Politicians are again out to kill the messenger who brings bad news. Oil companies are doing exactly what they should be doing by raising gasoline prices. If political threats of antitrust litigation, price controls and increased regulation prevent prices from rising now, it is the consumers who will suffer in the long run.
The free advice offered by political commentators is that since it takes six weeks for oil to travel from the Persian Gulf to refineries in the Gulf of Mexico, it is improper for prices to rise today. Waiting six weeks to raise prices means that consumers will end up paying even higher prices when a reduced oil flow out of the Persian Gulf is finally felt. Higher prices today reduce consumption and increase inventories and thus reduce how much prices will rise tomorrow.
The American oil industry is no more concentrated today than it was two weeks ago, and oil companies possess no sudden increase in monopoly power. Neither have they suddenly become greedier in the past two weeks. While Iraq and Kuwait have accounted for 8.2% of world oil output, the threat of war between Saudi Arabia and Iraq also places Saudi oil fields in jeopardy of at least temporarily being disabled. On Tuesday it became clear that President Bush and the Saudis believe that such a conflict had become possible, if not likely. Just think of how Monday morning quarterbacks will complain about inadequate reserves if hostilities do break out. The decline in gasoline prices since the deployment of American troops to Saudi Arabia reflects the reduced probability of a more extensive oil cutoff.
Many have called for new price controls. They seem to believe that controls did not work last time, simply because past administrations (apparently both Republican and Democratic) failed to administer them properly.
Economists may not agree on a lot of things, but one thing they do agree on is that controls create shortages. Trying to stop real prices from rising is an impossible task. Controls and quotas can only change the form that the price increase takes. Instead of higher dollar prices, consumers still pay a higher price for gasoline with their time. They will be forced to wait again for odd-numbered days if their license plates are even-numbered, and then they will be forced to wait some more in the long queues at the gas station.
The gasoline shortage of the 1970s would never have occurred without price controls.
What is particularly ironic about the current calls for central-government planning to determine the correct price for gasoline is that it comes after the recent collapse of central planning in Eastern Europe and its intellectual repudiation in the Soviet Union. Politicians seem to have forgotten the abysmal job that our government did when it tried central planning. Since prices and the market were no longer allowed to allocate gasoline supplies, the federal government tried to emulate the Soviet system, using giant computer systems to direct supplies around the country. The result was that too much gasoline was allocated to one part of the country, while too little went someplace else. Shortages would arise in California when there were none in Florida, and the next month the situation would be reversed.
The calls for windfall-profit taxes also miss the point because they would reduce the incentives of business to respond to the higher prices with greater output. And even the threat of such taxes will reduce our preparedness for future crises. Threats of costly antitrust litigation and investigations of unfair trade practices by the Federal Trade Commission make the job of conserving gasoline and increasing reserves more difficult.
Congressional screams of "price-gouging" and White House remarks doubting the validity of price increases may succeed in reducing the current increase in prices. But if these threats and political grandstanding are successful, it is doubtful that these same politicians will be around to accept the blame for even higher prices or greater shortages down the road.