The Nation's Pulse

Blame Big Business for High Gas Prices

But not for the reasons you think.

By 7.17.06

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This past week, the average price for a gallon of gasoline rose above $3 for the first time since the brief post-Katrina spike. On cue, politicians, journalists, and liberal agitators are crying "price gouging," and telling us we need federal policy to guide us towards a petroleum-free world.

These complaints hold traces of the truth: (1) We ought to be angry at big business for the high gas prices; and (2) there is something the government can do about it. But the problem is not corporate "price gouging" and the solution is not new subsidies or regulations. The corporate misbehavior causing high gas prices is what I call "subsidy suckling" and "regulatory robber-baronry." The solution, as Ronald Reagan would tell us, is for government to get out of the way.

Let's start with the product we're told is our ticket to energy independence, ethanol. The idea is a nice one: some day we'll fuel all of our cars on fuel derived from crops. Even better, we will begin with all-American corn.

There are problems with this dream. Most basically, ethanol might not really be an energy source as much as an energy sink. Some scientists contend that the fossil fuels needed to produce a gallon of corn ethanol (making fertilizer, running tractors, irrigating the crops, grinding, fermenting, distilling, and eventually shipping) use more energy than that gallon of ethanol yields. If this is true, then making ethanol can only be wasteful.

Clearly, ethanol is no magic potion, otherwise why would it need government supports? The special tax breaks amounting to about 52 cents per gallon have given ethanol an advantage over other fuels for decades. The federal protectionist trade policies keeping out foreign ethanol destroy any claim by politicians that our government is encouraging ethanol use for the environment. Nowadays, the federal government is mandating we use ethanol. Now that's a business model to emulate: make something useless, but make it illegal for people not to buy it.

Ethanol mandates, both new and old (federal oxygenate mandates have been increasing demand for ethanol for years), drive up the price of gasoline. This is bad news for drivers, but good news for ethanol makers. The number one ethanol maker in the U.S. is agribusiness giant Archer Daniels Midland (ADM). ADM's former chairman, Dwayne Andreas, was one of the most generous political donors to both parties -- $4 million by some accounts.

Adding to the crunch, ADM has recently forecast that there may not be enough ethanol in the U.S. to fulfill the federal mandate. A shortage on a mandatory product is probably the surest formula for sending prices sky-high.

So this is real price-gouging: Big businesses have convinced government to require that we use their product.

If you live in California, however, there is a much more insidious force driving up your gasoline prices. It is called Unocal, and it is a particularly clever case of regulatory robber-baronry.

In 1992, the California Air Resources Board (CARB) was considering strict new regulations of refiners. Specifically, the state was considering mandating a new summertime reformulated gasoline (RFG). Although this would clearly add to the cost of its business, refiner Unocal was working with the regulators, suggesting ways to reduce hydrocarbon emissions.

Shortly after CARB issued its rules, mandating a method for reducing hydrocarbons, Unocal made a surprise announcement: the company had patented precisely the method the state had mandated.

This left other refiners with two options in the summer time: stop selling gasoline into California, or pay Unocal for the right to use their "invention." After a series of lawsuits, the other oil companies, including Exxon, Chevron, and Shell, were forced to pay 5.75 cents per gallon sold to Unocal.

Because nearly all refiners were hit, this drove up costs for California drivers. Even with some ability to pass on the costs, California refiners felt the squeeze of the regulation. Over the next few months, many refiners closed up shop. Soon, even Unocal wanted out of California's regulatory tangle, and the company sold its refining business and gas station chain to Tosco, making Tosco the largest refiner in the nation.

CARB's action, then, drove smaller refiners out of business, costing jobs. CARB also drove up the price of gasoline in California. This is clearly bad for "business" but good for one business, Unocal, who collected that 5.75 cents per gallon from California drivers long after it quit the refining business.

The ethanol mandates and clean air rules I describe here are more the rule than the exception, as I lay out in my new book, The Big Ripoff. The government regulates an industry in the name of saving the planet, and ends up aiding big business at the expense of consumers, entrepreneurs, workers, and taxpayers.

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About the Author

Timothy P. Carney is a columnist for the Washington Examiner and the author of The Big Ripoff: How Big Business and Big Government Steal Your Money (Wiley).