Congressman, Step Away from the Pump

May 25, 2007 • Commentary
This article appeared on National Review Online on May 25, 2007.

With the Memorial Day weekend here, Congress appears determined to leave no bad idea behind in their frantic quest to demonstrate that they feel the voters’ pain over high gasoline prices. Tuesday, they voted to sick the Justice Department on OPEC for violating U.S. anti‐​trust laws (good luck with that). Wednesday, they voted to ban service stations from taking “unfair advantage” of motorists and outlawed “unconscionably excessive” prices for gasoline and other fuels were the president to declare an energy emergency.

What constitutes taking “unfair advantage”? Congress doesn’t say. Apparently, taking “fair advantage” of motorists is O.K. And what is an “unconscionably excessive” price? Again, silence. Presumably, “conscionably excessive” pricing is O.K., as is “unconscionably high” prices if we posit that there is a difference between a “high” price and an “excessive” price. The fact that Congress passes this sort of gobbledygook suggests that they aren’t particularly serious about doing much beyond providing themselves a talking point when they return to their districts this weekend.

Maybe symbolic blather is the best we can hope for from Congress under the circumstances, but it would be nice if the federal code were something other than the product of a freshmen dorm‐​room bull session. That’s particularly the case when there’s a fair chance that some future president might declare the prerequisite “energy emergency” and drop the hammer on gas stations for political gain. Because no reliable divining rod exists to guide service stations owners or wholesale distributors in their quest to ascertain exactly what is not‐​excessive or conscionable (legal) and what is excessive or unconscionable (illegal), we set up a situation in which no one knows if and when they are breaking the law until the prosecutors come knocking.

Our guess is that Congress means to ban fuel prices that are substantially higher than the cost of delivering that gasoline to the market during declared states of emergency. While that doesn’t strike most of us as unreasonable, it most definitely is. That’s because prices in a free market economy do not reflect production costs — they reflect supply and demand. If it were otherwise, even the best paintings in the world would cost less than $100 and homeowners would price their houses at cost plus a reasonable markup, not at what the real estate agent thinks someone might pay.

If our war on “price gouging” at the pump results in prices that are substantially to the left of the intersection of supply‐​and‐​demand, the gasoline will disappear. It’s a law of economic gravity that has been proven time and time again. Our most recent experience with this was 34 years ago, when then‐​president Richard Nixon imposed strict price controls on oil. Apparently, voters need a constant refresher course on this subject, so perhaps we’re due for a public demonstration regarding what happens when politicians fool too much with market prices.

The up‐​side is that price controls produce cheap goods for those lucky enough to get them before they disappear. For those who don’t get to the stores (or pumps) in time, too bad. But all that waiting in line imposes costs too, and don’t think the rich won’t hire people to stand in line for them. The competition to beat the crowd can become intense, which implies that those with more resources will likely win while those with less will lose. After all, if you’re trying to outrun a hurricane, the difference between a full tank of gas (at whatever cost) and an empty tank of gas might be the difference between life and death. Declaring price controls during a state of emergency is akin to poring gasoline on an economic and social fire and provides no guarantee that the poor get anything at all.

Skeptics, of course, maintain that price controls usually reduce profits, not supply. Well, that depends on how tight the price controls are. If they’re relatively close to what the market price would otherwise be, there will be no dramatic effect on prices or supply. But mess with them too much, and even the most left‐​of‐​center economist you can find will concede that shortages will result.

Hence, even if oil companies are making filthy profits — which they’re not, unless you think a 9.5-percent profit margin last quarter is worth going Bolshevik over — slapping price controls on gasoline threaten to do as much harm to motorists as to the oil companies. The fact that the House passed such an empty bit of legislative blather on Wednesday suggests that maybe they understand this as well as we do. Let’s hope.

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