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Debate over alleged gas-price gouging in California continues

Sacramento Bee (California)
They're ripping us off.

No, they're doing us a favor.

Let the debate begin.

Gasoline at $3 a gallon has motorists and elected officials spewing allegations about oil companies' price gouging and profiteering.

But even as California's attorney general begins an investigation into the record-breaking run-up at the pump, some economists say the high prices are a necessary and even beneficial response to the legitimate supply shortages that have followed Hurricane Katrina.

High prices serve as the most efficient way to allocate a scarce resource, said economist Severin Borenstein, director of the University of California Energy Institute.

Keeping prices low through some sort of government regulation would exacerbate the shortage and create gas lines like those in the 1970s, which helped plunge the nation into recession, he said.

"Suppressing prices when there's a real shortage is an ostrich policy to a real problem -- a head-in-the-sand policy response," he said. Letting prices rise "sends exactly the right signal: There's a real shortage, don't use so much gasoline."

That doesn't wash with California Attorney General Bill Lockyer, who has begun a probe into price increases of 25 cents per gallon or more since Katrina ripped through the Gulf Coast's vast energy infrastructure.

"I haven't seen any textbook on U.S. economics that says it's OK to violate the law, gouge consumers, collude, fix prices or to engage in unfair business practices," said Lockyer spokesman Tom Dresslar.

Dresslar said the state's anti-gouging law prohibits retailers from raising prices more than 10 percent when either the governor or the president has declared a state of emergency. Gas prices on average have risen about 9 percent in California since Katrina hit, although Dresslar said Lockyer has received 260 consumer complaints about individual stations raising prices as much as 29 percent.

One Inland Empire consumer reported $5-a-gallon gas.

"These e-mails indicate that California consumers are really in no mood, nor should they be, to get lectured on Econ 101 by theorists or Wall Street suits," Dresslar said.

Other elected officials have suggested going after the oil companies. State Sen. Joe Dunn, D-Santa Ana, reintroduced a constitutional amendment that would regulate gas prices in California. And U.S. Sen. Byron Dorgan, D-N.D., introduced legislation calling for a windfall profits tax on oil companies. The tax revenue would be shipped to consumers in the form of an income tax rebate.

The nationwide average for self-serve regular dropped a penny Thursday to $3.03 a gallon, according to AAA. The California average was down a fraction of a cent to $3.05. Sacramento's average was a record $3.03, up a fraction of a penny from the day before.

At gas stations Thursday, motorists said high prices are prompting them to drive less. Some refused to buy into Borenstein's theory that capping prices would create shortages.

"There's a lot of gas," said Sam Tongilava as he filled up at the 76 station at Fruitridge Road and Freeport Boulevard.

Others would welcome some form of government price control.

"I'd rather wait in line," said Ricky Freeny as he pumped $3-a-gallon gas into his 1978 van at the KwikServ on Fruitridge Road in Sacramento.

Freeny is 44, old enough to remember the '70s gas lines. But he said a crackdown is needed.

The oil companies are "taking advantage of us," he said. "They're using the situation to make a profit, a quick profit."

Wall Street analysts say the hurricane will translate into major profits for the big oil companies, even as the companies labor to repair the facilities damaged by Katrina.

"We are in the right business at the right time," Valero Energy Corp. Chief Operating Officer William Klesse told analysts at a conference in New York thisweek. The company expects "a prolonged period of very good refining (profit) margins," he added.

Valero's stock price has increased 25 percent since the hurricane. Some companies have seen more modest increases, including Chevron Corp., whose refinery at Pascagoula, Miss., is among the four in the gulf still closed. Chevron's stock is up 5 percent since Katrina.

The oil-company bonanza bothers economists like Borenstein, but not enough to justify a call for government intervention.

"I certainly don't like the idea that all this money is being transferred out of consumers' hands to oil companies' hands," Borenstein said. "But you can create more problems trying to fix that."

He said the oil companies are entitled to make their money as long as they haven't artificially withheld supplies to ramp up prices.

But consumer advocates such as Jamie Court say they believe the oil companies have shown they're willing to restrict supplies in an effort to raise prices.

The most recent example came when Shell Oil Co. was prepared to close its Bakersfield refinery until elected officials and Court's organization, the Foundation for Taxpayer and Consumer Rights, pressured Shell into finding a buyer for the facility. The refinery supplies about 2 percent of California's gas.

"We'd be in worse shape" if the plant had closed, Court said.

California motorists actually got off easy compared to their East Coast counterparts, who rely heavily on gas delivered by pipeline from the gulf. Gas lines and $4 prices were reported in several cities.

California gets only 3 percent of its gas from the gulf. But because it does have to import a portion of its supplies, the state has to compete for gas on a world market. When the price of imports shot up, every gallon sold in California went up as well; otherwise those gallons could be shipped elsewhere to the highest bidder.

"I'm not trying to convince people that they should like the fact that it's $3 when they drive up to the pump," said Joe Sparano, president of the Western States Petroleum Association.

But he said the prices have shot up legitimately because of the Gulf Coast devastation and the effect it had on supply. "The arbiter of supply and demand
is always price," he said.

Only one state has price controls. Hawaii imposed a ceiling on wholesale prices beginning Sept. 1, based on an index tied to mainland prices.

So far the ceilings haven't created major gas lines, although there are longer waits at some stations, said Paul Brewbaker, an economist at the Bank of Hawaii.

Borenstein said efforts to cut gas taxes are almost as troubling as price controls. Cutting taxes creates more consumption -- a mistake at a time of scarcity, he said.

Georgia's governor suspended the state's gas taxes last week through the end of September. On Thursday, West Virginia's governor said he would sign an executive order rescinding an increase in his state's gas sales tax scheduled to take effect Jan. 1.
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The Associated Press contributed to this report.