Tuesday, May 15, 2007

Do High Gasoline Prices Warrant Government Intervention?

KSL Radio’s Doug Wright says more government intervention is the answer to high gasoline prices. I rarely tune into Doug Wright’s show. It doesn’t work with my schedule and I don’t feel that I get that much out of it. But this morning I had some business to attend to, so I drove to work late and caught part of Doug’s segment on the outrageously high gasoline prices we are currently paying.

It’s no secret that retail gasoline prices have gone through the roof, jumping some 30% since the beginning of the year. We’re paying four cents more today than we were in the knee-jerk gouge-a-thon following Hurricane Katrina. Gasoline prices are at an all-time record high. And we haven’t even hit the annual Memorial Day price bump yet.

The job of a talk show host is to make everything they talk about sound very important while filling the allotted block of time every day. And it doesn’t matter if it’s a slow news day. If it doesn’t sound important, the ratings will drop and so will advertising revenue. Effective talk show hosts use all kinds of tricks of the trade (emotionalism, absurdity, partial truths, twisting facts, minimizing complexity, etc.) to make the issues they talk about sound significant.

Gasoline prices affect everyone and they are getting on everyone’s nerves right now. Since it’s a hot topic, expect talk show hosts to talk about it. Mr. Wright has apparently devoted several segments to this issue over the past several weeks.

Wright’s approach today was to suggest that the conglomerating of U.S. oil companies over the years has resulted in an environment where gasoline distribution is now more like a public utility than a free market. Wright repeatedly made the point that the free flow of gasoline through the economy is essential to our national security. At least he seemed to stop short of calling for a government takeover of the oil industry, a la Venezuela’s beloved dictator, Hugo Chavez. Rather, he suggested that we need something more along the lines of public oversight of the industry, similar to our state’s Public Service Commission that regulates electrical and natural gas suppliers.

Government can certainly take steps to help foster fairness and freedom in markets. Occasionally government has a role to play in enforcing morality upon amoral free markets. But usually when government meddles in the market, it ends up causing more significant problems than the ones it assays to solve.

Whenever people clamor for government intervention, I think it is wise to take a step back and look at what is really happening and how things really work. With that understanding in mind, we should then ask whether the desired intervention is likely to actually produce the desired outcome. And then we should ask what other effects will likely result from the desired intervention.

Fact #1 is that our economy is completely dependent on oil. We have found no viable alternative to oil. Wright was right (pun) when he said that biofuels are not a viable alternative. The amount of land mass required to grow the crops, the amount of fuel required to develop and harvest the crops, and the amount of energy expended in converting the crops to usable fuel are problematic issues. I wrote about various alternative fuels last May, when gas prices were making their annual spike.

Fact #2 is that the oil market is highly volatile. It is interesting to note that the $3.15 we pay for a gallon of gas today is roughly equivalent to $0.47 in 1960 Dollars. Back in 1960, gas cost only $0.25/gallon. So gas today costs about 188% of what it cost in 1960. But let’s take an expanded view using inflation adjusted Dollars. Just a few months ago gas cost 132% of 1960 prices, last fall it cost about the same as it does today, in 1980 gas cost 200% of 1960 prices (even more than today), and in 1998 gas cost only 56% of 1960 prices. Oil prices fluctuate wildly. So do gasoline prices. For a more detailed handling of the factors that go into gasoline prices, see this post. No amount of government intervention is going to prevent the market from fluctuating.

Fact #3 is that oil operates in a global economy. Becoming oil isolationists might improve national self reliance, but experience shows that both economic and political isolationism have proven to be disastrous courses of action. Even if our nation produced the amount of oil it consumed, that does not guarantee that domestic oil would not be sold to foreign buyers or that we would purchase no foreign oil unless we passed laws that forced it to be so. Such laws have almost universally resulted in bad news.

Part of the reason gas station boycotts never work is that oil functions in a global economy. The price you see on the marquee at your local gas station is determined as much by how much gasoline is being purchased in China and India today as it is by how much gas people in the U.S. are buying. But another reason that gas station boycotts don’t work refers back to fact #1. You might be able to keep from buying gas for a few days, but no business can do that. You might not drive to the store to buy a product, but by golly, you are waiting for UPS or FedEx to deliver products to you, and their trucks and airplanes aren’t fueled by nothing.

The answer, some say, is to create self sustaining walk-able communities. The libertarian-minded economists at the Café Hayek blog frequently take pleasure in poking holes in these kinds of proposals. They love to demonstrate that achieving this kind of self sufficiency either requires living in poverty or maintaining a very expensive illusion where the fuel expended by others to sustain your lifestyle is ignored.

Fact #4 is that, as Pete du Pont says in this article, “[O]ur country's political establishment, from Congress to the press and the presidency, has worked for a quarter century to prevent increases in our energy supply.” Not only has the political establishment put the kybosh on oil production, but du Pont discusses how they have effectively stifled the development of all of the most reasonable alternative fuels as well.

Doug Wright suggests that the oil conglomerates have such a strong monopoly that they collude with each other in their dirty smoke filled rooms to figure out how to stick it to hapless consumers and even the government, which is just as dependent on oil as are you and I. (Remember the Enron tapes?) Wright says that the industry is so powerful that it owns enough politicians on both sides of the aisle to stifle effective reform. He says it is high time for the government to regulate the industry. Please note that the oil industry is already one of the most highly regulated industries in our nation.

Wright also suggests that oil is more like a public utility, since it is a commodity that is so essential to our welfare, our national security, and our economy. Wright seems to be saying that the government needs to take control because we simply can’t stop ourselves from using oil. (Stop me before I drive again!)

