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.
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