The American Spectator

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-WA) suggests giving the President the power to set retail gas prices. Sen. Byron Dorgan (D-ND) 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. Illinois Gov. Rod Blagojevich (D) is threatening to prosecute companies over price hikes after the recent hurricanes. So is Republican Kentucky Gov. Ernie Fletcher. Georgia’s Gov. Sonny Perdue, another Republican, signed an executive order penalizing gas price hikes. GOP Gov. Matt Blunt of Missouri denounced “price gouging” as “unconscionable and illegal.”

They are all moderates compared to some critics. “It’s very clear to us that gas prices need to be regulated. 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.

Hawaii has imposed controls on wholesale gasoline prices. Several other states may follow suit.

Price controls have been around as long as prices. And price controls have had disastrous effects for just as long. They discourage production and encourage waste, creating shortages. They also penalize emergency preparedness — stockpiling, for instance. But counterproductive effects have never deterred demagogic politicians seeking votes.

Advocates of price controls apparently believe that the oil companies are artificially jacking up prices. It’s a convenient theory, but it makes no sense. After all, if ExxonMobil and Royal Dutch Shell could simply conspire to push up prices, they would have done so last year. And the year before. And the year before that.

In fact, Americans have been spoiled over the last two decades. Adjusted for inflation, gas prices have been historically low. Even today prices remain lower than in Europe.

GASOLINE PRICES HAVE 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. In particular, the former has turned from net energy producer into a potentially large consumer.

Over the long-term the supply of energy, and maybe even of petroleum, will increase. If nothing else, rising prices increase the incentive for investment and production. The extra 46 cents a gallon now going to crude oil producers is painful for consumers but will encourage additional exploration and production.

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 refinery opened in 1976, even though gasoline consumption has jumped a quarter since then. Today the U.S. must import ten percent of its gasoline as well as 57 percent of its oil.

Thus, the temporary closure of nine refineries (and reduction in operations at three others) caused by Katrina cut total refining capacity by 12 percent, sharply inflating pump prices. Hurricane Rita had an even bigger impact, shutting 27 percent of America’s refining capacity.

Companies are seeking to build more refineries, but 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 ten 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 over four years. Rules involving the additive MTBE, including potential liability for water contamination, raise costs. Although the recent energy bill included provisions intended to spur refinery construction, it added a new ethanol mandate — a political pay-off to agricultural interests — which will force expensive technical adaptations at refineries.