The American Spectator

Another problem is air pollution rules which mandate use of “cleaner” gasoline in “nonattainment” areas, even though they comply with stringent air quality standards most of the time. The result is more than a dozen gasoline formulations, which reduce economies of scale. Moreover, a disruption at even one refinery can have a disproportionate regional price impact.

Such costs wouldn’t matter as much if refining was wildly profitable. But it isn’t. Since 1990 refiners have averaged just five cents on the dollar. While consumers target gas stations with their ire, the bulk of recent price hikes have been retained by refiners, which have been collecting three times as much money as only a year ago. In contrast, distributors, marketers, and retailers receive just a penny more than in 2004. And the latter lose part of their small gain in higher credit card fees.

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

Government also pushes up prices through taxes, which average 42 cents a gallon nationally. In Hawaii, where the state government has imposed price controls, California, and Nevada, the combined state and federal tax is more than 50 cents. This is ten times the average oil company profit per gallon.

Unlike prices, taxes seem to go up and never come down. Since 1980 the federal levy has gone from four to 18.4 cents a gallon, a more than four-fold increase.

HIGH PRICES MAY BE PAINFUL, but they are the most efficient way to distribute goods in high demand. Indeed, the gasoline industry attempts to spread the supply as widely as possible. Wholesalers charge “over-allocation” fees to discourage any distributor from accumulating a disproportionate share of limited resources.

The basic point is simple: 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. Then the only way to get the item is by queuing.

That was the experience during the mid-1970s gas “crisis.” Citizens in the wealthiest country on earth 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 an extraordinary policy disaster that should never be repeated.

The U.S. also imposed a windfall profits tax between 1980 and 1987. Of course, while politicians are ever ready to penalize gains, they won’t protect against losses — as when the average price of a barrel of oil fell below $10 back in 1999.

Alas, the windfall profits tax discouraged companies from making potentially risky investments. In 1990 the Congressional Research Service concluded: “The WPT reduced domestic oil production between 3 and 6 percent, and increased oil imports from between 8 and 16 percent.” Replaying the old WPT would replay its effect, cutting production and increasing imports. That would help foreign producers and hurt domestic consumers. But if Sen. Dorgan really believes it to be such a good idea, he should propose imposing one first on farmers, since crop prices also vary greatly over time.

Economics isn’t the easiest subject to understand, but politicians should at least try. Sen. Cantwell has charged the oil companies with manipulating the market while allowing that “I just don’t have the documents to prove it.” As for the right price for gasoline, she admitted: “I don’t know what the level should be.” No politician or bureaucrat knows the right level.

As Hurricanes Katrina and Rita demonstrated, natural disasters often create economic dislocations and hardship. 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.