Gas' Round Trip

INVESTOR'S BUSINESS DAILY
Posted 8/25/2006

Energy Policy: Gasoline futures, if you haven't noticed, are now 19% off their high — proving again that often the best thing the government can do in the face of a tight market is nothing.

At least, that's been our position through this energy crunch. Sure, tap into the Strategic Petroleum Reserve if there's a short-term disruption in crude oil supplies. But there wasn't.

In fact, crude stocks on hand peaked in June at their highest in eight years. Now they're 2.3% above a year ago.

The temptations we were most afraid of were gasoline price caps and rationing. These have been tried in the past — most notably in the late 1970s. And they've always been a failure.

We predicted that the best way to get through the 2006 driving season in the face of low gasoline supplies and a chronic shortage of spare refinery capacity would be to allow the free market to do its thing.

It worked.

Labor Day is fast approaching, the traditional end to the summer driving season. How did we get through this mini-crisis? With flying colors.

Yes, gasoline broke new high ground. In Los Angeles, where IBD is based, we're still paying over $3 a gallon for the cheap stuff (though we're starting to see $2.95 at certain stations).

But the price of artificial caps would have been far higher: huge lines, shortages, a sense that we aren't in control.

Worse, price caps and rationing do nothing about the underlying problem.

Those who have to produce gasoline at ever-higher cost won't do so if they can't make money at it. The same is true of those who go out and find the oil we use to make gasoline in the first place. When caps and rationing are in place, firms invest less — so prices stay higher, longer.

Right now, gasoline refiners and oil producers have incentives to produce more when prices go higher — despite continuing regulatory hurdles imposed by government. That's why we're seeing prices break right now as the summer driving season ends.

Gasoline stockpiles are 2.7% higher than a year ago. That's still tight, as we weren't swimming in the stuff even then. But there's no shortage.

The Energy Information Administration reported gasoline stockpiles rose 400,000 barrels in the week ended Aug. 18. Market watchers expected a drop of 2.4 million.

We realize there are lots of potential bumps in the road ahead. We're entering hurricane season, and markets are jittery. A surprisingly cold winter could hit crude prices hard. So could bad news from Iran.

But there's a lot of oil and gasoline making its way to the market — even as consumers, faced with higher recent gasoline prices, begin to cut back their use.

Maybe soon we'll be able to hear that familiar American gas station refrain, "fill 'er up," without wondering if it will require a second mortgage to finance it.