I interviewed Sen. Maria Cantwell (D-Wa.) several months ago, right after Katrina. She and a bunch of other Dems, like Wyden and Durbin were standing outside the Congressional Exxon, near the Senate office buildings, taking advantage of the high prices as a back drop.
They were hawking some bill that would allow the FCC (Correction: Silly me. It was the FTC. Wrong acronym!) to investigate instances of price-gounging and prosecute or something crazy like that. I caught her afterward and asked:
ME: Do you recognize at all that high prices might simply be caused by the fact that Gulf Coast refineries have been wiped out, thereby depleting production, thereby depleting supply while demand stays the same or increases, which inevitably means that prices have to rise?
Cantwell: But you see, we’re going after price-gougers.
ME: I understand that. What I’m suggesting is that it could be that none of the gas prices are price-gouging; they’re just a natural market reaction to the depleted supply of gas brought on by Hurricane Katrina, which wiped out oil refineries in the Gulf Coast. And, if the prices are lowered by the FCC or Congress, we’ll end up with gas shortages because the higher prices are an incentive for oil companies to produce and deliver a sufficient amount of gas even under conditions that are not ideal. If the profit incentive is taken away, they won’t produce the gas and no one will have gas.
Cantwell: (Furrowed brow) Could you say that one more time?
ME: See, here’s the deal. The supply of gas went down and demand stayed the same or increased. Therefore, prices went up. I’m suggesting that the rise in prices is NOT evil oil companies gouging anyone, but a natural market adjustment, which allows us to have plenty of gas even in rough times. Now, if gas prices get lower….
Cantwell: Who did you say you work for?
Cantwell’s Assistant: (pulling her by the elbow) Senator, we’ve got to move on. You’ve got a meeting.
She was totally and utterly confused by what I said, and seemed genuinely interested in trying to puzzle it out, as if she had NEVER, EVER heard it before. Totally true story, even though it sounds too sad to be true. And, this is a woman who is fairly active in the energy policy arena. How can we possibly expect any solutions out of these people when they don’t understand the problems they’re dealing with? We will end up with no energy if people like Cantwell are in charge.
I can just imagine that, every year or so, when this gas-price crisis starts, Thomas Sowell sighs, rolls his eyes, and sits dutifully down at the keyboard once again to plonk out his crystal-clear Econ 101 lessons for the politicians and civilians of America.
It is a great service. He’s done it again this year in Oily Politicians :
Are the oil companies charging all that the traffic will bear? No doubt. But they were probably charging all that the traffic would bear when the price of gasoline was half of what it is today.
Even businesses that are losing money are charging all that the traffic will bear. Otherwise they could raise their prices and stop losing money.
Most of the people who are making this claim are charging all that the traffic will bear for their own labor or the use of their own products. Dressing up the plain fact that we all usually prefer more to less in political rhetoric about “gouging” explains nothing. Something that is true all the time cannot explain drastic changes.
Is it rocket science that, when oil prices hit new highs, gasoline prices also hit new highs? Do you think the price of wheat could double without the price of bread going up? Would we have politicians running around spouting off about “gouging” by Big Wheat?
Price movements up or down provide incentives for people to consume less or to consume more — and to produce more or produce less. From the standpoint of the economy as a whole, the history of any particular batch of oil is irrelevant.
Prices need to ration all oil according to existing supply and demand. At the same time, prices need to provide incentives to produce more oil or less oil, according to the same supply and demand conditions.
“Windfall” profits and windfall losses are all part of the same adjustment process. If politicians seize the windfall profits and leave windfall losses alone, what that means over a cycle of years is that the average rate of return on oil production falls below what is needed to attract the investments that greater oil exploration and production require.
God bless him. Maybe I’ll send copies over to Cantwell’s office.