This fallacy will not run out of gas

Posted by Marc Hodak on May 23, 2007 under Invisible trade-offs | 3 Comments to Read

In this article:

The House, eager to do something about record high gasoline prices in advance of the Memorial Day weekend, voted narrowly Wednesday to approve stiff penalties for those found guilty of gasoline price gouging.

The bill directs the Federal Trade Commission and Justice Department to go after oil companies, traders or retail operators if they take “unfair advantage” or charge “unconscionably excessive” prices for gasoline and other fuels.

Rep. Bart Stupak, D-Mich., its chief sponsor, in urging his colleagues to support the bill said the issue was whether “to side with Big Oil (or) … side with consumers who are being ripped off at the gas pump.”

The bill calls for criminal penalties of up to $150 million for corporations and up to $2 million and a jail sentence of up to 10 years for individuals found to be engaged in price gouging.

…the bill’s supporters argued that states can’t combat energy price gouging, leaving motorists at the whim of arbitrary oil company pricing.

So, the remedy to “arbitrary pricing,” approved by two-thirds of our Congress, is arbitrary prosecution. Even Rep. Stupak (I’m resisting the obvious play on his name) has no idea what “unfair advantage” or “unconscionably excessive” mean. I will let the lawyers tell me if there is such a thing as unconstitutionally vague laws, and if this would qualify.

What concerns me is that most of the people who voted for this bill are really not that stupid (damn, there I go). Congress has commissioned numerous studies on price gouging over the years, under Democratic and Republican administrations, and they all come back with the same verdict. It’s the voters who go in for the conspiracy theory behind such laws. The clearest evidence of the irrationality of that position is the utter lack of explanation about what leads to occasional gas price decreases. (It’s a one-way conspiracy? Big Oil was less greedy last month?) The point of this law is that the answer to why prices sometimes go down is clearly not current price gouging laws.

So what would be the predictable consequences of such a law? Well, rational business persons, when faced with possible $2 million fines and 10 year jail penalties for raising prices will:

(a) avoid situations where they might need to raise prices on a volatile commodity by always keeping them high,
(b) stop selling altogether in times of emergency, when the actual or opportunity cost of the commodity exceeds the “normal” price.

What businesses won’t do is try to make a decent return on a volatile commodity by allowing the price to come down when supplies are easy and not raise them when supplies are tight. And businesses certainly won’t take a chance on finding a market-clearing price for gas in the very times of emergency when gas, in fact, becomes most valuable to the public. So, then everyone will have theoretical access to gas at the “conscionable” price, but people who would have gladly paid more than the $1.50 or $2 (equivalent to $6-$8 per gallon) it might have cost them to drive five miles they desperately wanted to travel will instead stay put for fear of running out of their “reasonably priced” gas.