November 27, 2005
Falling
Pump Prices Prove the Market Works After All
By Ben
Lieberman
Few vacationers paying $3 per gallon on their way to the beach
last Labor Day could have imagined gas prices dropping 80 cents
by the time they headed out to Grandma's for Thanksgiving. But
it has happened, and if trends continue, the national average
could dip below $2 per gallon before Christmas.
While most
politicians are still obsessed with the price run-up immediately
after Hurricane Katrina, there are far more important lessons
to be learned from the subsequent decline.
Katrina hit
the Gulf Coast on Aug. 29, and the resulting combination of reduced
oil production, knocked-out refineries and closed pipelines sent
gasoline prices skyrocketing nearly 50 cents per gallon in a week.
At its worst on Sept. 5, the national average hit $3.06 per gallon.
But by week
two, prices dipped below $3 as oil companies began fixing damaged
energy infrastructure and overseas gasoline shipments started
arriving. And, with the exception of a smaller spike caused a
few weeks later by Hurricane Rita, the price at the pump has been
falling ever since.
The lesson
is that markets work. Katrina-induced supply shortfalls caused
an immediate jump in prices, which quickly triggered a series
of self-correcting actions. The additional profit motive sent
the oil industry scrambling to make repairs even before the floodwaters
had receded, bringing supplies back online very quickly. Similarly,
the high prices attracted extra gasoline from Europe and elsewhere
to the American market.
In addition
to encouraging more supplies, the price rise also induced the
public to cut back on unnecessary driving, temporarily bringing
down demand.
Thanks to
this market response, the pain at the pump didn't last long.
The price
decline also should help dispel the post-Katrina theories about
Big Oil manipulating prices. After all, if the oil companies could
create $3 gas whenever they wanted, why would they do so for only
a week? And why would they allow declines averaging a cent per
day for the past 10 weeks? The steadily plummeting prices after
the hurricane season should put such speculation to rest.
Too many
in Congress still complain about Labor Day gas prices and ignore
the subsequent decline and reasons behind it. Several bills seek
to impose price controls and windfall profits taxes, which experience
shows would do more harm than good.
Price controls
were tried in the 1970s, and they were an unmitigated disaster.
By trying to push prices down below market levels, these federal
controls discouraged the forces that lead to increased supply
and decreased demand. Thus, rather than a brief price spike being
quickly alleviated, price controls served only to prolong the
agony. We saw numerous gas shortages lasting for months at a stretch
during the 1970s, and we would see them again if price controls
were brought back.
Similarly,
the windfall profits tax, designed to confiscate oil-company profits
in a time of high prices, actually would discourage producers
from bringing badly needed fuel to market during a crisis. Few
oil companies would go to the difficult and costly lengths to
rush supplies to a market that sorely needs it if the government
would take most of the profits for doing so.
In other
words, Washington's favorite solutions wouldn't have helped had
they been in place after Katrina. Quite the contrary, they likely
would have derailed the price decline.
Nonetheless,
there are things Congress should do. Markets work, but only to
the extent they are not hampered by federal laws and regulations.
Thus, the government should consider streamlining the many burdensome
regulations that make it difficult to expand oil-refining capacity.
Congress should allow access to domestic energy supplies that
are currently off-limits, including the estimated 10 billion barrels
of oil in Alaska's Arctic National Wildlife Refuge.
But other
than that, Washington should give thanks for the remarkable and
ongoing drop in the price at the pump — and avoid doing
anything that would get in its way.
Lieberman is a senior policy analyst at the Heritage
Foundation, a Washington-based public policy research institute.
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