Price Gouging as Public Policy

Why should corporations have all the fun?


Having failed so far at immigration reform, the Senate turned its hand to energy reform this week. The debate is ongoing, so we won't know what harm, if any, the Senate might end up doing to domestic energy markets until next week. Naturally, Democratic senators are just outraged about how Big Oil is picking the pockets of American commuters by means of high gas pump prices. Congress looks ready to pass and President Bush to sign new corporate average fuel economy (CAFE) standards of 35 miles to the gallon for cars by 2020, up from 27.5 miles per gallon today. It must be a confounding puzzle to our lawmakers that while plenty of high mileage automobiles are available to drivers today, not everybody wants to buy them.

In addition, the Senate wants to require production of 36 billion gallons of ethanol a year by 2022. Using current technologies, that requirement is equivalent to turning the country's entire corn crop into car fuel. And even if producing that quantity of cellulosic ethanol becomes feasible that could mean plowing up 100 million acres of land for fuel each year-an area about the size of California.

Both the Senate and the House have approved legislation that outlaws "unconscionable" gasoline price gouging during presidentially declared energy emergencies. The Federal Trade Commission (FTC) is empowered to investigate complaints of gasoline price gouging. Remember when gasoline prices soared after Hurricane Katrina knocked out 10 percent of U.S. refining capacity? That would have qualified as an emergency under this new legislation. The FTC conducted a post-Katrina investigation into alleged price gouging and found that "the sizes of the post-hurricane price increases were approximately what would be predicted by the standard supply and demand paradigm that presumes a market is performing competitively." In other words, no price gouging.

Ignoring the other Senatorial meddling in energy markets such as imposing appliance, bus idling, lighting and insulation standards, let's focus instead on one aspect of political hypocrisy. Every spring when gas prices begin to rise, analysts consistently offer as part of the explanation the fact that no new oil refineries have been built in the U.S. since the 1970s. Refinery capacity has increased as refiners have added to their existing plants. Part of the problem has been that few people want an oil refinery next door, the notorious not-in-my-backyard (NIMBY) phenomenon. For example, one recent survey reported that nine of ten Americans want more energy self-sufficiency, yet 84 percent are against the building of an oil refinery in their hometown. It took seven years for Arizona Clean Fuels to get a permit to build the first new refinery since 1976. It is supposed to begin operating in 2011.

Complicated environmental permitting laws offer NIMBY opponents lots of opportunities to block refinery construction. So back in 2006, the House of Representatives passed the Refinery Permit Process Schedule Act that aimed to cut refinery construction approval time to just one year. It passed on largely a party line vote in a Republican-majority House with such Democratic luminaries as Nancy Pelosi (Calif.), Steny Hoyer, (Md.) Bart Stupak (Mich.), John Dingell (Mich.), Henry Waxman, (Calif.) and Rahm Emmanuel (Ill.) voting against it. The entire Massachusetts delegation opposed the legislation. A similar bill was killed by a party-line vote plus Sen. Lincoln Chafee (R-R.I.) in the Senate's Environment and Public Works Committee in the months after Hurricane Katrina.

So, when gasoline prices began their annual spring rise this year, analysts trotted out the same old explanations about tight refinery capacity being partly responsible. What did Congress do this time? Did members of Congress try to figure out how they might help expand refinery capacity? No. They passed price gouging legislation. Instead of increasing supplies to keep prices down; they just decided to make it illegal to raise prices. And guess who voted for it in the House? That's right, the same Democrats who opposed streamlining the process for approving new refineries (except Pelosi, who by custom as Speaker does not vote). In addition, the entire Massachusetts delegation supported the price gouging legislation.

But you really have to look to the Senate to find the most flagrant examples of grandstanding on gasoline prices. In the current version of the Senate's energy bill, the only mention of oil refineries involves temporarily exempting small ones from renewable fuel standards. On the other hand, the bill does promote biorefineries (which is playing havoc with food and feed markets). So instead of trying to figure out how to boost gasoline supplies, the Senate evidently wants to subsidize corn farmers and ADM.

Clearly, it won't do for Congress to share any of the blame for tight refining capacity, so it must be somebody else's fault. And, who else can it be? Senate Majority Leader, Harry Reid (D-Nev.) identified the culprits in a speech at the Center for American Progress earlier this week "There is nothing wrong with companies making money," declared Reid. "But there is everything wrong with manipulating energy supplies to keep prices artificially high. There's everything wrong with neglecting to reinvest a fair portion of those record profits in refinery capacity to increase supply." Never mind that environmental regulations and NIMBYism have stymied such investments. And never mind that the FTC has never found that the oil companies or refiners are "manipulating energy supplies."

Reid was joined by Sen. Ron Wyden (D-Ore.) in piling onto those malefactors of great wealth, the oil companies. Wyden's plan? He wants Congress to take tax breaks away from oil companies that do not invest as much as he thinks they should in new refinery capacity and upgrades. Look, for the record, I'm against "tax breaks" for any corporation, including those that manufacture bioethanol, hybrid automobiles, solar panels, or gasoline. Let's just get rid of corporate income taxes altogether, and then the Senators and Representatives won't be able to corruptly bestow legislative largesse on favored industry supporters. That said, it is not at all clear that Wyden's threat to take away oil company profits so that they will have less to invest in refineries makes much sense. And, for what it's worth, the American Petroleum Institute claims that refiners have spent $50 billion over the past decade meeting higher pollution and clean fuel standards.

If the Democratic majority in the Senate was truly sincere about weaning us from foreign oil and making us drive alcohol-fueled hybrid cars, live in more insulated buildings, and use more energy efficient appliances and lighting, they have the power to enact a simple and easy way to do it. They can "gouge" us themselves. That is, Congress can set a high price for carbon emissions on fossil fuels—either through taxes or through a cap-and-trade market—boosting the price of gasoline and electricity so much that Americans would be forced to buy all those wonderful energy efficient products that the Senators think we should want. Why, if Congress gouged us enough, demand for gasoline would fall so much we wouldn't need any new refineries; we could probably even shut some down.

Disclosure: I still own those 50 shares of ExxonMobil.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

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