Is Price Gouging the New WMD?

The Bush administration appears poised to make war on free enterprise – this time the oil industry – and the bogeyman is "price gouging." Our supposedly conservative president, who recently complained that Americans are "addicted to oil," is now responding to political pressure to use the Imperial Presidency to "do something about" gasoline prices. Much as his military adventure in Iraq was predicated on the widely-believed but largely unproven existence of weapons of mass destruction, the excuse for attacking the free market for gasoline and other oil products is the similarly illusory "price gouger" whom we are to believe is arbitrarily raising the price of gasoline at the pump. As usual, however, the only entity arbitrarily raising prices beyond the market-dictated (i.e., best-available) price is the state. Unable or unwilling to acknowledge this, the president is ready to attack free buyers and sellers for political gain.

The president's attitude was evident when he parroted the "addicted to oil" line popularized by the "environmental," anti-private-property movement. To classify Americans' desire to purchase a relatively inexpensive, widely available fuel as a means of traveling to work, to school, to the grocery store, etc., as an "addiction" told us that our president had little if any understanding of economic reality. That he was willing to attack purchasers for making free choices to better their lives signaled that he would soon attack the other side of the market exchange, the suppliers, and so he has.

The suppliers of oil – those entities that risk their own property for a chance to profit from delivering a needed and desired good – will be thrown to the mob as "price gougers" and dragged through various investigations, hearings, and other show-trial-type events so that the Republican Party can appear to the natural constituents of the Democratic Party to be the Robin Hood of their dreams. But as is usual with abandonment of even a pretense of principle, this will simply alienate conservative voters without appealing to socialist ones. Democrats will still vote for Democrats, no matter how well the Republicans pretend to be just as good at redistributing wealth. No one trusts a traitor, and the something-for-nothing crowd will remain loyal to the party that has always had that scam as its guiding principle.

But despite the futility, Bush and those Republicans who hope to still be in Congress in 2007 seem ready to stubbornly stick to this plan when, instead, they could champion the market and actually lower the price of gasoline by simply dismantling the stumbling blocks the government has placed in the way of suppliers' ability to meet the needs of willing buyers.

The first and simplest action should be to rescind the taxes on gasoline that add (state and federal combined, but easily eliminated at the federal level by virtue of the Commerce Clause) an average of about fifty cents per gallon to the price of gasoline at the pump.

The second initiative should be to remove restrictions on the building of refineries. Refining plants are the "choke point" that is currently driving down the supply of gasoline and thus resulting in higher prices as the market does what it is supposed to do – allocate a scarce resource among many willing buyers on the basis of who wants it the most. But environmental and other regulations make it all but impossible to build more refineries to process the oil that remains easily available on the world market.

A third remedy would be to eliminate the requirement that refiners produce fifty different blends of gasoline for the fifty states. This all but destroys the ability of gasoline producers to take advantage of economies of scale and adds an unknowable amount to the price of each gallon.

Each of these things represents a hurdle that government places in the way of suppliers. Despite these handicaps, the remaining amount of freedom in the market ensures that gasoline is available in every corner of the United States at prices well below those paid in jurisdictions in which even more knee-capping of the market is practiced (a gallon of gas in Denmark currently sells for around six dollars). The relationship between these fetters placed on the market and higher-than-necessary prices is well-known and cannot legitimately be disputed. Yet when the state is pressured to use its power to lower prices, it does not even consider remedying its own price-gouging, but instead accuses suppliers that are trying to survive in a competitive market of doing something they are entirely unable to do; i.e., arbitrarily raise prices.

The "evidence" of this gouging is record profits by oil companies. No thought is given to the years in which oil companies suffered losses. In those years, they took risks that are paying off today. Perhaps more importantly, however, is that each and every one of us should be ecstatic that the oil industry is doing well. This signals other market players that there is money to be made, and invites them to enter the market and to compete with the existing firms.

But here, too, the hand of the state is held up as a stop sign. The web of laws and regulations governing this industry constitute nearly insurmountable barriers to entry into the oil and gasoline business, leaving us with less competition and, again, higher gasoline prices than would be produced by more competition.

For the state to accuse gasoline producers of price gouging suggests that the state believes price controls to be the proper role of government. Is there anyone who can so much as spell the word "economics" that does not yet understand that price controls bring shortages, always and everywhere? If so, they are all in Congress and the White House. The counter one hears is that the oil companies are not operating in a free market; that they have received government protection from competition (the afore-mentioned barriers to entry, to name just one). This is true. But the state can cure its past mistaken and harmful protectionism only by dismantling it, not by adding another layer of distortion of the market.

Instead, however, the state is beginning its search for the wily Price Gouger, the beast that, if it existed, could as soon charge us $100 for a gallon of gas as three, but for mysterious reasons does not do so. The existence of these price gougers seems as likely as those WMD that failed, for the most part, to materialize in Iraq and would not have, had they existed, provided sufficient justification for war. If a price-gouger did exist, the market would surely punish him better than the government ever could. Allowing the market to police itself would not, however, distract voters in 2006 from the monumental mistakes of the tax-and-spend Republicans, so we may all be assured that the hunt will continue.

April 27, 2006