Record Profits and Price Gouging

Given the coincidence of still-uncomfortably high gas prices at the pump and record profits posted for oil companies, it’s not surprising that charges of price gouging have started to circulate.


Ira Kawaller

a year ago | 4 min read


Given the coincidence of still-uncomfortably high gas prices at the pump and record profits posted for oil companies, it’s not surprising that charges of price gouging have started to circulate. It appears that these accusations may have motivated Congresswomen Katie Porter (D-CA) and Kim Schrier (D-WA) to sponsor the Consumer Fuel Price Gouging Prevention Act, which recently passed in the House. As I read this bill, it strikes me as provisional, allowing for the President to declare an emergency under loosely prescribed circumstances in which the federal government can effectively apply price controls. Hopefully, the situation will never arise where this action would be deemed necessary.

In any case, charges about price gouging are easy to make but hard to prove. Record profits, on their own, aren’t conclusive. A more indicative measure would be profit relative to some other comparative element, of which there could be many. For example, more meaningful metrics might be profit relative to capitalization, profit relative to total assets, profit relative to equity, or even profit per employee, to name a few.

All of these comparative statistics would be better than simply profit, on its own; but, at the same time, all have their shortcomings. Merely assembling the appropriate data to make these comparisons is problematic given reliance on data that likely pertain to prior periods by the time of their release. Moreover, volatility of return measures may be inherent in the endeavor, without reflecting any nefarious behavior on the part of the managers. A seemingly high relative profit measure might reflect a not-unexpected mean reversion after periods of lackluster performance. Even with a series of ever-increasing returns, the performance might still be unremarkable relative to that of other industries or sectors. Would these scenarios be indicative of price gouging having occurred? Not necessarily.

Presumably, if oil companies were gouging, they would be earning excess profits in the vernacular of economists. Except in cases with undue barriers to entry, excess profits should be short-lived, as they serve to attract new entry into the production process; but that’s a vital function that shouldn’t be minimized given that, although refining companies are at high levels of their capacity, some slack in the system still remains, allowing for a higher volume of output to be realized in a relatively short term. This consequence of increased production is exactly what’s needed to moderate upward pressure on gas prices. Taxing this excess profit, which is something that Biden has threatened to do, may have populist appeal; but economically, it’s not a smart move.

It would be bad policy in that it would discourage the incremental supply that might otherwise be induced by these higher profits in the short run; and in the longer run, lower prices would eat into our efforts to wean our way off fossil fuels, which we should be doing in connection with our efforts to lower carbon emissions. The problem here is that we face two diametrically opposed objectives: One to increase supply to moderate increases in gas prices and the other to cut back on fossil fuel emissions.

Be that as it may, one might be tempted to fault oil company executives for pushing prices too high, given the current inflationary circumstances. I tend to think that that criticism may be misplaced. Competition should be the mechanism to keep these prices in check, but company managers have the primary responsibility of looking after the interests of the company. If the market signals that it’s appropriate for them to increase their prices, they should do so.

Critically, I would hope these companies would incorporate longer term considerations into their calculus, which I would hope would preclude their taking actions that would be detrimental to the overall economy. I’d expect “excessive” price increases to fall under that umbrella of considerations. It’s in the oil companies’ interests to raise prices somewhat, but not by too much.

My real concern is not whether the oil companies are price gouging, but rather, whether they are violating anti-trust laws. It would be one thing if price increases derived from market forces, but quite another thing if those prices had been raised because of collusion. Only one of these possibilities, however, is illegal; and I tend to think that’s as it should be.

I don’t want to be accused of carrying water for the oil companies. I’m agnostic as to their culpability in this instance. The one principle I hold, though, is that our tax policies should largely be applied universally. Oil companies shouldn’t be subject to special company- or industry-specific taxes, nor should they benefit from company- or industry-specific tax benefits.

I’m for a level playing field, and oil companies have enjoyed a host of preferential treatment tax policies, initiated historically in an effort to stimulate domestic oil and gas production. Perhaps it’s time for these special tax provisions to be reconsidered — not as a response to the charge of price gouging, but in recognition of growing awareness of the dangers of carbon emissions as a matter of fairness. To the extent that our policy makers want to do something in connection with relieving the financial pressures that derive from high prices, they should focus on assisting the population in greatest need with targeted assistance, as opposed trying to override the market forces that would otherwise prevail.


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Ira Kawaller

Ira Kawaller holds a Ph.D. in economics from Purdue University and has held adjunct professorships at Columbia University and Polytechnic University. For the bulk of his career, he focused on financial markets and derivative instruments. He ran the New York office of the Chicago Mercantile exchange from 1980 -1996 before founding three derivatives-related consulting business: Kawaller & Company, LLC, the Kawaller Fund, and Derivatives Litigation Services. In past years, Kawaller served on the board of Hatteras Financial Corp (which merged with Annaly Capital Management, Inc.) and participated on their risk committee and compensation committee. He also served on a variety of professional boards and committees, including the board of the International Association of Financial Engineers (now the International Association for Quantitative Finance) and the Financial Accounting Standard Board's Derivatives Implementation Group.







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