Price Gouging? It's Not That Simple

SUPPOSE a major corporation announced it would locate a new facility employing several thousand people in your small community. House prices would jump immediately, in anticipation of the stronger demand, though the plant might not be in operation for a year or so. Would you sell your house at the old low price, not wanting to be unfair to a buyer? Probably not. But when gasoline stations boosted their prices soon after the Iraqi invasion of Kuwait knocked almost 6 percent of the world oil supply off the market, many consumers and politicians were quick to charge the oil companies with gouging.

Major price jumps occur in other markets on occasion. But oil price hikes hit close to home. People have to buy gasoline to get to work or play, and they have to buy heating oil in the winter. The increase is proclaimed in giant letters at most stations. A tank of gas costs, say, $17 instead of $13. The impact on the pocketbook is immediate.

Of course, oil prices have sometimes dropped suddenly too. It happened last January for home heating oil firms when the December cold spell ended. Some dealers took large losses on their inventories.

Last week, though, prices jumped again. On the New York Mercantile Exchange, oil for delivery in November settled at $35.43 a barrel, compared to about $18 a barrel in early July. If that price sticks, the grumbles at the pumps could get louder.

At that level, oil prices could damage not only the individual's wallet but the world economy. Already the United States is close to recession, and expensive oil has pushed up the inflation rate. It is time for the Bush administration to reconsider releasing some oil from the Strategic Petroleum Reserve. Since there is not yet a real world shortage of oil, rather an inventory buildup, even the threat of tapping the reserve would send oil prices tumbling.

In a sense, such government action would amount to price control through supply control, just as OPEC attempted to control prices in the 1980s.

At the moment, however, oil prices are set for the oil companies on the spot and futures markets. Higher prices are ``fair'' in the sense that the oil companies are playing according to the rules of the system. Should the government try to alter the rules by putting a lid on prices directly or indirectly, it will lessen conservation and the adjustments in oil production that higher prices eventually bring.

Earlier this month, some oil companies attempted to assuage criticism by restraining gasoline prices. That's not so easy for refiners buying crude on the spot market, since the price is set when a tanker unloads its cargo. It is easier for those companies producing and refining their own crude.

ARCO, which gets much of its oil in Alaska, soon found it was running out of gasoline at some of its stations as drivers quickly recognized a bargain. Too-low, non-market prices can soon turn into too-long station lines.