Forget Price Gouging: Gas Prices Flow With Market

Houston Chronicle | By Bill Archer and Charles Stenholm

As Texans first and as past members of Congress second, sometimes we are left shaking our heads at the actions of our former colleagues. Despite the disastrous lessons learned in the 1970s when federal price controls were imposed on gasoline, Congress is now set to consider legislation that would bring a return to much of the same failed policies.

This time, however, proposed price control laws are being offered under the guise of protecting Americans against incidents of so-called “price gouging.” Call them what you want, but they are essentially the same thing: bad public policy that will ultimately hurt consumers.

Rather than providing needed legislative leadership to address issues affecting gas prices specifically or our nation’s energy challenges more generally, congressional proponents have instead chosen a political strategy that publicly casts specific individuals and industries as culprits before the American public. They have chosen this path despite all the historic, legal and economic evidence that price controls cannot and will not work, and will ultimately have the exact opposite of their intended purpose.

Hurricanes Katrina and Rita served as the initial impetus of this effort in 2005, and with renewed focus following any subsequent increase in the price of gas since then. In each instance, opportunistic policymakers have wasted no time in charging “price gouging” as the reason. Interestingly, during cycles where gasoline prices decreased, such as last year, apparently so did the political motivation to yell “fire” in the movie theater.

A more objective interpretation shows that the Hurricanes of 2005 did result in increased gasoline prices, but not for the reasons proponents of price controls would like you to believe. Because of the location where these disasters occurred, the nation’s energy infrastructure was significantly damaged, which interrupted the delivery of energy supplies not only in the Gulf region, but also to other parts of the country. In response, gasoline prices rose to allocate the temporary reduction in available supplies.

Higher gasoline prices resulted, stirring questions of whether refiners, distributors and retailers were possibly taking advantage of the situation. As such, the federal government sought to address these concerns. Following Hurricane Katrina, the Federal Trade Commission investigated allegations during the period of the supply interruption and found no evidence of widespread price gouging.

In fact, over the last several decades, the U.S. Department of Energy and the FTC both have investigated numerous instances of regional price spikes. The conclusions have been the same: Gasoline price increases in every case were due to basic supply and demand economics and that price variances corresponded directly to changes in supply. In short, official investigations at every turn have shown that gasoline price increases were not caused by any manipulation of the markets as politically motivated individuals and groups have claimed.

Yet, such investigations have done little to quell the political motivations of those who continue to push misguided “price-gouging” laws. If enacted, legislative proposals, such as Michigan Congressman Bart Stupak’s Federal Price Gouging Prevention Act, would function like controls on gasoline prices. To highlight the economic impact such laws would have on consumers and industry, the American Council for Capital Formation recently unveiled a study reviewing investigations of past gasoline price increases and the results of previous efforts to control prices during supply interruptions. Key results of this study found:

  • Price controls, had they been implemented as defined under current legislative proposals during the supply disruptions that occurred during the 2005 hurricanes, would have totaled $1.9 billion.
  • Price increases were due to the market operation of supply and demand not withholding supplies.
  • Criminal charges imposed for price increases would discourage suppliers from obtaining higher priced replacement supplies, therefore limiting consumers’ access to gasoline supply.
  • Price controls could discourage  refinery investment, resulting in tighter capacity at all times.  Ultimately, price caps will actually result in gasoline shortages, causing unnecessary hardships for consumers and disaster affected regions. Why? Because whether in times of crisis or normal operations, price fluctuations serve as basic signals to producers to either increase or decrease supplies and direct them accordingly. This holds true in all industries.

The current proposal before Congress relies on extremely vague terms, placing retail and wholesale fuel providers in a position to act in ways that would discourage re-supply out of fear of prosecution. Even the failed efforts of the past included specific definitions and detailed enforcement mechanisms. If these were such failures, why would even more ambiguous policies succeed? Simply put, they won’t. Further, in times of emergency such laws would likely ensure even more disastrous consequences, impeding residents from getting the fuel needed to evacuate and potentially hindering recovery efforts of first responders.

Policymakers should also take note that the United States continues to import a significant amount of gasoline from foreign producers. In the event price caps are triggered, foreign producers will simply sell their products elsewhere at higher market prices. Price controls don’t work; never have, never will. Proposed “price-gouging” laws would return the United States to the horrors of gasoline price controls witnessed under the Carter administration and effectively harm the very U.S. consumers such policies are meant to protect. What Congress seems to learn from history is that it never learns from history.

Archer is the former chairman of the House Ways and Means Committee and Stenholm is the former ranking member of the House Agriculture Committee. Both serve as members of the American Council of Capital Formation’s board of directors.