What, if anything, should government do about the sustained increase in gasoline prices? Not a thing. For both practical and theoretical reasons, politicians and regulators should resist the temptation to monkey around with fuel markets. No matter how well intentioned, intervention to protect consumers will only make matters worse.
First, some perspective. Gasoline prices seem relatively high today largely because we still have rather fresh memories of 1998 — the year in which records were set for the lowest inflation-adjusted fuel prices in American history. However, once we adjust for the changing value of the U.S. dollar, gasoline prices are not particularly high at all if compared to the historic record. While it’s true that prices at the pump are significantly higher now than they were last year, higher fuel prices have only set back households by an average of $25 a month in 2004.
We are tempted to cite the above data and admonish readers to stop whining. But it is fair to say that the recent run-up in gasoline prices has transferred a large bundle of cash from motorists to oil companies. Consumer activists are not making things up when they highlight the jaw-dropping corporate earnings for oil companies of late.
Does economic fairness demand that government do something to reverse this wealth transfer? After all, motorists have difficulty protecting themselves against such prices in the short term. That’s because the costs associated with moving closer to the workplace, engaging in car pools, using mass transit, or replacing gas guzzlers with new fuel-efficient cars are not trivial. Staggeringly large oil-company profits, some argue, indicate that government could mandate price reductions and still ensure more than reasonable earnings for producers.
The practical argument against that course of action is that gasoline prices are signaling scarcity in fuel markets. If fuel prices go down, consumption will go up. The market is so tight, however, that there’s no more gasoline available in the short run. If the government ordered price reductions of any consequence, pumps might well begin to run dry.
The theoretical argument against that course of action is that it constitutes a pernicious form of one-way capitalism. That is, when market conditions dictate low fuel prices, consumers win, producers lose, and government smiles. When market conditions dictate high fuel prices, consumers lose, producers win, and government angers. But if government tolerates wealth transfers in one direction only (from producers to consumers), why would anyone invest in the oil business? Fairness requires that government tolerate periodically high gasoline prices as long as it is going to tolerate periodically low gasoline prices.
Accordingly, some have argued that the best course of action is not to worry about redressing the wealth transfers associated with high fuel prices but to encourage more conservation instead. Tighter fuel-efficiency standards, higher gasoline taxes, and more lavish subsidies for alternative-fueled vehicles have all been suggested. Since consumers don’t respond much to price signals in the short run, government needs to step in — the theory goes — to ensure that we adequately react to market scarcities. Doing so would bring gasoline prices back down and work to everyone’s benefit.
Proponents of this argument, however, overlook two key points.
First, although motorists don’t conserve much in the short run when fuel prices go up, the experience of the 1970s and early 1980s demonstrate that motorists will turn to conservation with a vengeance if fuel prices stay high over a long period of time. Given the costs associated with exchanging cars, moving households, and adopting new travel practices, it’s not short sighted to ensure that high gasoline prices are here to stay before changing one’s lifestyle. Government intervention to encourage or force those investments in the short term might well cost society more money than it would save through reduced gasoline consumption.
Second, consumers have a right to make their own decisions about trade-offs between higher gasoline prices and conservation without the government whacking them over the head with higher taxes, constrained choices in the vehicle market, or extracting their earnings for the benefit of corporations engaged in making cars or fuels that consumers presently don’t want to buy. Simply put, individuals know better how to order their personal affairs than do politicians or bureaucrats no matter how well meaning they might be.
At the end of the day, the best remedy for high gasoline prices is…high gasoline prices, which provide all the incentives necessary for motorists to conserve, for oil companies to put more product into the marketplace, and for investors to look into alternative fuel technologies. Government has never demonstrated an ability to do better.