Commentary

Mixing Gasoline and Moonshine

The House approved by a 389-34 vote a plan to impose criminal penalties and fines of up to $150 million for refiners and wholesalers for “gouging,” with a fine of $2 million for retailers.

It is pitiable that 389 House members were so eager to make a public spectacle of their economic illiteracy. It is revealing that they exempted congressional moonshine — otherwise known as ethanol.

The measure “calls on the Federal Trade Commission to develop a definition of price gouging,” noted the Associated Press. The House is threatening stern penalties for a crime it cannot even begin to define.

“Gouging” is a meaningless word. Charging more than others do for the same fuel is inconceivable at the wholesale level because fuel is traded on global markets and the going price is instantly visible online.

At the retail level, if one gas station tried to charge 10 cents more than others, consumers would buy their gas elsewhere. But what if that was the only gas station for 100 miles, or the only station willing to stay open Sunday night? In such cases, a higher price is an essential incentive to move fuel to where it is most acutely needed, to encourage station owners to provide fuel at nonpeak hours, and to discourage wasteful use and stockpiling in areas faced with episodic scarcity from a transportation bottleneck or hurricane.

“Addicted to oil” is another meaningless phrase. Passenger cars and light trucks account for only 40 percent of all U.S. oil consumption. And commuting and shopping are not just frivolous “addictions.” Nearly as much oil (32 percent) is used by all the addicts who operate buses, airplanes, railroads, trucks, farm machinery and ships. About 17 percent goes into petrochemicals used to make plastics, pharmaceuticals, polyester, paint and many other addictive products. And 4 percent goes to feeding the nation’s addiction to paving over dirt roads.

All this sleazy silliness about “addiction” and “gouging” and “robber barons” is just a ruse to prevent us from noticing Congress and the president worsened this international energy squeeze by (1) prolonged warfare in Iraq and threats of war with Iran and (2) a pork-laden “energy bill.”

The energy bill had nothing to do with easing regulatory obstacles to the production of natural gas, crude oil or gasoline, or alleviating the federal government’s socialist claims of ownership of energy lands. It was all about giving away more billions to the windmill lobby, the hybrid lobby and the politically generous ethanol lobby.

That law, plus threats of lawsuits about a previously mandated gasoline additive, compelled the addition of ethanol to gasoline at a technically arduous pace. That is now causing big problems for those who have to stir some ethanol into numerous state-mandated varieties of gasoline, while refiners make the seasonal switch from heating oil to gasoline.

It takes a lot of petroleum in the form of diesel fuel, fertilizer, plastic and pesticides to produce and distribute corn and turn it into moonshine — about seven barrels of oil to produce eight barrels of corn-based ethanol.

Making ethanol from sugar would be worse because formidable U.S. trade barriers push the cost of sugar far above the world price (making Brazil’s ethanol industry irrelevant). Making ethanol from waste is hypothetical for now, as is the uncertain cost. Because ethanol can’t flow through pipelines, it is twice as expensive as oil to transport — by fuel-burning truck or rail.

Unfortunately, there is much less energy in eight gallons of ethanol than in the seven gallons of gasoline-equivalent needed to produce it. The Energy Department estimates the highway mileage of a Nissan Titan drops from 18 mpg to 13 mpg by switching to E85 (85 percent ethanol). That is why lavish subsidies to auto companies to produce flexible fuel vehicles are useless — a disguised bailout at best.

A few more thoughts on these matters:

  • Threatening oil producers because world fuel prices are up makes no more sense than threatening big ethanol producers. The price of ethanol went up just as much as the price of gasoline and is expected to climb higher.
  • Oil company profits account for a very small portion of the retail price — much smaller than taxes. Oil producers and refiners could not reduce their profits by charging less than the market price. Retailers and distributors would just pocket the difference, or they would quickly run out of fuel if they didn’t.
  • Suspending gas taxes for two months would be unwise because it would artificially stimulate demand at a very inopportune time.
  • The millions that oil company executives earned from exercising stock options were entirely financed by other stockholders. Stock-based compensation has nothing to do with what the companies charge for products (which cannot be more or less than the market price) or what they pay employees.
  • Subsidies to consumers who buy hybrids are useless. The highway mileage of large or sporty V-6 and V-8 hybrids is much worse than it is with small 4-cylinder cars.
  • CAFE fuel standards are useless. Most vehicles on the road are used, not new, and fleet-average mileage standards for domestic producers have no effect on anyone’s choice of a new car. Prices, on the other hand, have a big effect.

The price system has important work to do. The House of Representatives, evidently, does not. If anything needs investigating, it’s the Congress. Cheap politics cannot produce cheap oil.

Alan Reynolds is a senior fellow with the Cato Institute and is a nationally syndicated columnist.