Congress is considering legislation that would punish “price gouging” on gasoline and diesel fuels during periods of national emergencies such as hurricanes Katrina and Rita. On the face of it, protecting consumers by assuring low prices and preventing gasoline producers/marketers from earning large windfall profits at the expense of the innocent victims would seem to be good public policy. The problem is not that simple, however. The legislation will have just the opposite effects of those intended.

Proponents of price controls and this legislation are confusing the symptom of the disease with the disease itself. A shortage of gasoline caused by refinery outages during the hurricanes is the disease. The price increases triggered by the reduced supply are merely the symptom of the underlying disease. Holding down prices to pre-hurricane levels will not remedy the physical shortage of gasoline. Curiously, by attempting to treat the symptoms of the disease, we not only make the current problem worse but also exacerbate future supply shortages in three ways:

  1. Price controls impose hidden costs on consumers in the form of added waiting time and wasted fuel from longer waiting lines at the pump.
  2. Price controls lead to lower supplies in future emergencies as gasoline producers/marketers are denied the incentives from higher prices to build spare capacity and to hold extra inventories for emergency situations.
  3. Foreign refineries, which provide about 10% of U.S. gasoline supplies, are immune from price controls. They can simply divert their supplies elsewhere, compounding the shortage problem.

Finally, we should not forget the fiasco with price controls on oil and petroleum products which began in 1971 as a 90 day expedient to control inflation. What was initially intended as a temporary emergency policy became the status quo and was not ended until January 1981. Interestingly, after the elimination of price controls, the real price of gasoline fell for over two decades.

All of the data show us that the gasoline market and prices have behaved exactly as one would expect. The market is rapidly returning to normal and prices are falling as additional supplies come on stream. This is hardly the picture of a market failure–rather the market performed well in a difficult situation.

Price gouging legislation represents a needless diversion from a potentially more serious problem. Future supply disruptions, particularly of world oil supplies, could be much more disruptive. Existing policies that encourage the exportation of refining capacity and the geographical concentration of domestic refining capacity pose a serious security problem, deserving of Congressional consideration.

Attached Files

  • Full Study, PDF, 234.7 KB
    by James M. Griffin
Print Friendly, PDF & Email