Wednesday, September 28, 2005
By BERNARD L. WEINSTEIN
KNIGHT RIDDER NEWSPAPERS
Though gasoline prices have retreated from record highs in recent days, cries of "price-gouging" are still heard in many quarters.
Attorneys general in 45 states have banded and called for a federal investigation of high gas prices. The state of Hawaii has imposed a cap on wholesale gas prices, and some members of Congress are talking about reviving price controls and the windfall profits tax.
Although no one is happy about paying $2.80 to $3 for a gallon of regular unleaded, imposing price controls would do more harm than good -- a lesson we learned painfully in the 1970s.
But unlike that oil crisis, the current one is not a result of war or boycott but rather a result of high demand and not enough supply.
"Price-gouging" is not a term found in economics textbooks or dictionaries. Rather, it is a phrase used by politicians to assign blame when the price of a product jumps sharply and quickly, especially if this product is considered to be a necessity, like gasoline.
Global demand
Because of extremely strong global demand, crude oil and gasoline prices already had risen about 30 percent this year. In the aftermath of Hurricane Katrina, which severely disrupted the energy supply chain, gasoline prices jumped another 20 to 25 percent.
Did some retailers take advantage of supply shortages to increase their margins in the face of panic buying? Perhaps. But overall, the higher prices have had the desired effect of dampening consumption so as to bring supply and demand back into balance. Just in the past two weeks, U.S. gasoline consumption has fallen by 5 percent.
Here's a simple example of how price changes help us deal with shortages.
A big storm off the New England coast destroys thousands of lobster traps, so that I have to pay $12 a pound for live lobster at my local fish market as compared with $7 a pound before the storm.
No one would call this "price-gouging." The higher price simply serves to allocate the limited supply of live lobsters until the lobstermen can reset their traps.
Similarly, the higher price for gasoline and other refined products is helping to allocate a limited supply until the Gulf Coast's energy infrastructure is fully operational.
Instead of pointing fingers at alleged price-gougers, politicians and pundits should be addressing the imperative to upgrade, expand and modernize our nation's energy industry while also stressing renewed efforts at energy conservation.
For example, U.S. refining capacity has expanded during the past two decades, but not enough to keep pace with the increase in gasoline consumption from about 6.5 million barrels per day to 9 million barrels per day.
No surprise, then, that gasoline prices jumped when 10 percent of America's refining capacity went off-stream after Katrina.
Historically, refining has been the least profitable part of the energy business, due to low returns on investment and excessive regulatory and environmental red tape.
That's the main reason that no new refinery has been built in the United States for more than 30 years. If we are to encourage expansions in domestic refining capacity, Congress must make the requisite changes to law and regulation.
New energy exploration
Similarly, we must create a regulatory structure that stimulates, rather than impedes, new energy exploration and production in coastal areas and the Alaskan wilderness. The energy industry has more than adequately demonstrated that it can operate in these environmentally sensitive areas without damaging the indigenous flora and fauna.
Global energy consumption, especially for oil, will continue to escalate as China, India and other fast-growing economies register their demand in the marketplace.
As stated in a recent ad paid for by Chevron, "It took us 125 years to use the first trillion barrels of oil. We'll use the next trillion in 30."
The challenge for America, then, is to be prudent in our use of energy resources while expanding our domestic production and processing capabilities. Price controls and government-mandated allocations are not the way to achieve these objectives.
X Bernard L. Weinstein is a professor of applied economics at the University of North Texas in Denton. He wrote this for the Fort Worth Star-Telegram. Distributed by Knight Ridder/Tribune Information Services..