On November 17, 2021, President Biden sent a letter to FTC Chair Lina Khan encouraging an investigation into oil and gas companies and retail gasoline prices. This is the second time in four months the White House has requested an investigation into retail fuel prices. As previously detailed, on August 11, Brian Deese, Biden’s Director of the National Economic Council, requested that the FTC investigate elevated prices, noting "divergences between oil prices and the cost of gasoline at the pump." In his subsequent letter, President Biden referenced Deese’s letter, stating "prices at the pump have continued to rise, even as refined fuel costs go down and industry profits go up."
Of course, the actual cause of higher gasoline prices is a source of significant disagreement. The American Petroleum Institute responded to Biden’s request for an investigation with the following: "This is a distraction from the fundamental market shift that is taking place and the ill-advised government decisions that are exacerbating this challenging situation. Demand has returned as the economy comes back and is outpacing supply." The trade group went on to state: "Rather than launching investigations…we should be encouraging the safe and responsible development of American-made oil and natural gas."
Extended or sudden periods of elevated gasoline prices almost always invite some scrutiny from state and federal enforcers. Perhaps the most recent and robust FTC inquiry came in 2006, when the agency published a lengthy report titled: "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases." During the year-long investigation, the FTC issued 139 Civil Investigative Demands (similar to subpoenas). FTC staff identified more than 105 retailers accused of price gouging. The resulting report stated that seven refiners, two wholesalers, and 24 single-location retailers had higher average gasoline prices not substantially attributable to higher costs. However, the agency concluded: "additional analysis…showed that other factors, such as regional or local market trends, appeared to explain the pricing of these firms in nearly all cases." The report described the post-hurricane price increases as "consistent with the standard supply and demand competitive paradigm."
A subsequent 2011 report by the FTC’s Bureau of Economics, titled "Gasoline Price Changes and the Petroleum Industry: An Update," stated, "crude oil prices continue to be the main driver of gasoline prices." The study specifically examined the question that seems to be at the heart of the recent White House letters, namely the phenomenon of retail gasoline price declines lagging upstream price declines. This phenomenon is colloquially referred to as "rockets and feathers," referring to the notion that relevant retail prices go up like a rocket but settle like a feather. The technical terminology is "asymmetric pass-through." The 2011 report was somewhat inconclusive as to the cause of such price cycles, however, it noted "there is no evidence that cycling in the United States is due to less competition."
If the FTC follows the President's call for a new pricing investigation, the effort will likely be longer and more aggressive than its 2006 predecessor, given recent forceful statements and the enforcement-focused posture of new FTC leadership. Ms. Khan has made clear that she believes her predecessors were far too tolerant. In late October, Khan told New York Magazine: "I think it's fair to say that my tenure here represents change in a whole host of dimensions."
Indeed, in her short time in charge, Chair Khan has already instituted several policy and practice changes, some focused specifically on the energy industry. For example, in August, Ms. Khan responded to Deese’s request for a pricing investigation by stating, in part, that the FTC would be investigating "abuses in the franchise market," as well as taking "steps to deter unlawful mergers in the oil and gas industry." Further, a September 15th package of omnibus resolutions created standing authorization for staff to investigate a wide range of potentially problematic conduct. One focus was the abuse of intellectual property rights, which specifically called out the effects on "pharmaceuticals, technology and gasoline refining."
Ms. Khan will have to marshal FTC staff carefully if she hopes to conduct an effective and efficient investigation. As she noted in a September letter, "above all, we need to be intentional in how we direct our resources...current deal volume is imposing huge demands on our staff."
If the 2006 investigation proves any template, the new investigation would focus primarily on refiners and finished product distributors. In the 2006 report, which did not analyze oil exploration and production, the FTC noted: "Even the largest private oil companies control only a very small fraction of world crude oil production, and significant price manipulation through control of crude oil by private oil companies therefore appears highly unlikely." The report also noted that "CID recipients included integrated and unintegrated refiners, pipeline owners and operators, terminal owners, and petroleum marketers." President Biden’s November 18 letter, however, makes specific reference to U.S. oil companies engaged in "billions of dollars of buybacks and dividends" and asks that "the Commission further examine what is happening with the oil and gas markets." Therefore, whether the scope of any future investigation will mirror the 2006 investigation, or will be broader, is unclear at this time.
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