Do Oil Companies Routinely Price Gouge the Public

INTRODUCTION In recent years there has been much discussion on whether or not oil companies arbitrarily increase the price of gasoline at the pump. This has been exacerbated by the profits these companies have shown in recent quarters. Many studies have been undertaken to analyze if indeed price gouging is the driving force leading to these profits. Anderson (2006) asserts that oil company profits do not contribute to higher gas prices. Krantz (2007) states that the relationship between oil and gas prices is cyclical. He concludes that profits are influenced by factors such as world-wide demand and the associated cost of production. Barley (2006) posits that the key influencing factor is the series of mergers and joint ventures that preceded the run up in oil company profits. While Jenks and Clark (2007) state that this is an old issue that dates back to the days of the Standard Oil monopoly. We have too few players today, thus resulting in an oligopoly situation where a few control profits. These findings indicate that there can be quite a bit of disagreement on what has caused oil company profits to spike and to what extent, if any, the oil companies are seeking unfair profits. One thing that cannot be overlooked is the fact that in the fourth quarter of 2007, the net profits of the top five oil companies amounted to $22.55 billion compared to $1.59 billion in the fourth quarter of 2001. And therein lies the crux of the matter. The investing and consuming public is fixated on net profits or the bottom line. And why not? Net Income is used as a basis to determine return to the stockholder, a key indicator of wealth building. But there is also another element that goes virtually unnoticed in the financial report, the profit figure. Many items, both operating and non-operating in nature, are deducted from gross in arriving at net profit. These are important items because, among other things, they aid in assessing the company's ability to manage in a responsible manner. So when we look at the net income for an oil company, or any company, we have difficulty in determining if the profits are due to price gouging or maybe just good management skills. Could there be another way of assessing if price gouging exists? Gross is the result of a company's revenue less the costs of manufacturing the product (i.e., material, labor and overhead). If a company finds itself paying more for the costs of production, they have two options; reduce other expenses (operating or non-operating) or increase prices commensurately, in order to maintain net profit. An easy way of maintaining gross goals is to pass any increase in production costs on to the consumers. This causes the gross percentage to stay constant. If there is an increase in the gross percentage, while costs of production are increasing, one can infer that the price charged to the consumers (resulting in the revenue of the company) has increased more than the increase in costs. Regarding the oil companies, their major cost of manufacturing, i.e., oil, has steadily increased over the past five years. How has the gross been affected during this period? No research has yet to answer that question. This study will extend prior research in attempting to ascertain if oil companies do indeed show indications of price gouging the consumers. In doing so three questions will be answered: 1. Have gross percentages for the major oil companies increased over the past five years? 2. Do gross percentages vary significantly between the major oil companies? 3. Do gross percentages for oil companies vary significantly from those in other industries? HYPOTHESIS DEVELOPMENT If oil companies have been engaging in price gouging, one would expect to see an increase in gross levels over some period(s) in the past five years, indicating that the price charged the consuming public is greater than the cost paid for the elements of production. …

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