How Gas Prices Got That Way

Published calculations that U .S. gasoline profits have jumped from $20 million to $40 million per day since last January make many Americans understandably wonder why prices keep going up. Some persist in believing there is a scheme among the big oil companies to hoard supplies and make a killing at the expense of the consumer, but there is no evidence of that. The basic cause of rising prices is OPEC price fixing, compounded by the intricacies of Government regulation all the way from the wellhead to the pump.

When crude petroleum enters a refinery, the buyer records its price. To that figure the refiner is allowed to add a margin varying in size to cover processing costs and profit. Until this year, the price of a refiner's product was based on how large a percentage of a barrel of crude it represented. That was considered unfair in the case of gasoline, which costs more to produce than most other oil products. So the refiner was allowed to increase his margin on gasoline by an average of 4-c- per gal.

The refiner is paid by the wholesaler, who adds a margin averaging 4-c-. The retailer is then allowed the same margin he got in 1973, plus a 3-c- inflation increase, a pass-through allowance for higher rental costs and a further price boost for antipollution requirements. All that adds up to about a dime per gal.

With all these controls, why have prices risen so much faster than expected? One main reason is that market pressures kept prices below the federal ceilings when gas was plentiful. There was price competition among gas stations vying for customers. When supplies diminished, service stations raised the price to the legal maximum limit--an increase that outstripped the OPEC price rise. Beyond that, retailers who sold below the maximum price were allowed to "bank" the difference; now they can legally add that amount to the price they charge for gas. Such are the vagaries of regulation.

Many gas stations, however, simply ignore the legal prices. The DOE guesses that about half the gas now sold is above the official ceiling. Prices have ranged from the official rates of around $1 to as high as $1.70 per gal. at a few stations in New York City and Boston. Some station owners have justified these rates by saying that they had to pay more than $1.25 to wholesalers, but most were charging what the market would bear--i.e., a black market. The major oil companies are not involved in the black market. "We have too many auditors looking over their shoulders," says a DOE regulator.

Price gouging can be punished by a fine of $10,000. A retailer in Boston who charged $1.57 for unleaded was hit with a civil suit by federal officials; a U.S. District Court ordered him to roll the price back 70-c-. Despite such actions, however, black marketeers vastly outnumber DOE inspectors. "If we ever have the personnel and the time to investigate, we could uncover some incredible stuff," says a DOE official. But the department, which is scheduled to have 800 inspectors by mid-1980, needs thousands to enforce the scheduled prices. It has little prospect of getting them.

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