Advancing a Free Society

Bad News on Gasoline Prices–What Government Should Do in Response

Sunday, April 24, 2011

As gas prices in the United States continue their relentless march upward, the political question of the hour is what, if anything, the United States government should do about the situation. The issue is of course not a new one. Whenever international instability threatens the supply of oil, we follow the lead of Captain Louis Renault in Casablanca, and round up the usual suspects. Our lot is a painful Congressional hearing in which indignant Congressional figures berate oil company executives for responding to supply conditions, only to ask the Federal Trade Commission once again to launch a fruitless investigation.

Those folks should save their energy for a more useful activity. The simple explanation for the increase in prices is the constriction in supply. As the supply curve moves upward, the quantity of oil sold goes down and its price goes up. If demand increases with the prospect of hoarding, the price could go higher still.

There is no question that the increased scarcity brings with it increased hardship. But the real question is not whether things are worse because of external changes, but whether government can do anything constructive to counter the situation. And the answer is the same as it always is: no. There is no massive conspiracy to use world turmoil to create hidden cartels. Oil is fungible, and there are too many players in motion at any one time for this scenario to be credible.

In fact, the prosaic explanation for our national distress goes back to the reason why we have markets in the first place. A market is the only mechanism that allows goods to be bought and sold without having to listen to tales of woe by individual sellers and buyers. Each seller deserves more money for his goods. Each buyer should pay less. It is indeed the case that wealth is not a perfect proxy for utility. But neither is the extensive administrative action that is needed to sort through the literally millions of mini-conversations to determine which stories should be heeded and which should be ignored.

Markets cut out those tales of self-pity. The higher prices force people to put their money where there mouth is. More often than not, those who bid the higher prices have the greater needs. Everyone therefore has an incentive to conserve on resources before entering the market. The contractions in supply lead to an orderly increase in prices which allow the nation to avoid the senseless queues that accompanied price controls in the wake of the 1973 Arab-Israeli War.

There are of course good political reasons for Presidents and Congressmen to wax indignant about how rich corporations rob wealth from poor consumers. But if they want to do some good, they should start to think about other impediments that alter the price of oil, from overly restrictive drilling restrictions to high taxation levels.

These reforms should not depend on whether the times are good or bad. They depend only on a clear recognition that the proper taxes on gasoline should reflect their negative externalities, e.g. pollution, which should be regulated no matter what the conditions of supply and demand on the ground.

The pity of the situation is that our deep commitment to economic meddling shows that the United States government has not lost its magic touch: the ability to spend public resources on pointless grandstanding designed to make a once great nation poorer than it needs to be.

(photo credit: Joel)