Price Controls, Windfall Profit Taxes Would Harm Consumers

Supply and demand factors, not producer conspiracies, responsible for price movements

January 12, 2006

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WASHINGTON - As federal lawmakers continue to consider imposing controls on gas prices, the Cato Institute is releasing a new, definitive study demonstrating that any government intervention would likely create fuel shortages and reduce investment in new gas supplies.

In the Policy Analysis “Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes,” Cato senior fellows Jerry Taylor and Peter Van Doren argue prices are established by the interplay of supply and demand and that competition ensures consumers face the lowest possible prices. Today’s relatively high prices will do more to encourage conservation and new supply than any combination of federal policies.

They argue that “no evidence exists of collusion or price fixing among investor-owned oil companies or gasoline retailers in domestic markets” and the Cato scholars provide evidence showing that “the oil and gas sector has been less profitable than the rest of the U.S. economy over the past 33 years.”

“Oil company profits have increased over the past two years but are still not particularly impressive,” they add.

Warning that denying investors profits, but allowing them to book losses, amounts to one-way capitalism, the scholars argue: “Denying the industry the opportunity to make substantial profits when supplies are tight is both unfair (unless their losses are likewise alleviated during low-price periods) and counterproductive in that it will discourage investment in the oil business.”

Calls for laws against price gouging are likewise misguided. Anti price-gouging legislation is nothing but price controls applied during crises — the exact period in which price controls would do the most harm.

Analyzing the effects of government intervention in the 1970s, Taylor and Van Doren show that price controls and excise taxes proved ruinous. “Such policies fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but do manage to reduce supply, increase imports, and impose steep costs on the economy as a whole. Flirtation with a return to the policies of the 1970s is akin to flirtation with putting one’s hand on a hot stove.”

Policy Analysis 561