David Rodeback's Blog

Thursday, September 1, 2005

Price Controls Are a Stupid Idea. Don't Fall for Them.

With a significant percentage of the nation's oil refinery capacity now off-line for a while, because of the destruction wrought by hurricane Katrina, we're about to see gasoline prices soar. Our refinery capacity is only barely adequate on a good day, and, apparently, there won't be a good day for some time.

I'm not a professional economist. Even if I were, I probably could not tell you how high the prices will go. If ten percent of our refinery capacity is off-line, you can pretty much count on the price of a gallon of gasoline increasing far more than ten percent. To me $3.00 per gallon seems inevitable, $4.00 seems very likely, and $5.00 or $6.00 wouldn't surprise me at all.

Something else is inevitable: We will soon begin hearing a public outcry for the government to set a ceiling on gasoline prices, so they won't get as high as they might otherwise. If our leaders in Washington (who are generally committed to their own political welfare, not to sound economic principles) fall for this foolishness in sufficient numbers to pass price control legislation, this much is certain: They will make the situation worse. Much worse. Assuming the ceiling they set is lower than the natural price of gasoline - if it's not, why bother? - the result of price ceilings is absolutely certain: shortage.

When the supply of a thing decreases but the demand at its current price does not, the price goes up. Eventually, as the price increases, the demand for that thing (at that price) decreases. People simply buy and use less of it, or find cheaper alternatives. It's common sense: If the price of a Big Mac were to rise significantly, people would be inclined either to take their fast food business elsewhere, eat out less frequently, or buy a smaller burger.

Now, a Big Mac might be something most people could do without entirely. (I can.) Gasoline is not. However, almost everyone could get by on less gasoline. I could walk to work more or use mass transit (to the extent that it exists in Utah County). I could combine trips, so as to make fewer of them. I could take a shorter vacation. In the long run, I could buy a more economical car.

But to a considerable extent, gasoline is a necessity for me and for many millions of other Americans. Some will see that as meaning we should keep gas affordable by controlling the price. But that is exactly the wrong answer. The right answer is: We should keep gasoline as available as possible by not fixing the price.

I am old enough to remember the energy pseudo-crisis of the early 1970s, when President Nixon and others had a massive, collective brain cramp and fixed the price of gasoline. This foolish act was immediately followed by the appearance of long lines at the pumps and a lot of signs at gas stations saying "No Gas Today."

If we ignore the whining voices demanding price controls - who are usually the same misguided folk who think that anytime a price goes up, it's evil capitalists engaging in price gouging - if we let the price of a gallon of gas seek its natural level, at least there will be gas at the pump when we get there. It will cost more, but it will be there. This will not be true of everyone, but for me, as for many people, the time I will spend looking for a place which actually has gasoline, then waiting in a long line, will cost me far more, both in actual dollars and in quality of life, than far higher gas prices will.

For others, who are using only the gasoline they must use, and who simply do not have spare dollars, higher gas prices will be a real problem. But if government wants to help them, it should help them directly, not do major damage to the economy as a whole by imposing price controls. Perhaps an immediate tax credit, involving an actual check in the mail, or something like that.

For similar reasons, rationing would be a bad idea. The price itself will ration most effectively if we will allow it - far more effectively than a law could.

Finally, let's look further into the future for a moment. If government wants to prevent this problem (inadequate refinery capacity) from recurring in the long run, it should temper the hostile regulatory climate which has made it next to impossible to build new refineries in the past two decades or so.

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Copyright 2005 by David Rodeback.
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