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Of Public Interest July 2007 Anti-Price-Gouging Laws Will Only Cause More Pain at the PumpBy Dr. Don Racheter and Dr. Margo Thorning*
With the summer travel season about to get underway, Iowa consumers continue to watch religiously the price of gasoline per gallon on a daily basis. They may instinctively believe that oil companies are getting rich at their expense. This is a common misconception whenever prices seem to inflate beyond recent levels. 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, “anti-price-gouging” laws.
Phrases like these should raise red flags, because no matter how well-intentioned at best, or politically motivated at worst such actions are, history and basic economics teach us that price caps ultimately result in unintended consequences (as Richard Nixon finally learned), including shortages in the market and unnecessary economic hardships for consumers. Anyone who remembers the long lines, gas shortages, and inflation when price controls were instituted on gasoline in the 1970s knows that 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, Congress is again talking about such ideas instead of what would constitute sound energy policies based on supply and demand. Rather than helping to increase domestic refining capacity and domestic drilling to reduce our dependence on foreign oil, they instead have chosen a purely political strategy void of economic fundamentals. 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 gas 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 lawmakers seem preoccupied in their misguided pursuit to label “culprits” in the court of public opinion, they should be looking in the mirror considering that, on average, American consumers already pay 42 cents per gallon in combined federal and state taxes per gallon of gasoline purchased!
Spikes in fuel prices during the devastating and tragic hurricane season of 2005 have been the primary motivation for “anti-price-gouging” legislation. Suspicions continue that producers were profiting from tragedy, but the economic reality is that fluctuations in fuel prices serve as basic signals to producers to either increase or decrease supplies. This holds true both in times of crisis and during normal operations. Because of the massive damage that occurred in the Gulf Coast area to refining and distribution equipment (30 percent was estimated to be knocked offline), energy supply and distribution was severely interrupted throughout the nation. In response, gasoline prices rose to allocate the temporary reduction in available supplies.
Following these hurricanes the Federal Trade Commission (FTC) investigated allegations of price manipulations, but found no evidence of widespread “price gouging.” In fact, over the last several decades, the U.S. Department of Energy (DOE) and the FTC both have investigated numerous instances of regional price spikes. The conclusions have always been the same: gasoline price increases were due to basic supply and demand economics, and price variances corresponded directly to available supplies.
Yet, had “anti-price-gouging” legislation now being supported in Congress been in place during Hurricanes Rita and Katrina, the ultimate result would have been higher costs for consumers and even tighter supplies. A recent American Council for Capital Formation (ACCF) 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 the operation of supply and demand and not from producers or middlemen withholding supplies.
Estimated costs associated with price controls (as defined under current legislative proposals), had they been implemented during the supply disruptions that occurred between the September and October 2005 hurricanes, would have totaled $1.9 billion. Price controls would have made shortages worse 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. Yet, while such misguided and ineffective “anti-price-gouging” laws may play well for politicians in the short-term, they will ultimately harm the very consumers they are purportedly meant to protect.
*Dr. Don Racheter is President of Public Interest Institute (PII) in Mount Pleasant, Iowa (www.limitedgovernment.org ). Dr. Margo Thorning is Senior Vice President and Chief Economist of the American Council for Capital Formation (ACCF) in Washington, D. C. (www.accf.org). The views expressed are those of the authors and not necessarily those of PII or ACCF.
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