Gasbags

The Wall Street Journal | By Bill Archer and Charles Stenholm

Congress does some things very well. Yet the emotional politics of today can often transform well-intentioned efforts into bad public policy with unintended consequences.

Current Congressional proposals to address alleged practices of gasoline “price gouging” serve as a perfect example. Government intervention to control prices, reduce demand or increase supply, however temporary, will create more instability in the marketplace, not less. We need producers and refiners to do what they do best—keep America moving. We cannot afford to subject them to a new labyrinth of regulatory and legal restrictions that would impede critical delivery fuels or expansion of domestic refining capacity.

In 2005, Hurricanes Katrina and Rita caused significant damage to the energy infrastructure of the Gulf Coast and interrupted the delivery of energy supplies nationwide. Gasoline prices rose, as does the price of any good in sudden short supply. These higher prices stirred compassion for those in obvious distress and angered those who thought refiners, distributors and retailers were “taking advantage” of the situation.

And so the Federal Trade Commission investigated. It found no evidence of widespread price gouging. In fact, in the last several decades, the FTC and the Department of Energy have investigated numerous instances of regional price spikes. The invariable conclusion, in every case, was that gasoline price increases were due to the normal, market operation of supply and demand. The reality is that there has never been a legitimate finding that gasoline price increases were caused by any manipulation of the markets.

Nevertheless, the lingering if utterly misguided perception that “price gougers” were ripping off the public remains deeply embedded. And so, in anticipation of the summer months when more Americans take to the road, Congress is set to consider proposed federal legislation to make “price gouging” illegal. (Acynic might note that such efforts were not as politically attractive when gas prices were decreasing in the latter half of 2006.) If enacted, proposals such as the Federal Price Gouging Prevention Act recently unveiled by Rep. Bart Stupak (D., Mich.), would function like controls on gasoline prices, according to a recent study by the American Council for Capital Formation. The study, “Effects of Proposed Price Gouging Legislation on the Cost and Severity of Supply Interruptions,” reviewed investigations of past gasoline price increases, and the results of previous efforts to control prices. Key results:

  • The estimated costs associated with 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.
  • In every case, price increases were due to the market operation of supply and demand—not withholding supplies.
  • Imposing criminal charges for price increases would discourage suppliers from obtaining higher-priced replacement supplies, therefore limiting consumers’access to gasoline supply.
  • The expectation of price controls could discourage refinery investment, result-History and basic economics teach us that price caps result in shortages in the market and hardships for consumers. Anyone who remembers the gas shortages and inflation from the 1970s knows that this is not a legacy to fall back on. The reality is that fluctuations in fuel prices serve as basic signals to producers to either increase or decrease supplies. This holds true in times of crisis as well.

Even when price controls have been designed carefully and included very specific rules defining legal prices and specific enforcement mechanisms, they have proven to be failures of enormous consequence. In contrast, current legislative proposals rely completely 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. This would likely cause increased shortages, impeding residents in emergencies from getting the fuel the need to evacuate and potentially hindering recovery efforts of first responders.

In addition, the fact that the U.S. continues to import a significant amount of gasoline from foreign producers should give great pause to legislators seeking to impose price-gouging legislation. In the event price caps are triggered, foreign producers will simply sell their products in other countries where they can get higher market prices—effectively harming the U.S. consumers the controls were meant to protect. Mr. Archer (R., Tex.) is the former chairman of the House Ways and Means Committee . Mr. Stenholm (D., Tex.) 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.