Why U.S. consumers suspect gas price gouging — and how much oil companies actually profit from a gallon of fuel

Oil company executives will be on the hot seat Wednesday at a House subcommittee hearing as U.S. consumers across the country allege gasoline price gouging at the pump, where drivers last month paid record-high prices per gallon for the fuel.

The rise in the cost for gasoline came amid a spike in crude-oil prices to their highest in nearly 14 years. But market experts say that while there may be some cases where consumers have been overcharged for the fuel, there is a reasonable explanation for the climb.

“The chief reason driving retail gasoline prices to a record high in March was Russia’s invasion of Ukraine, against a tight global oil market,” said Brian Milne, editor, product manager at DTN. “Oil demand has recovered quickly from the pandemic lockdowns, outpacing supply growth, with the invasion of Ukraine and the subsequent sanctions on Russian oil exports heightening concern over supply disruptions and shortages.”

That’s of little comfort for U.S. drivers who paid an average of $4.353 a gallon for gasoline on March 11, the highest price on record, according to GasBuddy data.

On Wednesday, the Democratic-run House Energy and Commerce Committee’s subcommittee on oversight and investigations plans to have executives from major oil companies, including Chevron Corp. (CVX), ExxonMobil Corp. (XOM) and BP PLC (BP), testify at a hearing titled “Gouged at the Gas Station: Big Oil and America’s Pain at the Pump.”

The hearing comes as politicians and consumers point out that many oil companies have turned hefty profits amid the surge in oil prices. BP posted its highest profit since 2012 last year.

In what could give rise to calls in the U.S. and in Europe for profit-windfall levies or the like connected to the rising energy prices, Exxon said in a filing late Monday that its first-quarter profits could top $9 billion, compared with $8.8 billion in the fourth quarter.

That’s thanks in part to between $1.9 billion and $2.3 billion in crude price changes, and up to about $400 million in gas price changes, Exxon said in the filing. That would be offset by thinner margins in chemicals, impairments related to leaving Russia after the start of the invasion, and others.

Exxon is expected to report late this month, and FactSet consensus calls for adjusted per-share earnings of $2.17, which would compare with adjusted EPS of 65 cents a share in the year-ago quarter.

Other major energy companies have not yet provided first-quarter updates, which are somewhat unusual in the tightly scripted world of integrated giants.

People look to oil-company profits and think they are “raising [gasoline] prices arbitrarily,” but are also potentially not looking at the “tremendous” losses for those firms in 2020, said Patrick De Haan, head of petroleum analysis at GasBuddy.

The idea of gas price gouging is “not a fair assessment” of the market, he said. Oil companies, of course, do better when oil prices are higher, but the claims of gouging are more a “voice of frustration” over the rise in oil prices.

Prices for fuel generally “lag on increases and decreases” in the oil price by anywhere from two to four days before starting to move in the direction of a major oil-price change, saif De Haan, and there is some “truth to the ‘rocket’ and ‘feather’ prices,” given that prices can “rocket” up and then slowly decline.

But gasoline stations are aware that the market has been extremely volatile and the last thing they want to do is cut their price significantly by, say, 10 or 15 cents a gallon, only for wholesale prices to go up by 20 cents, he said.

In 2021, the price of crude oil accounted for nearly 54% of the average retail price per gallon for gasoline, according to the Energy Information Administration. So, it makes sense that the roughly 60% rise in U.S. oil prices as of April 1, from the same time a year ago, would lead to a spike in gasoline prices at the pump. At an average $4.175 for gasoline on April 4, prices are 46% higher than a year ago, GasBuddy data show.

But that doesn’t translate into big profits from gasoline sales for oil companies. In a recent report, Jeff Lenard, vice president of strategic industry initiatives at the National Association of Convenience Stores, or NACS, said that only around 39% of the country’s 145,000 fueling outlets carry branded fuel from one of the five major oil companies, and only about 0.1% of U.S. fueling outlets are actually owned by a major oil company.

The markup on a gallon of gas averages 30 cents, and after expenses such as credit card fees, retailers have “net profits of around 10 cents a gallon,” Lenard said.

U.S. drivers consume roughly 9 million barrels of gasoline a day. Multiplying by 365 days in a year and by 42 gallons in a barrel at that roughly 10 cent-per-gallon retail net profit adds up to $14 billion in estimated annual profits from gasoline sales in the nation — for all 145,000 fuel retailers, said Lenard.

“Claims of price gouging along the gasoline supply chain are disingenuous, looking to scapegoat an industry that is under extraordinary regulatory oversight to distract from the inflationary pressures harming American consumers,” said DTN’s Milne.

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Originally published on MarketWatch.com

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