Antitrust Alert: U.S. Announces New Effort to Uncover Gasoline Price "Fraud"

Yesterday the U.S. Attorney General announced the formation of an Oil and Gas Price Fraud Working Group, a state and federal interagency organization that will address oil and gas market "collusion, fraud, or misrepresentation" and speculation and trading practices that may have increased fuel prices.  This effort only duplicates existing efforts by multiple government agencies, none of which has found any significant evidence of anticompetitive conduct leading to higher prices, but may signal more aggressive enforcement of existing laws.

New working group

This new working group will be part of the government’s Financial Fraud Enforcement Task Force and will include representatives from the Departments of Justice, Energy, Treasury, and Agriculture, the Federal Trade Commission, the Federal Reserve System Board of Governors, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the National Association of Attorneys General.  The Attorney General stated that the working group should "share information and foster collaboration" as the various agencies use their existing authority to:

• Explore whether there is any evidence of manipulation of oil and gas prices, collusion, fraud, or misrepresentations at the retail or wholesale levels that would violate state or federal laws and that has harmed consumers…
• Evaluate developments in commodities markets including an examination of investor practices, supply and demand factors, and the role of speculators and index traders in oil futures markets.

Crude prices this week reached beyond $110 per barrel, and average gasoline prices at the pump are above $3.80.  The government understandably wants to do something about high prices.  Nevertheless, even with the broad authority to investigate and challenge illegitimate conduct, government agencies have uncovered little in the way of unlawful conduct to explain price spikes that have occurred in recent years.

Existing government authority to investigate high fuel prices

The Federal Trade Commission and Department of Justice closely watch energy markets for possible antitrust violations.  The FTC has a gasoline price monitoring program and has investigated price spikes nationally and in the West, Pacific Northwest, Midwest, Cape Cod, and elsewhere, but found that supply and demand generally explain the fluctuations.  Refinery constraints and demand for boutique fuels required by government regulation sometimes have contributed, but not collusion among suppliers.  Likewise, the DOJ has found few opportunities to prosecute gasoline retailers for price fixing.

Similarly, the FTC has made retrospective studies of mergers in oil sectors, but not found evidence they have caused significant price increases.  As FTC officials have observed, the agency aggressively pursues combinations involving crude oil and refined products commodities and has brought merger cases at lower levels of concentration in the petroleum industry than in any other.

The FTC in 2009 issued regulations to enforce new authority given to it by Congress to challenge wholesale gasoline fraud and market manipulation, including making knowingly fraudulent statements or omissions that, although true, mislead market participants and distort or are likely to distort market conditions.  No investigation or enforcement action has been announced.  This rule is similar to the false reporting and anti-manipulation rules of the Commodity Exchange Act, enforced by the CFTC.

The CFTC also polices oil market activities and has actively monitored those markets in recent years for signs of market manipulation.  In 2008, during another period of high gasoline prices, in a rare public statement about an ongoing investigation, the CFTC publicly disclosed its then six-month-old "National Crude Oil Investigation."  The CFTC undertook a large scale review of oil marketing and trading activities to identify any irregularities that might imply conduct violating the anti-manipulation rules.  The CFTC has identified one enforcement action resulting from this investigation.

In addition, the laws of some three dozen states address "price gouging" in sales of petroleum products and other commodities during states of emergency, most applying a standard prohibiting "unconscionably excessive prices" or the like.  In the last few years, investigation of price gouging has increased, especially during hurricane season and considerably after Hurricanes Katrina and Ike.  Nevertheless, state attorneys general have brought few enforcement actions, especially with less hurricane activity and generally lower market prices during the last couple of years.

Conclusion

This new working group should not make a significant addition to the government's already-busy oil industry agenda.  The agencies involved already have broad authority to address anticompetitive conduct or other activity that may contribute to higher fuel prices.  But the fact is that prior investigations have not found much to support the implication that collusion, fraud, misrepresentation, or speculation are to blame.  The OPEC cartel is an exception, of course, and beyond the reach of U.S. courts.  OPEC output limitations, increased petroleum demand in developing countries, Middle East unrest, a weak dollar, and other factors affecting global crude markets are more likely factors.  Nevertheless, the announcement of this working group is a reminder to energy companies that there will be closer government scrutiny during this period of high prices.

Lawyer Contacts

For more information, please contact your principal Jones Day representative or either of the lawyers listed below.

J. Bruce McDonald
Washington / Houston
+1.202.879.5570 / +1.832.239.3822
bmcdonald@jonesday.com

Jason F. Leif
Houston / Washington
+1.832.239.3727 / +1.202.879.5449
jfleif@jonesday.com

Lee Ann Russo
Chicago
+1.312.269.4283
larusso@jonesday.com

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