Over the last several months, a steady chorus of critics has suggested oil companies are profiting excessively. Some have even thrown around the “G” word—gouging. For there to be gouging in Florida, officially speaking, there must be a declared state of emergency. Beyond that, prices must have risen by a “substantial” amount above the 30-day average before the emergency. Because there is no state of emergency, technically there is no gouging. However, one might use the term in a nonlegal sense to mean companies are generating excessive profits at the expense of consumers. Let me be abundantly clear: This is not happening.
Washington politicians have blasted this idea from the Capitol steps, even hinting at an investigation by the Department of Justice, while another politician has called for oil companies to pay a 95% “windfall profits” tax. Of course, the politician fails to mention that doing so will drive up prices further. All of this is political posturing and does nothing to help Americans understand the problem, nor help them at the pump.
For oil companies to earn excessive profits, there would have to be extensive collusion. Oil companies are already under a microscope. Their every move is watched by consumers, regulators and activists. For them to collude in a way that harms consumers is highly unlikely.
While the collusion necessary to justify profiteering is almost impossible, the data also does not support the claim. In fact, my current research on this topic leaves me convinced oil companies have been restrained in their price increases since the beginning of the year. This is especially true since the Ukraine crisis began.
I have been more than a casual observer of the relationship between pump prices and gasoline futures prices for 15 years. Futures are financial contracts that allow market participants to “estimate” the price of a commodity—gasoline in this case—at some point in the future. This estimate is based on what is happening in the markets now and what expectations the participants have for the future. My colleagues and I noticed the premium of pump prices to futures prices rose dramatically during the pandemic. This prompted us to examine whether this was an anomaly. Our research, and that conducted by others in our field, shows there is a strong relationship between crude oil prices and pump prices. Moreover, our research also demonstrates the relationship between pump prices and futures prices is even stronger.
Since 2005, including the pandemic period, the pump-to-futures premium averaged 42%. If we exclude the pandemic period, the premium is 39%. While we only have limited data points in 2022, the average has been 32% as of April. But since the war between Russia and Ukraine began, the pump-to-futures average premium is only 27%. That’s 30% lower than the average in relative terms. If oil companies were profiting excessively, we would expect the average pump-to-futures premium to be higher.
Without getting into statistics, this is a very large difference. When looking at the total increase in pump prices and futures prices over the same period, we draw similar conclusions. Futures prices have risen 56% since the beginning of the year, but pump prices have only risen 30%. The comparable figures for the period since Ukraine was invaded are 29% (futures) and 20% (pump).
So, oil companies are not unduly profiting from economic and world events—quite the opposite. Rising prices are not necessarily a sign of inappropriate behavior but may simply reflect current market conditions. Yet, politicians are beating the drum that oil companies are the enemy. Don’t buy the hype; be informed.
Tom Smythe, Ph.D. is a professor in the Department of Finance & Economics in the Lutgert College of Business at Florida Gulf Coast University.