Surging Gasoline Prices Drive Debate at Pumps

With gasoline prices drifting over $2 a gallon in many places, the talk at the pumps is turning ugly.

“I think someone is taking advantage of the situation,” said John Schmidt of La Verne, filling up his minivan with $2.04-a-gallon mid-grade gasoline at a station near downtown Los Angeles.

“They’re just gouging us here,” agreed Richard Holloway, who was filling his big Dodge van. “They’re overdoing it.”

As gasoline prices climb higher, accusations of price gouging are never far behind. The normally staid motorist club AAA raised the specter of gouging two weeks ago, and Democratic presidential candidate Sen. Joseph I. Lieberman (D-Conn.) on Monday called on Energy Secretary Spencer Abraham to investigate the situation.

But industry experts say surging gasoline prices are largely tied to the higher cost of crude oil in a tight market. Some believe that oil companies and station owners also may be making additional profit amid the rising tide of prices, but assessing profit margins is largely guesswork because gasoline sales are not regulated. And in a market economy where motorists are free to drive down the road in search of a better deal, proving suspicions of profiteering is a tall order.

“It’s a fine line,” said Jeremy I. Bulow, a former chief economist with the Federal Trade Commission who studied gasoline price spikes in the Midwest three years ago and now teaches at Stanford University.

“If you go skiing in the Sierras during a holiday weekend, you’re going to pay more than if you go the next weekend or the weekend before. Is that gouging? I think most people would say no,” said Bulow, whose study blamed the price hikes on production and supply problems stemming from different regional fuel specifications, not gouging.

“What makes gas prices such a big deal,” he added, “is you pay them every week and they’re posted at the side of the road.”

During previous price run-ups, some state officials have succeeded in wrangling refunds or cash settlements from gasoline retailers accused of price gouging under extraordinary circumstances. But in those cases, accusers generally were armed with broad state consumer protection statutes, an official state of emergency and legions of outraged motorists.

The Florida Department of Agriculture and Consumer Services, for example, won price-gouging settlements from about 60 gas stations after the Sept. 11 terror attacks, reaping about $101,000 in fines. The stations were accused of boosting prices by as much as 50 cents a gallon in the hours after the attacks.

Florida had the advantage of a law, passed after Hurricane Andrew slammed the state in 1992, that forbids profiteering in times of emergency. California has a similar law, which requires a formal declaration of emergency by the governor.

Industry experts say the current price rise is being driven by a variety of factors, including the labor turmoil that has hobbled Venezuelan oil exports and jitters from the anticipated war in the Middle East.

Gas prices now average $1.658 a gallon nationwide and $1.922 in California -- up 17 cents here in the last two weeks, according to the latest federal survey Monday. California typically has the loftiest gasoline prices in the country in large part because of strict air-quality standards.

In his letter to the Energy secretary, Lieberman called on the Bush administration to “assure the American people ... that the prices that they are paying at the gas pump and for their fuel oil are not the result of price manipulation or gouging.”

Crude oil, which accounts for nearly half of the cost of a gallon of gasoline, has risen about 25% since December, while AAA figures show that gasoline costs nationally have risen 45%. AAA asserted Feb. 11 that “nothing fully justifies” the recent jump in prices, an implicit reference to gouging.

“The way prices are going up, it’s getting uncomfortably close to that, but we’re not saying it is gouging,” said Mantill Williams, a spokesman for the Orlando, Fla.-based association.

“We’re asking refiners and wholesalers to show some restraint,” Williams said. “We would support any kind of government action if we found they were trying to take advantage of the situation.”

John Felmy, the American Petroleum Institute’s chief economist, said the AAA’s warning was “inappropriate, unfair and untrue.”

In addition to war worries and the oil strike in Venezuela, Felmy said, high prices are being driven by abnormally cold weather in the U.S. and Europe, which diverted crude to produce heating oil. He also cited the potential strike in Nigeria, a significant U.S. supplier.

Energy Department spokeswoman Jeanne Lopatto agreed, saying, “The combination of world events, our growing economy and the cold winter are now having an impact. We continue to monitor energy sector developments and their impact on the energy markets very closely.”

FTC spokesman Mitchell Katz said the agency also was monitoring gasoline prices but not yet investigating. “Gouging to one person might not be gouging to another,” Katz said.

Indeed, proving price gouging, at either the wholesale or the retail level, is difficult for a commodity such as gasoline that is bought and sold in relatively competitive markets.

Timothy Cohelan, a class- action attorney in San Diego, said he and his partners “were the first ones stupid enough to bring a case,” accusing oil companies of conspiring to manipulate gasoline prices in California.

The 1996 lawsuit took on nine major oil companies and claimed that together they intentionally drove up fuel prices that year by limiting the supply of California’s new, cleaner-burning fuel.

The class-action case dragged on for four years and cost his law firm, Cohelan & Khoury, more than $2.5 million. At the three-year mark, Union Oil paid Cohelan’s side $3 million to be rid of the suit. But in 2001, the California Supreme Court dismissed the case, saying that the evidence of conspiracy “was, at best, ambiguous.”

Despite the challenges of such cases, Cohelan hasn’t given up. He has a similar case pending in federal court.

State Atty. Gen. Bill Lockyer also has accused oil companies of cartel-like action in California. But his office has found no grounds for prosecution.

In fact, a study released by Lockyer in 2000 found that price spikes are not unusual in California, because only six refiners control more than 90% of the market for the state’s clean-burning gasoline.

A gas-price task force convened by Lockyer recommended that the state consider ways to cushion price shocks, including possibly creating a strategic gasoline reserve or developing plans for supply pipelines. But the state has taken no action except to study the proposals, Lockyer spokesman Tom Dresslar said.

Felmy of the American Petroleum Institute noted “there has never been any convictions for collusion or anything like conspiracy” on the part of the major oil companies for price fixing.

“It’s never been anything but exoneration for the companies,” he said.

Charles Langley of the San Diego-based Utility Consumers’ Action Network said he had no doubt that today’s retail prices are providing a larger-than-usual profit margin for someone.

But he and others have yet to find a smoking gun.

Mark Mahoney, who follows West Coast gas prices for Oil Price Information Service of Lakewood, N.J., thinks refiners and gas station owners are simply taking advantage of momentum. Motorists are already prepared to pay more because of rising crude prices, the logic goes, so why not add a few pennies of extra profit to the mix?

“There’s no law against making money,” Mahoney said.

Yet Tom Schmachtenberger, who owns a 76 station in Santa Monica, rejects the notion that gas stations are picking up extra money at customers’ expense. He said the price spikes simply reflect the higher cost he has to pay for his product.

“The dealer’s margin is almost always the same,” he said. “I think people are sophisticated enough to know that we’re not the ones who are pocketing the money. We’re just the waitress that brought you the steak.”

Schmachtenberger says he has been “out on the islands” talking to customers and acknowledges apologizing to half a dozen upset motorists in the last week. The station was charging $2.03 a gallon for regular on Friday.

“I hate to be in this position,” Schmachtenberger said. “I’ve never sold gas for this much money in my life.”

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Times staff writer Richard Simon in Washington contributed to this report.