Anti-‘Price-Gouging’ Regulation

by | May 5, 2006

With gasoline prices across the nation at $3 a gallon, one knows that American oil companies are easy targets for every regulator (and every potential regulator) in town. And when an oil-man-turned-president blames Americans for having an “energy addiction,” it is only a matter of time before those that feed that “addiction” come under the […]

With gasoline prices across the nation at $3 a gallon, one knows that American oil companies are easy targets for every regulator (and every potential regulator) in town. And when an oil-man-turned-president blames Americans for having an “energy addiction,” it is only a matter of time before those that feed that “addiction” come under the gun.

It’s not surprising then that the US House of Representatives just passed one of the worst bills to control the price of fuel since the 1970’s era of gas lines and odd/even gas rationing. H. R. 5253, the so-called “Federal Energy Price Protection Act of 2006” grants the Federal Trade Commission the power to define claims of “price gouging” by oil producers and impose criminal fines of up to $150 million dollars and two years in jail. Additionally, the bill would permit courts to award civil damages of up to three times the difference between the “gouging” price and the FTC-determined “fair” price.

The bill was introduced by Rep. Heather Wilson (R-NM). Not surprisingly, after reading though the congresswoman’s bio and in spite of the “Spirit of Free Enterprise” award bestowed upon her by the U.S. Chamber of Commerce, it seems Wilson’s has zero background in economics. This is a telling omission, for it evidences that even a rudimentary understanding of economic principles did not drive Rep. Wilson to propose her bill to regulate oil prices. Morality did–and a corrupt morality at that.

In the government regulator’s alternate universe, the producers of things such as oil, healthcare, computer operating systems, or even staples as mundane as “super-premium ice cream” do not live for their own sake. Instead, these and other producers exist solely to assuage the needs of their customers-and it is need and not productivity that is the currency of this universe.

In contrast, the free market is predicated upon the recognition that each person has a right to live for his own sake-including people who work in the oil industry. Each of us works because our lives and our happiness demands that we be productive. We seek profit for our endeavors, which is nothing more than the return on our investment of time and money after expenses are paid.

Call the above seemingly obvious points the moral basis of the free market. The free market deserves to be fought for, yet it is precisely the market’s moral basis that Rep. Wilson and her fellow would-be regulators seek to overthrow. These regulators say that they will permit producers to profit from their work-but only to a point. Pass that arbitrarily defined threshold and one becomes guilty of “price gouging.”

Yet price is nothing more than the intersection between supply and demand. To criminalize a price on the free market is criminalize our right to set terms for our work and our time. After all, when markets are free, every price is a negotiation and every purchase is voluntary; anyone can choose either to take a price or leave it. In the case of oil, when the price goes up, we can choose to conserve the fuel we purchase by using it in ways that are worth its price, seek substitutes by purchasing more fuel-efficient cars, or in the long term, develop other sources of energy that are cheaper than oil.

But if high prices are outlawed simply because some regulator decides that too much profit would be made, the incentive to produce is destroyed (along with the inventive for any newcomers to enter the market).

Additionally, if oil companies had the easy ability to squeeze their customers for usurious profits, one would expect that more people would enter the energy production market so they could get a piece of the action. Why don’t those who think they have the expertise to claim the oil companies are price gouging simply drop what they are doing, form an oil company that undercuts the supposed fat cats on price and make a fortune for themselves in the process?

The truth is, harvesting oil from the Earth and bringing it to market is a complex process requiring tremendous organizational ability and financial acumen. In blaming American oil producers for high oil prices, the oil industry’s critics ignore the political situation in the world (such as Iran threatening to unleash atomic jihad or strongman Hugo Chavez’s Marxist posturing over Venezuela’s oil resources) which leads to oil prices being highly volatile. They ignore the increased worldwide demand for oil, such as from China growing economy. And they ignore the human cost of the weak American dollar, which makes imports more expensive and reflects the world’s lack of confidence in America’s economic and monetary policies.

These critics also ignore the of government’s other interventions in energy markets, such as the cost of gas taxes, Congress’ decision to refuse to allow oil production in ANWR, as well as the cost of mandating ’boutique’ fuels under the guise of reduced emissions. At root, anti-price-gouging legislation is nothing less than an attempt to get something for nothing, and shift the blame for America’s oil woes from the supporters of government regulation to the men and women who actually work to bring energy to the marketplace. Such is way of those who enshrine need as a virtue.

If Rep. Wilson’s price-control bill passes in the Senate and is signed by President Bush, it guarantees that America will return to the gas crunch era of the 1970s. If energy producers cannot adjust their prices to market forces and are compelled to sell at artificially reduced rates, Americans will see gas shortages at the pump. No legislature on the face of this earth can suspend the law of supply and demand at their will. No legislature can criminalize production and still expect energy producers to keep to their work. It is immoral and it cannot work.

Thirty years ago, Americans let Democrats under Jimmy Carter devastate the American economy by enacting their price controls on energy. The real crime will be that the American people might very well allow the Republicans to make the same mistake today.

Nicholas Provenzo is founder and Chairman of the Center for the Advancement of Capitalism.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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