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many critics of President Bush's energy plan, the cause of today's
energy problems, particularly rising gasoline
prices, is
something called "price gouging." And what is that?
"We know
that big oil has played a role in the price spikes and we know they
are making business decisions to maximize their profits," said
Rep. Jan Schakowsky (D., Ill.) recently.
"Powerful
oil interests manipulated markets to limit supplies," said
Sen. Paul Wellstone (D., Minn.). "I call that price gouging."
Whoa! First
of all, maximizing profits is what every business tries to do. This
is not some kind of evil, anti-social practice but, in fact, the
mechanism that provides us with the necessities and the joys of
life. As Adam Smith wrote in 1776, "It is not from the benevolence
of the butcher, the brewer or the baker that we expect our dinner,
but from their regard to their own interest. We address ourselves,
not to their humanity, but to their self love."
How do businesses
maximize their profits? Certainly, not by "limiting supplies,"
as Sen. Wellstone suggests. It's true that cutting supply in the
face of constant or increasing demand raises prices, but cutting
overall supply is rarely an option for a business. Monopolists and
cartels (yes, including the oil cartel led by Saudi Arabia) occasionally
get away with it, but not for very long.
The petroleum
industry is viciously competitive — at the wholesale and at the
retail level. Motorists, for example, flock to a gas station that
cuts its prices a few cents below the station down the street. The
Value Line Investment Survey lists 25 integrated oil companies,
from Amerada Hess to Valero. Have they all colluded to cut supply
and raise prices? Nonsense.
In fact, the
history of the oil industry is a history of exploration and investment
— the quest for more supply, not less. For example, according to
Value Line, capital spending by ExxonMobil totaled more than $50
billion between 1995 and 2000. Chevron last year had a cash flow
of $8 billion and plowed $5 billion of that back into capital investments
to find and produce oil and natural gas.
The truth is
that, as a result of this emphasis on supply (and on cost-cutting
high technology), gasoline prices have been remarkably steady, adjusted
for inflation, over the past 15 years despite big increases in demand.
In 1979 and 1980, a gallon of super unleaded gas shot up to $1.50
but by 1986, it had fallen to 50 cents (in 1979 dollars). Since
then, the price, adjusted for inflation, has bounced between 50
cents and 80 cents, with the biggest spike coming during the Gulf
War, with the threat of severe supply constraints.
Yes, prices
have risen, but do increases amount to "gouging"?
Wellstone and Schakowsky hitch their claims to a statement by the
Federal Trade Commission chairman, Robert Pitofsky, that "there
were some strategic choices by oil companies designed to maximize
profits that contributed to the temporary price increases."
But what Wellstone
and Schakowsky conveniently ignore is the rest of Pitofsky's statement:
"Most of the causes were beyond the immediate control of the
oil companies. ... Once the magnitude of the price increases became
apparent, several oil companies moved aggressively to bring supply
into the Midwest market, and the price spike was eliminated."
In short, profit
maximizing helped solve the problem. A basic economic tenet in free
markets is that, when prices rise, firms rush to boost production
to take advantage of the situation. The increased supply that results
then reduces prices.
As Orson Swindle, a Republican appointee to the commission, added:
"The bottom line is that the problems in the Midwest were caused
not by antitrust violations — of which there is no evidence — but
by a combination of the EPA requirement and unforeseen market circumstances.
Ultimately, the market worked to correct the situation. These conclusions,
and not certain between-the-lines insinuations, should be the overarching
message of the Final Report."
A three-year
investigation into Western gasoline prices that the FTC completed
earlier this month drew the same conclusion: Industry collusion
— the only solid basis for claiming that price gouging had occurred
— played no factor.
So what is
the real source of gasoline price increases if it isn't price gouging?
As Swindle indicated, look to government rules and regulations.
Sure, crude
oil price increases by the OPEC cartel have had a temporary impact.
But the Democrats' solution last year — to threaten some OPEC nations
friendly to the United States with cuts in aid — only plays into
the hands of OPEC nations not so friendly to us. A better way to
pressure OPEC on prices is to remove impediments to affordable energy
development here — to boost domestic supply.
Past Congresses
and the Clinton administration have put large swaths of natural
resources off limits. Whatever sense that may have made in the past,
new oil and gas drilling techniques have substantially reduced the
environmental damage drilling can cause. Congress needs to rethink
the outdated restrictions, as Bush suggests.
Likewise, as
much as it may appall Mr. Wellstone, the conflicting, confusing
and damaging rules for reformulating gasoline need to be brought
in line with common sense.
Today, more
than 30 different reformulated fuels are required to serve various
parts of the country. The Energy Information Administration, in
reports on gasoline prices has repeatedly made clear that this balkanization
of the gasoline market creates bottlenecks, supply disruptions and
price spikes. The price run-up in the Midwest last year, the EIA
reported, stemmed in great part from the Midwest's "unique
reformulated gasoline," which was not typically produced by
refineries elsewhere. When a Midwest refinery had a problem, it
took several weeks for suppliers outside the region to change their
formulas and meet demand.
And who began
this splintering of the gasoline market? A Congress controlled by
Democrats, with the consent of President George W. Bush's father.
In 1990, as part of the Clean Air Act amendments that year, Congress
mandated that 10 metropolitan areas with air quality problems begin
using reformulated gasoline to clean their air. Part of the mandate
was that the reformulated fuels contain 2 percent oxygen content
by weight.
That was a
good deal for corn producers. Corn is the source for one of the
key oxygenates, ethanol. But the requirement hasn't been so good
for the environment or for consumers socked with higher gasoline
prices. MTBE, the most common oxygen additive, has seeped into groundwater
where it becomes a toxic, long lasting pollutant.
Meanwhile,
ethanol, according to a 1999 National Academy of Sciences report,
actually may increase the level of ozone-polluting chemicals. The
panel reported that the decline in smog in the 1990s was "largely
because of better emissions control equipment and components of
reformulated gasoline — other than oxygen additives — that improve
air quality."
Finally, the
oxygenates reduce gas mileage, increasing pollution and raising
costs to drivers.
If Democrats
were really serious about environmentally friendly energy production,
they would go after the Bush program for not seeking the elimination
of that scientifically suspect oxygenate rule. The plan instead
calls only for the Environmental Protection Agency to study how
to reduce the number of boutique gasoline grades around the nation.
But count on
their silence. Key Democrats from corn-producing states, including
Senate Minority Leader Tom Daschle of South Dakota and Wellstone
himself, may hate oil company profits, but they have no qualms about
using government mandates to gouge the public if it may help them
maximize their vote count.
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