Caprice at the Pump

The Washington Times
By Margo Thorning
May 23, 2007

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As the summer travel season quickly nears and consumers continue to watch as the cost of filling up gas tanks steadily increase, they may instinctively believe oil companies are getting rich at their expense. This is an understandable, but common misconception whenever prices seem to inflate beyond reason.

Unfortunately, some federal policymakers are all too eager to seize on this frustration and propose so-called solutions that place artificial ceilings on gas prices, often referred to as "price controls," or today's more popular political moniker, "price gouging." Phrases like these should raise red flags, because no matter how well-intentioned at best or politically motivated at worst, history and basic economics teach us price caps ultimately result in harsh unintended consequences, including shortages in the market and unnecessary economic hardships for consumers.

Anyone who remembers the long lines, gas shortages and inflation from the 1970s when pump price were controlled knows this is not a legacy to fall back on.

Despite previous lessons learned and the overwhelming evidence that price controls simply have not and will not work, certain members of Congress again look to shelve the requisite legislative leadership needed for sound energy policies. Rather than help increase domestic refining capacity and reduce U.S.

dependence on foreign oil, they have chosen a purely political strategy. If focused on the former, we could begin to free ourselves from the global price variances of crude oil, by far the greatest and least manageable determinant of gasoline prices.

But why take the hard road to address increasing gas prices or the nation's broader energy challenges when pointing fingers is so much easier?

Consumers should note that while such lawmakers seem preoccupied in their misguided pursuit to label "culprits" in the court of public opinion, they might ask their elected officials to look in the mirror. After all, it is they who have held in place polices that ensured no new refining plant has been built in the U.S. since 1972. Or, that, on average, American consumers pay 46 cents per gallon in combined federal and state taxes.

More recently, spikes in fuel prices during the devastating and tragic 2005 hurricane season have been the primary motivation for "price gouging" legislation. Suspicions continue that producers were profiting from tragedy, but the economic reality is that fluctuations in fuel prices provide basic signals to producers to either increase or decrease supplies. This is true in times of crisis and normal operations.

Because of the massive damage in the Gulf Coast (30 percent of capacity knocked off-line), U.S. energy supply and distribution was severely interrupted. In response, gasoline prices rose to allocate the temporary reduction in available supplies.

Following these hurricanes, the Federal Trade Commission (FTC) investigated claims that prices were manipulated but found no evidence of widespread "price gouging." In fact, over the last several decades, the U.S. Department of Energy (DOE) and the Federal Trade Commission both have investigated numerous regional price spikes. The conclusions have been the same: Gasoline price increases in every case were due to basic supply and demand economics and price variances corresponded directly to available supplies.

Yet, had "price gouging" legislation, such as current proposals by Democrats Rep. Bart Stupak of Michigan and Sen. Dianne Feinstein of California been in place during Hurricanes Rita and Katrina, the ultimate result would have been higher consumer costs and tighter supply. A recent American Council for Capital Formation (ACCF)peer-reviewed economic study reviewed investigations of past gasoline price increases, determining previous track records of efforts to control prices and how laws that penalize supply-based prices during interruptions would affect the size and duration of the shortages, and the resulting costs. In every case, the price increases were due to supply and demand and not withholding supplies.

The study also estimated costs associated with any price controls implemented, as defined under Mr. Stupak's legislative proposal during the supply disruptions that occurred between the September and October 2005, hurricanes would have totaled $1.9 billion. Price controls would have worsened shortages by reducing supplies available to consumers. Imposing criminal charges for price increases would discourage suppliers from seeking replacement supplies (which might cost more), therefore limiting consumers' access to gasoline supply. Further, the very expectation of price controls would tend to discourage refinery investment, resulting in tighter capacity at all times.

No one likes to pay more at the pump. While efforts to prosecute bad actors may be well intended, they smack more of political opportunity than any sound economic solution to our current energy woes. Such misguided and ineffective "price-gouging" laws may play well for politicians in the short term, but will ultimately harm the very consumers they purportedly are meant to protect.

Margo Thorning is senior vice president and chief economist of the American Council for Capital Formation.