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Just Making an Honest Buck?

By Dean Foust While federal rescuers needed days to mobilize after Hurricane Katrina tore through the Gulf region, another group was on the scene almost immediately: profiteers. In Mississippi, state officials say a couple from Indiana rolled into Jackson and began selling $700 generators out of a horse trailer for as much as $2,600. In Texas, officials are probing complaints that some budget motels charged refugees from Louisiana up to $300 a night -- six times the normal rate.

And the price-gouging wasn't limited to the Gulf region: With Katrina sending wholesale gas prices soaring, some stations as far away as Atlanta jacked up retail prices to as high as $6 a gallon.

Every time a hurricane or other disaster hits, the debate begins anew: Are rising prices a function of supply and demand or are they the result of price-gouging? Most Americans believe the latter. With gas prices up 17%, to top $3 a gallon on average since the hurricane hit, some 79% of respondents to a Gallup poll conducted on Sept. 5 and 6 said gasoline sellers were exploiting Katrina to charge unfair prices.

TOUGH TO PROVE. The public mood prompted some members of Congress to demand a national anti-gouging law. While that's unlikely, various states have already enacted such legislation. And the latest outbreak of price hikes has officials from California to the Katrina-stricken region pledging to crack down before gas costs spiral out of control. Vows Mississippi Attorney General Jim Hood: "I'm going to send some people to the penitentiary before this is over."

Perhaps. But proving that someone is profiteering is harder than it might seem. To make a case, investigators usually compare the price an alleged gouger is charging for essential commodities with the price 30 days before a state of emergency is declared. If the price rises sharply during the period, the merchant must prove that he or she maintained roughly the same profit margin as before -- and that the price increase was the result of wholesale costs.

In Florida, Attorney General Charlie Crist says that in "about 95%" of the complaints received by consumers, retailers were able to demonstrate that their wholesale costs had risen.

PANIC BUYING. That has certainly been the case this time with plywood, which soared nearly 20% in commodity markets as homebuilders and distributors raced to lock in supplies ahead of an anticipated rebuilding of New Orleans. "It's not so much profiteering as panic buying out of fear there will be shortages later on," says Michael Carliner, an economist for the National Association of Home Builders.

And for all the outcry about soaring gas prices, some industry experts say that state investigators will have a hard time bringing profiteering charges against gas stations. They note that many independent retailers, which make up the vast majority of stations, are subject to complex contracts in which they're charged the daily wholesale price. To maintain their own profit margins, they must raise prices as soon as wholesale prices start rising -- even for gasoline that's already on hand.

Moreover, as upset as consumers are getting, the market seems to be working. Tom Kloza, chief oil analyst for Oil Price Information Service, a Rockville (Md.) oil-information service, notes that wholesale prices surged from the equivalent of $1.90 the Friday before Katrina hit to as much as $3.10 a gallon the Wednesday after. Add transportation costs, state and local taxes, the 2.5% credit-card processing charge, and the 5% to 10% markup that many retailers earn on gas sales, and that works out to between $3.70 and $3.90 a gallon -- in line with what some stations were charging in high-cost markets.

With wholesale gas prices for October delivery falling to $2.05 per gallon on Sept. 7, motorists should be seeing some relief at the pump. If not, state officials will be apt to show no mercy.

Foust is BusinessWeek's Atlanta bureau chief

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