In response to recent rises in
gas prices, we are once again hearing calls for the government
to “do something” to force prices lower. But no
matter what the price of gasoline is, such calls are wrong.
All market fluctuations in the price of gasoline, up or down,
are a good thing—and none of the government’s business.
When customers’ demand for gasoline increases relative
to the supply, the sellers of gasoline raise their prices. As
the producers and owners of gasoline, this is their right—and
we should be glad that they exercise it. Not only do price increases
encourage future production, but without such price increases,
we would very quickly see shortages as customer demand for cheap
gasoline far outstripped the available supply. Thanks to price
increases, we can ensure our continued access to gasoline to
the extent we are willing to pay for it—i.e., to the extent
we value it. Most of us are willing to pay $3 a gallon for a
15-mile office commute—but might not be for a 15-mile drive
to our pet’s beauty salon, and so our personal consumption
voluntarily decreases as prices increase.
In the realm of business, a higher price means that firms will
only purchase oil or gasoline to the extent that they can make
profitable use of it at those prices. An efficient airline will
still be able to offer low prices while using high-priced jet
fuel; a less efficient airline may not be able to. A company
in China or India that uses oil to run highly efficient factories
can make profitable use of oil at $70 a barrel; their laggard
competitors may not be able to. Since nearly every product we
use involves oil at some stage of production, we all gain vast
benefits from oil being directed toward its most profitable uses.
There is no moral or economic justification for any politician
or consumer to declare market prices “too high,” and
to use the government to coerce lower prices. To do so violates
both the rights of gasoline producers and their productive customers
to set voluntary prices—and, in doing so, causes destructive
shortages. When shortages exist, how much gasoline one is able
to get depends not on one’s willingness to pay a mutually
agreeable price, but on one’s political pull to secure
rations, or on whether one has time on one’s hands to wait
in endless lines (as in the 1970s).
There is only one sense in which we are entitled to tell the
government to “do something” about gasoline prices:
insofar as these prices are made artificially high by the government’s
many regulations on oil and gasoline production.
Consider oil refining regulations. Various state governments
impose the absurd mandate that companies refine nearly 60 different “blends” of
gasoline—despite the fact that cars using today’s
standard unleaded gasoline, even with the overall increase in
driving, pollute very little by historical standards. Additionally,
endless red tape and “environmental impact studies” forced
by regulators hostile to industrial development make new construction
dramatically less profitable. The costs of such regulations are
huge and raise the price of gasoline; according to the American
Petroleum Institute, “the refining industry has spent over
$47 billion over the last decade to comply with environmental
and fuels regulations—expenditures that generally yield
little or no return on investment.”
Another costly set of regulations are those prohibiting domestic
drilling on plentiful sources of oil. In the name of safeguarding
a portion of the caribou habitat in an Alaskan wasteland, drilling
is prohibited in ANWR—a potential source of 1 million barrels
a day. Also off-limits is the entire Outer Continental Shelf
of the United States—a far larger untapped source of oil.
Chevron’s recent discovery of an estimated 3 to 15 billion
barrel reserve in the Gulf of Mexico invites the question: How
many such troves are currently off-limits?
The government is right to take action if an oil company provably
threatens or harms a person’s property. But to impose huge
costs on oil companies and their customers in the name of preserving
untouched nature is unconscionable.
What should the government do about gasoline prices? Get its
hands out of the market—and keep them off.