Oil Price is Right

From IBD: What would a conservative do about oil prices? I can tell you this, windfall profit taxes wouldn't be in the mix.


Posted 5/3/2006
Oil: When it comes to the concept of gouging, Congress does not know what it's talking about. Such economic ignorance can do real damage, as those who lived through the '70s know.

In its zeal to appear to be doing something about the high cost of gasoline, the House on Wednesday voted 389-34 in favor of a bill to ban the sale of crude oil, petroleum products and biofuels "at a price that constitutes price gouging." What does this mean?

The House has no idea, as its newly passed bill makes clear. On the question of defining what it is to "gouge" or charge an unfair price, the measure hands this homework to the Federal Trade Commission, which is given six months to produce a definition. Good luck with that.

To an economist, there's no such thing as "gouging" in a market that is free and efficient, and the oil and oil-product markets meet that standard. They have been probed often for collusion and other forms of manipulation, and they have come up clean. Charging the going rate under such conditions is inherently fair. The price is right as long as it's determined by the free market.

Economists don't call the shots in a democracy, of course, and public anger over high prices can force even the most sensible politicians into a corner. Do they try to educate the public — and risk losing office in the process — or do they go with the flow and try to do as little damage as possible? If it's the latter, they can limit the market interference by making sure any price-gouging rule is limited in time and place to some short-term crisis, like a hurricane.

Unfortunately, the House bill is not designed to fade away. If it were put on the books, it would eventually create price rules of some kind, with stiff penalties for violators and potentially rich publicity for prosecutors. The net effect would be a new price-control regime, and millions of American motorists remember how the last such regime went.

It's a fundamental rule of markets that setting an artificially low price for something will lead to less production — an artificial shortage. We don't have gas shortages. We'll have them, as in the 1970s, if oil companies, refiners and station owners are forced through regulation or threat of fines to sell below the market price.

Even if Congress thinks it's not serious about price controls, it's already done some damage by endorsing the idea that something — or someone — other than supply and demand may be to blame for the gas-price spike. In effect, it's drawing attention away from the steps that should be taken and blaming the usual suspects instead.

Congress could take several steps to hold down gasoline prices in the long term (short-term fixes are just illusory). All are related to supply. It could open the Arctic National Wildlife Refuge. It could also allow drilling in potentially oil-rich offshore zones of the eastern Gulf of Mexico. It could revise clean-air rules to simplify the list of required fuel formulations and cut refining costs.

Another positive step would be to streamline the rules for building new refineries. The House voted Wednesday on a bill do just that, but the measure was offered under a rule barring amendments and it failed to get the two-thirds needed to pass. This was not a good sign. It showed Congress balking at even a modest effort to pump up the supply of gasoline while enthusiastically voting for one of its worst ideas.