November 15, 2005
Ignoring Economics II
A newspaper headline -- "Lawmakers Struggle to Define Gasoline
Price 'Gouging'" -- shows how phony the current Congressional
jihad against the oil companies is. "Price gouging" is one of
those phrases that evoke strong emotions but have no definition.
Where particular states have passed laws against "price gouging,"
their different definitions reveal how slippery and arbitrary
the concept is. Kansas attempts to define price gouging as selling
at prices more than 25 percent higher than they were before some
disaster. Georgia makes it illegal for prices to rise after the
state government has declared a state of emergency, unless the
seller can prove that his costs have gone up.
What all this boils down to is that prices higher than what observers
are used to are called "gouging." In other words, prices under
normal conditions are supposed to prevail under abnormal conditions.
This completely misunderstands the role of prices.
Why do prices exist at all? To cause things to be produced and
made available to the public -- and to cause consumers to limit
how much they consume. Why then do prices suddenly shoot up? Because
there is either less of a supply available or more of a demand,
When hurricanes knocked out both oil drilling sites and refineries
around the Gulf of Mexico, there was suddenly less supply of oil.
That meant higher prices and higher profits.
What do higher prices do? Force people to restrain their own purchases
more so than usual. What do higher profits do? Cause more money
to be invested in producing whatever is earning higher profits,
and this in turn expands output. Isn't a larger supply of oil
and a reduced consumption of it what we want?
Whenever there have been sharp rises in gasoline prices, whether
nationwide or locally in California, Senator Barbara Boxer has
loudly demanded an investigation of the oil companies. These repeated
investigations over the years have repeatedly failed to turn up
anything other than supply and demand.
The real irony is that it has been precisely liberals like Barbara
Boxer who have been the chief obstacles to increasing the supply
of oil because they are dead set against drilling for oil in more
places and against building more refineries.
When you refuse to let supply rise to meet rising demand, why
should you be surprised -- much less outraged -- when prices rise?
Yet there was Senator Boxer on nationwide TV, decrying the high
salaries of oil company executives, who are making perhaps half
of what a number of baseball players make or a tenth of what movie
stars make. The insinuation is that their salaries and oil company
profits are what drive up gasoline prices. But there were no hard
facts to back up either insinuation.
Given the enormous sums of money involved in the production of
oil, even if all the oil company CEOs worked for nothing, there
is no hard evidence that this would be enough to reduce the price
of gasoline by even one cent per gallon. As for oil company profits
-- representing "greed," as the Barbara Boxers call it -- these
profits per gallon of gas are much less than federal taxes per
gallon of gas. But the government is never called "greedy" by
These political circuses have a cost that can be even greater
than the high cost of gasoline.
We went through all this before, back in the 1970s, when oil company
executives were also hauled up before Congress and denounced on
TV by politicians. Inflammatory but vague and unsubstantiated
charges went flying hither and yon in the media.
This demonization of oil companies made it politically inconvenient
to remove price controls on oil when other price controls from
the Nixon administration years were repealed.
The net result was that the shortages which price controls produce
disappeared for other things but remained for gasoline. Motorists
had trouble finding gasoline and sometimes spent hours waiting
in long lines at filling stations. This was the hidden cost of
Anyone nostalgic for those days of waiting in gasoline lines,
which sometimes reached around the block, can jump on the bandwagon
for gasoline price controls or other laws to crack down on "Big
Oil." Just be aware that there is a cost. There is no free lunch
-- and no free demagoguery.
2005 Creators Syndicate