Commentary

Price Gouging in the Public Interest

This article appeared on TownHall.com on October 24, 2005.
Gasoline costs too much in almost everyone’s opinion. President George W. Bush is urging Americans to drive less. Other politicians want government to push prices down.

Sen. Maria Cantwell, D-Wash., suggests giving the president the power to set retail gas prices. Sen. Byron L. Dorgan, D-N.D., complains that companies are “profiting in an extraordinary way at the expense of the American consumer” and has proposed a windfall profits tax.

Eight governors have requested a federal probe of gasoline pricing. Hawaii has imposed controls on wholesale prices. Other states might follow suit.

“We really need to step back and recognize that, like electricity, gasoline is too vital to the economy to be left in the hands of these corporations that have been gouging us,” argues Doug Heller of the misnamed Foundation for Taxpayer and Consumer Rights in Los Angeles.

Price controls have been around as long as prices. And price controls have had disastrous effects for just as long.

Heller’s argument makes no sense. After all, if ExxonMobil and Royal Dutch Shell could simply conspire to push up prices, they would have done so before now.

Gasoline prices have recently increased for a number of reasons. One is growing demand. The emergence of China and secondarily India as industrial powers is transforming the global market.

Another reason prices are high - and have spiked in response to the damage inflicted by Hurricanes Katrina and Rita - is pervasive regulation. Most important, it has become extraordinarily difficult to build oil refineries.

Both the number of refineries and their total capacity is lower today than in 1980. The last new refinery opened in 1976, even though gasoline consumption has jumped 25 percent since then.

Today, the U.S. must import 10 percent of its gasoline as well as 57 percent of its oil. Thus, even the temporary closure of several refineries by Hurricane Katrina and Hurricane Rita sharply inflated pump prices.

Environmental regulations, backed by activists who mix demonstrations and lawsuits, create delays and inflate costs.

One Arizona project begun a decade ago is still at least five years away from completion.

Over the last 10 years the industry has invested $47 billion to comply with new environmental controls rather than construct new capacity, according to the American Petroleum Institute. Compliance with sulfur standards alone cost about $20 billion.

Although the recent energy bill included provisions intended to spur refinery construction, it added a new ethanol mandate - a political payoff to agricultural interests - which will force expensive technical adaptations at refineries. Air pollution rules require different gasoline formulations for “nonattainment” areas, reducing economies of scale.

While consumers target gas stations with their ire, the bulk of recent price hikes have gone to refiners. In contrast, distributors, marketers, and retailers receive just a penny more than in 2004.

Even today, prices at the pump are constrained by local competition. If gas stations could charge as much as they desired, they would have been doing so already.

Government also pushes up prices through taxes, which average 42 cents a gallon nationally. In Hawaii, where the state government has imposed price controls, the combined state and federal tax is more than 50 cents.

High prices might be painful, but they are the most efficient way to distribute goods in short supply. Indeed, the industry attempts to spread gasoline as widely as possible. Wholesalers charge “over-allocation” fees to discourage any distributor from accumulating a disproportionate share of limited resources.

Quite simply: prices rise when supplies fall. That signals consumers to use less and sellers to supply more. Price controls short-circuit the adjustment process and intensify shortages.

That was the experience during the mid-1970s gas “crisis.”

Citizens in the world’s wealthiest country sat in gas lines because the federal government allocated supplies and restricted prices.

Only when newly inaugurated President Ronald Reagan lifted price controls did supplies jump and prices fall. Federal energy regulation was a public policy disaster that should never be repeated.

The United States also imposed a windfall profits tax between 1980 and 1987. Alas, the WPT discouraged companies from making potentially risky investments.

In 1990 the Congressional Research Service concluded: “The WPT reduced domestic oil production between 3 percent and 6 percent, and increased oil imports from between 8 percent and 16 percent.” Replaying the old WPT would replay its effect, helping foreign producers and hurting domestic consumers.

As Hurricanes Katrina and Rita demonstrated, natural disasters can create severe economic dislocations. Adjustments almost always are difficult.

But government intervention always exacerbates the pain. If gasoline seems expensive today, just try turning the energy market over to government.

Doug Bandow is a Senior Fellow at the Cato Institute and a former Special Assistant to President Ronald Reagan.