In the first week of May gasoline prices hit their highest
average ever. A few days ago I was cheered when the cost of regular
unleaded at my suburban Virginia service station edged below $3.00
a gallon. But then I flew out to California on business and found
myself paying an extra 40 cents a gallon. Price-gougers! Corporate
profiteers! Where is Congress when we need it?
Busy protecting the public, thank you very much. The gasoline
price run-up in the aftermath of Hurricane Katrina caused the Bush
administration and GOP-controlled Congress to seize the standard of
consumer protection. The House passed a bill sponsored by Rep.
Heather Wilson (R-N.M.) to “prohibit price gouging in the sale of
gasoline, diesel fuel, crude oil, and home heating oil.”
Now Democratic legislators are leading the charge against Big
Oil. For instance, Rep. Dennis Kucinich (D-Ohio), left-wing gadfly
and presidential candidate, has written several oil refiners
demanding to know how they planned to “remedy the disparity”
between prices in California and elsewhere.
Kucinich, who chairs the Domestic Policy Subcommittee of the
Oversight and Government Reform Committee, last month blamed the
oil companies for playing “a role in raising the price of
gasoline.” He announced: “Congress can no longer sit on the
sidelines and watch as escalating prices continue to take a heavy
economic toll on consumers and risk further harming the
economy.”
Rep. Bart Stupak (D-Mich.) is pushing the Federal Price Gouging
Prevention Act. Backed by 86 Democrats and three Republicans, the
bill would make it a crime to “sell crude oil, gasoline, natural
gas, or petroleum distillates at a price that is unconscionably
excessive or indicates that the seller is taking unfair advantage
[of] unusual market conditions (whether real or perceived) or the
circumstances of an emergency to increase prices unreasonably.”
The legislation provides corporate penalties of $3 million a day
for civil action and $150 million for criminal conduct, as well as
a fine up to $2 million and ten years in prison for individuals.
State attorneys general — usually ambitious governor-wannabes —
also could bring civil actions. Let the lawsuits begin!
Sen. Ted Stevens (R-Alaska) has authored S. 94, which would
punish price increases of an “unconscionable amount.” Senate
Majority Leader Harry Reid (D-Nev.) has introduced a sense of
Congress resolution (S. 6) which would encourage the passage of
laws against such practices as “price gouging, profiteering, and
market manipulation.”
If only the world was so simple.
IT WOULD BE NICE if the oil companies were charities, giving away
their wares for free. But they aren’t. They are profit- making
ventures. Their goal is to make money, and to do so they charge
“what the market will bear,” as the saying goes, investing the
proceeds to find and produce new sources of energy, also to be sold
for a profit.
This shocks some people, who apparently believe that free, or at
least cheap, gasoline is a basic human right. Yet attempting to
maximize profits by charging people more rather than less is the
way most businesses operate. Consider grocery stores, software
developers, and book publishers: all cheerfully take advantage of
market conditions to make money.
It gets even worse, however. Auto dealerships and airline
companies engage in blatant “price discrimination” — charging
different prices to different people based on their willingness to
pay. Thus, passengers sitting side by side on the same flight may
pay wildly different amounts. Unfair!
Then there are people who exploit rising prices. Most homeowners
prefer to pocket their real estate gains instead of sharing the
profits with buyers. Why are sellers entitled to keep money they
did nothing to earn?
Yet the oil companies have long been particular targets of
political ire, subject to demonization by activists, journalists,
and politicians. During the “energy crisis” of the 1970s, Uncle Sam
controlled prices, regulated supplies, subsidized alternatives,
taxed profit “windfalls,” and otherwise meddled in the energy
market.
The energy crisis essentially ended when President Ronald Reagan
deregulated oil prices. Prices actually fell, gas lines became a
distant memory, and America prospered.
Low prices in the 1990s left industry critics at the sidelines.
But now international demand is climbing, as China and India
rapidly industrialize. Amazingly, the Mideast has become even more
unstable (a botched occupation will do that). Other major oil
producers, such as Nigeria and Venezuela, have been roiled by
political strife.
It has been years since construction of a new refinery.
Moreover, environmental rules segment the domestic gasoline market.
