Price Gouging and Posturing Politicians
Ronald Bailey has a good article over at Reason that looks at the recent posturing by politicians to try and benefit from the dissatisfaction over the increase in gasoline prices.
Gasoline prices rose to historic highs this week and Americans are feeling all of that pain at the pump. Trilby Lundberg, the head of the California-based fuel market research firm, the Lundberg Survey, calculates that the national average price per gallon of regular gasoline is now $3.18. In inflation adjusted dollars this price breaks the all-time high record price of March 1981 by three cents. In 1981, regular gasoline sold for $1.35 per gallon which would be $3.15 in today’s dollars. So what’s going on?
The natural villain for high prices is, of course, Big Oil. And Congress is rushing yank the industry’s greasy hands from our pockets. Chairman of Congress’ Joint Economic Committee, Sen. Charles Schumer (D-N.Y.) held a hearing this week on whether or not the Big Oil companies should be broken up. Also on Wednesday, the House of Representatives passed the Federal Price Gouging Prevention Act which makes it “unlawful for any person to sell, at wholesale or at retail in an area and during a period of an energy emergency, gasoline or any other petroleum distillate … at a price that is unconscionably excessive; and indicates the seller is taking unfair advantage of the circumstances related to an energy emergency to increase prices unreasonably.” The act does allow that it would not be gouging if the price “was substantially attributable to local, regional, national, or international market conditions.” And according to Lundberg that’s exactly what has been happening in the past two months.
Earlier this week, Democratic presidential hopeful Sen. Hillary Clinton (D-N.Y.) called for a two-year tax on oil company profits. “What do you think oil companies are doing with their profits?,” asks Routt. “They’re doing what they should be doing—they’re investing it to produce more fuel.” Recent high gasoline prices may be finally persuading oil companies and other refiners to invest in and build the first new refineries in the U.S. since the 1970s. For example, Shell Oil will be spending $3 billion to double the capacity of its refinery in Port Arthur, Tex.
This is all quite accurate. Much of our problem when it comes to gasoline, are self-inflicted. The boutique/regional blends, the ethanol requirement, and the hostility to building new refineries have all contributed to higher gasoline prices. Changing the laws so that there is a single nationwide requirement for gasoline blends would certainly help. When there is a refinery breakdown that affects one part of the country, then gasoline supplies from other parts of the country could help soften the impact. This would be a sensible starting point in addressing gasoline prices, but it is also boring and rather wonky so most politicians will avoid it in favor of the outraged posturing.
Also factor in that demand has been growing world wide, and in the U.S. as well. With increasing demand, a small number of producers, and periodic shutdowns and you have a recipe for higher prices. Does this translate into higher profits for oil companies? Absolutely. However, one has to keep the refinery running, and with all this money hopefully there will at least be an expansion of capacity at existing refineries.
And there isn’t much that can be done to “fix” this problem. Demand for oil is a global phenomenon. Opening up drilling in ANWR or other locations will likely have little effect on the price of gasoline. Switching over to alternatives is just as costly as using oil, if not costly. And capping the price…well ask anybody who was around when Nixon was President (or even Carter, as many of the price controls from the Nixon era were still, largely, in place). Changes in prices signal changes in scarcity. When something becomes more expensive that means, there is, in relative terms, less of it than there was before. If you try to “fix” the problem with some sort of control on prices then you’ll usually end up producing shortages. Don’t believe me, look at what is happening in Venezuala.