The ‘Phantom Menace’ of Price Gouging

By May 22, 2007Energy

Two views of gas price played out in the Sunday papers this week. One was a fairly non-hysterical and educated analysis from Edmund Andrews of the New York Times — a paper not traditionally known for its fierce defense of the oil industry, or as a clarion of conservative economic thought. The other was a more cynical — and ultimately erroneous (and all too predictable) — view from the WaPo’s Steve Pearlstein.

We’ll start with the lower bar: Pearlstein, knowing that economics will fail him in the argument, abandons it to say one need not look to economics to explain energy companies’ opposition to higher gas taxes. He attributes it to pure self-interest, since it’s consumers who will pay higher prices and what, after all, would oil companies care about that? Like we said, economic thought takes a holiday on Pearlstein’s piece. We’d abandon economics, too, if it wouldn’t bolster our argument.

Andrews’ analysis, on the other hand (entitled, “Oil Price ‘Gouging’: A Phantom Menace?”) notes the inelasticity of demand for gasoline. Consumers can’t just stop buying gas, as only a small portion of its use is truly discretionary. Ask any manufacturer who has to ship stuff around this big country of ours and they’ll tell you. They can’t take the bus.

Says Andrews of the Dems’ ridiculous claims of price manipulation, “[I]f the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s? For that matter, why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?”

Why indeed. He goes on to talk about that pesky little law of supply and demand, and the fool’s errand that is the definition of “unconscionably excessive” prices that is now embodied in several Dems’ anti-price-gouging bills before the Congress. In fact, the last Federal Trade Commission (FTC) investigation into so-called “price gouging” in the oil industry found none, essentially the same finding as all previous FTC examinations of the topic. But it sure makes for good political theater.

Today the House Energy and Commerce Committee will hold a little theater, uh, hearing on this topic and the Joint Economic Committee will follow suit tomorrow, all in a rush to get in front of the cameras, to shed more heat than light on a fairly straightforward issue. The JEC hearing will be on breaking up the US oil companies that control all of about 13% of the world market. If they can set the world prices, it would be an economic first worthy of a Nobel Prize.

Congress’ time would be better spent working on the supply side of the equation, opening up domestic supplies of energy so we can lessen our dependence on foreign energy. But that doesn’t make for nearly as good a story.