A shortage in one area cannot be remedied with supplies from
another. The Environmental Protection Agency requires different
blends for summer, which are more expensive to produce. Lucian
Pugliaresi of the Energy Policy Research Foundation points to
“[r]ising gasoline demand in the U.S., combined with unscheduled
refinery closings, looming strikes, limited spare replacement
capacity, longer turnaround times for scheduled maintenance, and
refining factors.”
AFTER HURRICANE KATRINA the Federal Trade Commission investigated
the oil industry and found no price gouging. Indeed, the FTC and
Department of Energy have repeatedly reviewed gasoline prices and
discovered nothing amiss. Reports W. David Montgomery, author of a
new study for the American Council for Capital Formation: “Their
conclusions in every case have been that gasoline price increases
were due to the operation of supply and demand in light of an
interruption of supply, and that the magnitutde of price increases
was consistent with the magnitude of the loss in supply. There has
never been a finding that gasoline price increases were caused by
any manipulation of the markets.”
Crude oil prices are set in distant, impersonal, global markets.
The most important local price determinant is station competition,
but city and county zoning departments have more influence than
international oil companies over who sells gasoline where.
Moreover, unusual crises, such as a natural disaster destroying
infrastructure and disrupting supplies, have enormous price
impacts.
The contrary theory that energy behemoths run the world raises
the interesting question, why have gas prices been relatively low
so often? If Big Oil could run prices up at the click of a gas
pump, then why did prices fall so dramatically in 1981? No
self-respecting profiteer would have left money in consumers’
pockets during the 1990s if domestic companies could manipulate the
market. Surely the sneaky monopolists wouldn’t have chosen
Hurricane Katrina as the moment to start mulcting the public, since
they could predict heightened public scrutiny. In short, if the
price-gouging story is true, the energy concerns are remarkably
stupid, incompetent, or both, utterly incapable of taking advantage
of their supposedly unique ability to enrich themselves.
Unfortunately, the truth, though clear, is complicated, offers
no easy solutions, and doesn’t help legislators win votes. So many
people and most politicians prefer to believe that the oil
companies have conspired to raise consumer costs. Thus, Congress
should just prohibit price gouging. Hence Rep. Stupak’s “Federal
Price Gouging Prevention Act.”
When challenged last month to justify what would end up as de
facto price controls, Rep. Stupak professed innocence: “There is
nothing in the legislation that would restrict the supply of oil to
this country. All we’re saying is: Just justify your costs…if you
can justify your costs, you have no fear of this legislation.”
That is, go before jurors angered by high prices and trust them
to objectively judge your conduct based on such undefined terms as
“unreasonably,” “gross disparity,” “unconscionably excessive,”
“reasonably reflects,” and “unfair advantage.” Risk serious fines
and even prison time hoping that people would understand the
vagaries of the international energy market.
WE HAVE CENTURIES OF DISASTROUS experience with direct price
controls, in which politicians decide who pays what to whom.
Federal energy price controls were no better. Observed William
Simon, who administered the system in the mid-1970s: “As for the
centralized allocation process itself, the kindest thing I can say
about it is that it was a disaster. Even with a stack of
sensible-sounding plans for evenhanded allocation all over the
country, the system kept falling apart, and chunks of the populace
suddenly found themselves without gas.”
The more indirect controls that would arise from the Stupak
legislation would be little better. W. David Montgomery warns that
the bill would dissipate any consumer savings from lower prices “by
the costs of non-market allocation mechanisms such as gas lines,”
exacerbate shortages “because of diminished or eliminated
incentives for producers to find replacement supplies and for
consumers’ efforts to conserve,” and direct limited supplies to
those “who have the lowest cost of waiting” rather than to those
who would most value the gasoline.
As a result, the people who would most suffer would be those
supposedly protected from higher prices. Gasoline would be cheap
… if you could find it. But few individuals or companies would
want to risk prosecution when attempting to locate, acquire, and
transport additional supplies to areas suffering from shortages.
Why go to the extra effort and expense if the government might not
only sue but imprison you?
Most people prefer cheap to expensive gasoline. When costs rise,
most people prefer to believe simple charges of corporate
conspiracy rather than sophisticated explanations of market
complexity. As a result, politicians profit, companies suffer, and
people lose.
But there is no magic elixir to bring down high gasoline prices.
Indeed, asking politicians to do something, anything, to make us
pay less is the best way to make us pay more.
