ALEXANDRIA, Va. – The retail fuel marketplace is the most competitive commodity market in the nation. There are an estimated 150,000 retail fueling facilities in the United States. Of these operations, less than 1% are owned and operated by the major oil companies, and about another 4% are owned by a refining company. The majority—about 95% of stores—are owned by independent companies, whether one-store operators or regional chains. Each of these companies has different strategies and strengths in operations, which can dictate the type of fuel that they buy and how they sell it.
Most of the nation’s fuel retailers purchase their gasoline and diesel supplies from a refiner. As such, these businesses have no influence over the wholesale price established by the refiner and, during a catastrophic event such as a hurricane, these retailers can incur extremely volatile wholesale prices and restricted wholesale availability. Wholesale prices are largely influenced by activity in the commodities trading market, in which traders bid prices up or down based upon actual and anticipated changes in supply availability. During disruptive events, these contracts can vary widely in a very short period of time.
Refiners seek to ensure they have sufficient product to satisfy their contractual obligations when supplies are disrupted. Refiners often will place their branded retailers on allocation, restricting their volume to a certain percentage based upon the previous year’s activity and ensuring the refiner’s product is available throughout their service area. While these branded retailers are likely to have at least some supply guaranteed, they have one supplier for product. The unbranded retailer, meanwhile, who relies on the uncontracted gallon of gasoline, often pays an elevated wholesale price or is completely denied access to supplies. This limitation on supplies for the retail segment as demand remains constant results in increased wholesale prices.
It’s common for retailers to operate daily in a volatile wholesale gasoline marketplace, where costs often change several times a day. Under normal market conditions, retailers may seek to adjust their prices upward in response to increasing wholesale prices to pay for their next delivery. This practice is known as factoring in replacement costs and is a critical element in the pricing decision for many retailers, especially during periods of extreme volatility.
But including replacement costs in retail prices may not always be feasible. But because price-sensitive consumers will switch locations to save a few cents per gallon, retailers will often remain competitive in their fuel pricing strategy, which affects their ability to recover the full cost of wholesale price increases, resulting in reduced margins and, in some cases, net losses at the pump for transactions.
Higher prices at the pump often lead the public to assume a retailer is price gouging. Price gouging is defined by some government entities as the increase in prices or value for goods and services that are higher than the prices ordinarily charged for comparable goods and services at or immediately before the time of a state of emergency. In the wake of natural disasters that affect the U.S. transportation infrastructure, governors may declare a state of emergency and institute a price gouging prohibition.
Following Hurricane Katrina in 2005, some members of Congress sought to enact legislation on price gouging that would have punished honest retailers for violating an ambiguous definition of price gouging. The legislation that passed both the House and Senate defined “unconscionably excessive prices” as:
- Significantly higher than the average price charged by that supplier during the 30-days prior to the emergency;
- Significantly higher than the competition; and
- Not attributable to increased costs, including replacement costs.
NACS argued at the time and continues to advise policy makers that the concept of price gouging is very complicated and must be carefully considered. Laws that do not adequately protect the normal operating practices of fuel retailers can have a very damaging effect on the market. Retailers must be given the opportunity to respond to changing market conditions and to recover their costs. For example, laws that prohibit a retailer from increasing fuel prices following the declaration of an emergency yet provide no allowance to adjust prices in response to escalating wholesale prices serve only to penalize retailers who stay open for business to serve their communities and accelerate the exhaustion of already limited supplies.
While Congress did not ultimately enact price-gouging legislation, several states that experience hurricanes and flooding have price-gouging statutes:
The Office of the Attorney General has authority to prosecute any business that engages in price gouging after a disaster has been declared by the governor. §17.46(b) of the Texas Deceptive Trade Practices-Consumer Protection Act provides that it is a false, misleading or deceptive act or practice to take advantage of a disaster declared by the Governor under Chapter 418, Government Code, by:
- Selling or leasing fuel, food, medicine or another necessity at an exorbitant or excessive price; or
- Demanding an exorbitant or excessive price in connection with the sale or lease of fuel, food, medicine or another necessity.
Once a state of emergency is declared, the price gouging ban is effective during the period specified in the declaration and for an additional period not to exceed 30 days after the declared state of emergency ends, unless expressly extended by the governor (La. R.S. 29:732(B)). Louisiana’s price gouging statute is not to freeze prices. Wholesalers and retailers may increase prices as long as the increase in price charged by the seller is attributable to regional or national market trends and fluctuations, or to reasonable expenses and charges for a business’ risk incurred in obtaining or selling the goods or services during the state of emergency (La. R.S. 29:732(A)).
The state’s price gouging ban covers goods and services necessary for use as a direct result of the state of emergency, such as gasoline or diesel fuel of any grade, hotels, motels and generators.
According to the Office of the Attorney General, Florida Statute 501.160 states that during a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities for an amount that grossly exceeds the average price for that commodity during the 30 days before the declaration of the state of emergency, unless the seller can justify the price by showing increases in its prices or market trends. Examples of necessary commodities are food, ice, gas and lumber.
The law compares the reported price of the commodity or service during the state of emergency to the average price charged over the 30-day period prior to the declared state of emergency. If there is a “gross disparity” between the prior price and the current charge, it is considered price gouging.