NJ Business Matters: The Blog of the CIANJ

Gas Prices The Result of Supply and Demand, Not Price Gouging

Bloomberg News is reporting that yet another investigation has found that last year's gas price increases were not the result of price gouging. That's not shocking news for those who follow little things like supply and demand, but our populist friends and their enablers have continued to push the myth that the omnipotent "big oil" conspired to increase prices.

As Bloomberg reports,

Gasoline price increases in the spring and summer of 2006 were not the result of antitrust violations by oil companies or refiners, the Federal Trade Commission said Thursday.

"The 2006 price increases were caused by a confluence of factors reflecting the normal operation of the market," the commission said in a report to President Bush.

Those factors included higher prices for crude oil and ethanol, greater demand for fuel during the summer driving season as well as lingering refinery outages from Hurricanes Katrina and Rita. Reduced capacity while refinery owners switched to using ethanol as a fuel additive also contributed.

The full report is available here.

Money for Nothing

Gas prices are high. So high, that yesterday the owner of your blogger's favorite pizzeria had to explain to a customer - repeatedly - why gas prices forced him to charge more per slice. And when prices get that high, Congress always seems to feel it has the power to step in and alter the meeting place of supply and demand.

Once they were through passing "price gouging" legislation that made it illegal for companies to charge"unconscionably excessive" prices, "tak[e] unfair advantage of unusual market conditions," and "increase prices unreasonably" during an emergency, the next target was auto makers. Rather than letting the free market decide how efficient a car your average American wants to drive, the Senate passed legislation that would increase the minimum vehicle mileage average to 35 mpg by 2020.

The Washington Post explains that leadership in the House of Representatives is considering the same,

As the price of benchmark West Texas crude oil topped $70 a barrel for the first time in 10 months, House Speaker Nancy Pelosi (Calif.) yesterday affirmed her support for the tougher fuel-economy standards recently passed by the Senate.

And after a news conference touting energy measures recently approved by 11 House committees, Majority Leader Steny H. Hoyer (Md.) said such standards -- currently missing from the House measures -- would be introduced in time to resolve differences between House and Senate energy legislation later this year.

What they don't talk about is the cost of such a change. Fortunately, Charles Krauthammer dedicates this column on Real Clear Politics to the issue,

[T]o quote Sen. Dianne Feinstein precisely: "What the China situation, or the other countries' situation, shows is that these automakers, in all of these countries, build the automobile that the requirements for mileage state. And they don't fight it, they just do it."

Yes. That is how things work in Communist Party dictatorships. It is odd to hold up China as a model of corporate-government relations. It is also poor salesmanship. Just a week after Feinstein made that statement, the Brilliance BS6 sedan -- "a car with which [China] wanted to conquer Europe's automobile market" -- failed a German crash test so miserably that it may be banned from Europe, reported the European news agency AFX News. "It was the second time in less than two years that a Chinese-made car has failed the test, following the spectacular failure of the Landwind sport-utility vehicle made by Jiangling Motors 18 months ago."

You get what you pay for. When you build lighter cars with more fuel efficiency, you know that ultimately -- even with the best (let alone Chinese) technology -- safety is compromised. That happened three decades ago when U.S. mileage efficiency rose dramatically in response to the oil shocks of the '70s. It will probably happen again.

Now we may, as a society, decide that the trade-off is worth it. We may reason that fuel inefficiency leads to dependency on foreign oil which in turn leads us to lives lost in other ways -- such as wars to defend our interests in the oil-rich Middle East and elsewhere. But what we cannot deny is that there are trade-offs. What is fundamentally wrong with the energy bill the Senate passed last week and with the debate leading up to it is the chronic, almost pathological, refusal to recognize that there are such trade-offs.

That pathological refusal equates to a lack of full understanding by the public - especially when the mainstream media fails to point it out.

Energy Policy, Price Controls and...Of Course...Anti-Gouging

The Heritage Foundation has published a hard-hitting white paper on the Senate's proposed energy plan (S.1419) which is chock full of higher energy prices, price controls and pandering.

Some members of Congress are convinced fuel prices are too high and are attempting to legislate them down. The trouble with that is you cannot legislate against the law of supply and demand. Fuel prices currently sit at the intersection of the two. By forcing prices artificially low, Congress would have the perverse effect of outstripping supply. That leads to dry pumps and long lines. You may remember the last time we tried this.

Despite the economic logic, and the fact the Federal Trade Commission (FTC) found there was no "price gouging" during the aftermath of Hurricane Katrina, the Senate feels the need to do something. As the Heritage Foundation points out,

Ironically, the Federal Trade Commission (FTC), the very agency charged with implementing the price-gouging measure, is on record stating that such legislation is a bad idea. The FTC has stated that "our examination of the federal price gouging legislation that has been introduced … indicates that the offense of price gouging is difficult to define."[8] The FTC adds that "the lack of consensus on which conduct should be prohibited could yield a federal statute that would leave businesses with little guidance on how to comply and would run counter to consumer' best interest."[9]

The FTC concludes that a price-gouging law that does not account for market forces would be counterproductive. "Holding prices too low for too long in the face of temporary supply problems risks distorting the price signal that ultimately will ameliorate the problem," and that such laws create a risk that "wholesalers and retailers will run out of gasoline and consumers will be worse off."[10] Congress should not ignore FTC's concerns about price-gouging legislation.

It's almost as if Congress wants you to forget two things they have done to increase gas prices: a tax structure that means the government earns more per gallon than oil companies and an ethanol mandate that has failed to reduce emissions but succeeded in driving up gas and grocery prices.

Fair Question

John Stossel has a bit of a field day following the House of Representatives' passing of an impossible to interpret "anti-gouging" bill.

At a recent press conference Sen. John Kerry was upset as he snarled, "Oil companies in America are reporting record profits. Record profits."

When did profit become a dirty word?"

Even if gasoline prices set no record, Congress surely set a record for inanity. What else are we to say about an anti-"gouging" bill passed last month by the House that would make it a crime to charge "unconscionably excessive" prices, "tak[e] unfair advantage of unusual market conditions," and "increase prices unreasonably" during an emergency?

And Congress should know better. After Hurricane Katrina, Congress had the Federal Trade Commission investigate price gouging, and so the FTC studied price spikes going back years. But it found "no instances of illegal manipulation."

Head on over to RealClearPolitics for the full article.