purchase coffee. Will you charge me $2 a pound, what you paid for it, or $5, what it will cost you to restock your coffee inventory?"

This is where the crude prices, which are lagging behind the retail prices, comes into play; consumers are being billed on the expectation that crude will go up, thereby bumping rates all the way down the line. The length and complexity of the supply chain from crude to retail gasoline begs the question of where on that continuum do agents of the Federal Trade Commission (FTC) assign fault for the spikes – especially in the face of a disaster. That also doesn't even begin to get into deeper causes for fuel problems, like already-shorted refining capacity (see the bottom; by the way, anytime you talk about monkeying with oil prices, this is the free-marketers first response). After that, there's the question of real-world efficacy: how quickly can the FTC uncover, verify and post/announce abuses - and they better verify. Frankly, I can't see turn-around on this as anywhere near nimble enough to work effectively.

The grand point, I suppose, is that this is really complicated; it seems appropriate to check twice before applauding any of the pols now stirring to action. In the meantime, whatever the abuses, the high gasoline prices did exactly what was intended: they discouraged consumption. Maybe it's not so bad… The striking thing is the extent to which high gas prices actually encourage behaviors that progressives support; in the long-term, they ought to (no guarantees!) encourage more people to use public transportation, or to buy more fuel-efficient cars. One prominent fella argues that this points to the wisdom of boosting gas taxes, but there's the possibility that peak oil will do this almost automatically.

Returning to the present, this isn't to say that government should play no role; the probe may turn out to be a good idea, but, if memory serves, Enron's gaming was so blatant that it begged an investigation; I'm not sure the same applies here. The sad reality seems to be that no tidy, upfront or real-time mechanism exists for preventing gouging; that's not satisfying, but maybe a deterrent, even a neutered one, is the best we can do. In that case, I'd skip straight to Sen. "Gordo" Smith's and skip the FTC mechanism.

Of the alternatives I saw in my little tour 'round the Web today (capping prices, bears watching; or temporary reprieve from gas taxes….mmm…not so much) a scheme of rationing – wherein each consumer is limited to X gallons of gas for each visit - seemed the most reasonable for coping through a crisis. Still, absent a side policy to control prices, that won't serve the full purpose expected.

And none of the proposals really get to the toughest question: what to do about those who, already living hand-to-mouth, find themselves trying to survive in a scenario that borders on the post-Apocalyptic with inflated prices all around. The only thing that occurred to me would be to compare pre- and post-disaster costs for necessity and repay victims on a means-tested basis….but can you imagine the hell of producing, never mind keeping track of, receipts during a full-blown crisis?

I'm open to suggestions.

By Jeff Bull Sept. 22, 2005