Government Gasoline Help?

Prices at the gas pump have every politician taking aim at the “gouging” gas companies, threatening everything from Federal Communication Commission investigations to “windfall” profit taxes, price controls and anti-trust laws. Someone messed up all right but it was not the terrified oil executives. Congress did it with an assist from a nervous Executive afraid to veto the bill that caused the crisis. The one thing Congress does not promise that would actually work is for it to stop “solving” the problem.

Never has a crisis been so easily traceable to a single act, the Energy Bill passed last summer and signed into law by President George W. Bush. The recent dramatic spot shortages in Texas—yes, oil rich Texas—were the direct result of a provision in the bill forcing drivers to use 7.5 billion gallons of ethanol (usually from corn) by 2012 together with its refusal to protect the rival oxygenate MTBE that Congress and its environmental allies had previously forced on the public the last time they “helped,” now claiming MTBE is a pollutant!

Obviously, in this day of litigation-crazy liberalism, gas refiners immediately stopped blending MTBE into their product and the big bad oil companies were forced to switch to ethanol even earlier. Ethanol shot up from $1.44 a gallon last year to $2.77. Even at that price there was not enough ethanol outside the corn-rich Midwest, so spot shortages appeared on both coasts and in Texas. While some of the recent increase in gas prices resulted from increased world demand, Congress has repeatedly refused to allow drilling in Alaska and the U.S. continental shelf that could increase supply and control costs. It is supply and demand, remember? In addition, Congress refused to adopt a House provision that would have reduced the so-called “boutique” specialty regional gas blends that supposedly reduce pollution but are only proven to increase costs.

Actually, Congress has helped Big Oil. While aiming at the big guys, the politicians have mostly hit mom and pop gas stations. In the Environmental Protection Agency’s last attempt to sock it to Big Oil in the 1980s-90s, its own review admitted its rules would leave the average dealer “in poor financial condition” and “cause the median dealer to fail.” Did you ever wonder why gas stations have gone from small operator-owned stations to chain ownership? About 40,000 mom and pop operations went under then and were replaced by Shell, Exxon and BP. Mostly the small guys could not buy the new expensive tanks and clean up the residue of the old ones. The same is happening with the new ethanol requirements. Ethanol creates new kinds of pollution and requires at least a cleaning and for older tanks replacement. For those stations with older tanks, they will have to buy new ones or shut down. If the tank is up to date by EPA reckoning, it has to be cleaned in a special manner that will be costly and disruptive at best for the remaining mom and dad operators

Knowing they were the source of the high prices, the politicians rushed to blame the easy targets, mostly oil company executives who were rushed to hearings to face the modern equivalent of a witch trail. Besides threatening investigations in the spirit of Enron, Congressional plans ranged from silly to counterproductive. The winner of the former was the Republican plan to offer $100 rebates, which was withdrawn the following day when Sen. Trent Lott said his own daughter accused his GOP of pandering. Ideas such as price controls and suspension of the gas tax actually would increase demand either over the long or short runs and thus actually increase prices. President George Bush originally urged Congress to raise the so-called fuel economy standards forced on automakers to make them produce smaller cars. After it turned out the president could probably do this himself, the White House retreated from the offer in the face of soccer moms wondering how they would transport their children to multiple child sport practices without their SUVs.

The biggest question is why were environmental liberals protesting at all? Their long range policy is to increase prices dramatically so people will be forced to drive less and smaller and pollute less. A few brave progressive souls persisted in spite of the $3 prices, such as a professor on National Public Radio who said the increases were way too small and must go to at least $7 a gallon as in Europe by increasing the gas tax to that level. But most liberals were leading the charge for the silliest solutions that would actually increase pollution.

The fact that the public has not been as panicked as the politicians represents the only good news. In the 1990s when the price of gas was $17 a barrel, no one but the environmental extremists was complaining. Yet, at that price oil firms could not afford to invest in exploration for new sources, or in new refining capacity. At $70 a barrel they can afford it if they can get permission from the environmentalists, which mainly they cannot, although the House is considering reducing some of the legal burdens. The miracle of the market is that price increases allow more funds to be invested to solve the problem so future shortages can be avoided.

The market corrects itself as Adam Smith predicted it would. If politicians repeatedly take “windfall” profits, future problems will become insolvable as they are in most of the rest of the world. Bolivia and Venezuela politicians are trying to nationalize their oil but the market will pay them back with no future investment. That is the way it works. Argentina tore up contracts four years ago and has suffered with an investment rate at least one percent below what it needs to grow in the future.

The fact of a worldwide market guarantees there is no free lunch. Oil is expensive today because of bad government policy and increased world demand. It is understandable, if more self-defeating, in the developing world for politicians to try and fool the people with blame-game appeals. It is less understandable in the U.S. The fact is the only way to reduce the cost effects of oil increases is to drive less and consume less gasoline. To show the politicians we understand their shell game, perhaps the place to begin is not to drive to the polls on election day.

Donald Devine, Editor.

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