Who is Gouging Whom? [by ARI Editorials]

  By David

Last Wednesday 79 members of the House of Representatives introduced a bill
instituting criminal and civil penalties on any corporation or individual found
guilty of gasoline “price gouging.” But the real gouger driving up gasoline
prices is not the private sector, it is our government. To “gouge” means to extort, to take by force–something that oil companies
and gas stations have no power to do. Unlike a government, which can forcibly
take away its citizens’ money and dictate their behavior, an oil company can
only make us an offer to buy its products, which we are free to reject. Because sellers must gain the voluntary consent of buyers, and because the
market allows freedom of competition, oil and gasoline prices are set, not by
the whim of companies, but by economic factors such as supply and demand. If oil
companies could set prices at will, surely they would have charged higher prices
in the 1990s, when gasoline was under one dollar a gallon! Because oil companies and gas stations cannot set their prices arbitrarily,
they must make their profits by earning them–by efficiently producing something
that we value and are eager to buy. In so doing, they assume great risks and
expend enormous effort. Over the decades, oil companies have created a huge
infrastructure to produce and distribute gasoline by investing hundreds of
billions of dollars in prospecting, drilling, transporting, stocking and
refining oil. In the absence of political factors like the 1973 OPEC oil embargo or the
Gulf Wars, the net effect of oil companies’ pursuit of profit has been to drive
the price of oil and gasoline, not up, but down. The price of a gallon of
gasoline (in 2006 dollars) fell from $3 in the early 1920’s to $2.50 in the
1940’s to $2 in the 1960’s to under $1.50 in the 1990’s. This downward trend is
all the more impressive because it required the discovery and exploration of
previously inaccessible sources of oil and because it persisted despite massive
taxation and increased government regulation of the oil industry. When we see the price of gasoline today, we should not accuse oil companies
of gouging, but rather thank them that prices are not much higher. The true culprit that we should condemn for driving up prices is the
government, which has engaged–with popular support–in the gouging of both the
producers and consumers of gasoline. Federal and state governments have long viewed gasoline taxes as a cash cow.
In 2003, for instance, when the average retail price for a gallon of gasoline
was $1.56, federal and state taxes averaged about $0.40 a gallon–which amounts
to a far higher tax rate, 34 percent, than we pay for almost any other product.
(Contrary to popular belief, gasoline taxes do not just pay for the roads we
drive on; less than 60% of the gas-tax-funded “Highway Trust Fund” goes toward
highways.) Along with high taxes, environmental regulations–justified in the name of
protecting nature from human activity–have dramatically increased the
production costs, and thus the price, of oil and gasoline. The government, for example, has closed huge areas to oil drilling, including
the uninhabited wilderness of ANWR and the out-of-sight waters over the Atlantic
and Pacific continental shelves. This of course significantly reduces the
domestic supply of oil. The government has also passed onerous environmental regulations that make it
uneconomical for many old refineries to keep producing (50 out of 194 refineries
were shut down from 1990 to 2004) and discourage new refineries from being built
(no major refinery has been built in the last 30 years). Regulations such as these push the surviving refineries to operate at almost
full capacity, creating a situation where any significant reduction in the
production of some refineries (e.g., from a hurricane) cannot be compensated by
increased production in others. Exorbitant spikes in prices, which many
attribute to oil companies’ “gouging,” are actually caused by government
constraints. If we want to stop the irrational forces that have been driving up the price
of gasoline and our cost of living, we must demand that our elected officials
eliminate the regulations and excessive taxes that restrict the producers of oil
and gas. It’s past time to stop gouging oil companies–and ourselves.

David Holcberg is a media research specialist at the Ayn Rand
Institute (Copyright (c) 2007 Ayn Rand Institute. All rights

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