I would just like to point out that these same arguments could be said of food staples. Should we also, for example, bring the bread industry under the auspices of a Public Service Commission? Would adding the kind of regulation Wright suggests improve the free flow of the commodity and bring prices down? It certainly hasn’t worked that way in any other country that has tried it. How is it that we are suddenly going to make it work?

Most calls for government intervention are founded in frustration and/or a desire to protect one’s turf. Turf protection is why you can’t legally pump your own gas in Oregon, for example. That’s not where Wright is coming from. Many consumers are frustrated with gasoline prices right now. That is understandable.

But most frustrated calls for government intervention are also founded in ignorance of how things really work. I suggest that except for emergency cases, any call for government intervention should be approached calmly and deliberately with an eye on getting a firm grasp on how the matter actually works and what effects intervention is likely to cause. I’m no libertarian purist. I am not saying that there is never a place for government intervention. I’m simply saying that there is a right way to approach such questions.


Democracy Lover said...

Interesting post. Even for a "big government" person like myself, nationalization of the oil companies or even a rate commission seems like a poor solution to the problem.

First of all, I would want to investigate this matter, using subpoena power to determine whether there is any unlawful collusion or price-fixing in the industry. Second, we need to take a look at the industry in light of the Sherman Anti-Trust law to determine whether the largest conglomerates are anti-competitive. Once we answer these questions, action should be taken if warranted.

Most important, it seems to me, is moving toward conservation, alternative sources of energy (other than biofuels), and a more diverse and efficient transportation system. Ultimately if we insist on moving people and goods in small vehicles with internal combustion engines, we aren't going to make much headway on reducing our oil dependence. That may be the only rational method of transport in areas like the Mountain West, but in much of the Eastern US and the West Coast, there are better alternatives.

google_PEAK_OIL said...

It seems odd to me that this lengthy speculation on the true causes of high gasoline prices neglects to mention the fact that US oil production has been declining for 37 years and is now roughly half of what it once was, that world oil production has not risen for over two years now, and that many geologists believe it is on the verge of permanent decline.
The oil companies are making good money right now because they are taking temporary advantage of a situation that is soon to become much much worse. google "PEAK OIL"

"We should take note that our major oil companies, including Chevron and ExxonMobil, are beginning to state publicly that we may be reaching peak oil." - Orrin Hatch

“A significant number of petroleum geologists have warned that the world could be nearing the peak in oil production." - Bill Clinton

Reach Upward said...

When oil becomes truly scarce, humans will do as they have always done when faced with similar situations: they will innovate. The fact that we aren't seriously pursuing innovations and alternatives suggests that the market does not yet believe that it is necessary or that it will prove profitable.

I applaud all efforts at innovation and development of reasonable alternatives. But as a society, we're not very serious about it yet. When we get serious about something, we cogently focus on it as a society and we do what it takes to get the job done. We did that, for example, with getting humans to the surface of the moon. We did it when we got invovled in WWII.

When society truly feels a need to get serious about the problem with oil, we will focus heavily on it and will produce actual solutions. Apparently we're not there yet.

Democracy Lover said...

As you say, when the society gets serious about something (going to the moon, WWII), we charge our government with the responsibility to make it happen. We did not wait for the market to signal a profitable interest in walking on the moon, nor did we time our entry into WWII with the market readiness of the arms manufacturers.

If we are serious about moving away from fossil fuels, both to reduce our dependence on foreign oil and to save our environment, we will direct our government to take action.

Reach Upward said...

Our involvement in WWII and going to the moon are indeed examples of Americans rising to the occasion under the auspices of their government. But as I think about it, I realize that these two examples are not as aligned with the fuel issue as are many others.

We got involved in WWII because we had a credible threat of invasion and of the demise of democratic societies worldwide by fascists and militarists. The moon shot was a critical part of the Cold War. After the Soviet's early successes in space, we felt that it was necessary to demonstrate that democratic societies could outperform communist/totalitarian societies.

In both of these cases there was no market alternative. Although the government extensively used the capatalist system in both of these efforts, the fact is that there was no impetus for free market leadership in either. No independent military could go to war for us. Nobody was independently involved in space at the time.

But let's look at some examples that align more closely with fuel, since the market is already providing more fuel and more fuel options than at any time in history.

The development of the automobile transformed our world. But it didn't happen overnight. And we did not direct government to make it happen. To be sure, government responded to the development and expansion of the automobile industry, but government did not direct it. Transportation already existed. Government did not leap in to move it to the next level. The market took care of that on its own.

Television developed largely without government intervention until serious broadcast efforts began. Then the government became involved in a regulatory role, finally enforcing a set standard in 1941 that we still have with us today (until 2009). Government only responded to calls for upgrading the standard long after the market had developed vastly improved technology. While some development research has been government sponsored, government has not played a significant leadership role in the television market. When we want new television technology, we do not instruct our government to make it happen. We let the market do that. We go to the government to ask them to regulate the market.

Government has played a greater role in the development of maritime industries. Many leaps in shipbuilding technologies have occurred during wartime in government (or government sponsored) shipyards. But other advances have occurred completely in the free market due to the expansion of the cruise ship industry. Either way, government has played a regulatory role. It can be argued that the leadership role it has played has been a market response to a military need. It's just that the government is necessarily the major market player in the military industry.

The same can be said for the Internet, which was initially developed as a defense initiative. But when the market demanded it, this technology was co-opted and improved upon in ways that government never imagined possible.

Government can play a leadership role when the market demands it and in cases where no market exists. But where a market exists, history shows that the market is almost always better at providing solutions than government. The best government can do in that case is to get out of the way. It can remove protectionist regulations and ensure that the market is free to meet society's wishes.

We currently have many laws and regulations that provide special protection for the oil industry. Some argue that these are necessary for national security. Might not the market work to resolve this problem better, and might not security actually be improved if these protections were lifted?