"Price Gouging": Setting the Record Straight
The Washington Post reports that the House of Representatives this week overwhelmingly passed a measure imposing severe penalties for "price gouging," an alleged phenomenon it was unable to define and has left to the Federal Trade Commission to define. Once the Federal Trade Commission figures out what price gouging is, it is authorized to impose fines of up to $150 million for wholesalers and $2 million for retailers. Two year jail penalties for both retailers and wholesalers are also authorized, though presumably imposition of jail time would still require a jury trial in an actual criminal court, not a mere hearing before the FTC.
The causes of the recent run up in gasoline and crude oil prices are not hard to find. There is a rising global demand for crude oil, in large measure because of rapid economic expansion in China and elsewhere in Asia. At the same time, the supply of crude oil is sharply restricted by the fact that most of the world's supply has been nationalized by various governments. This greatly reduces incentives and the ability to find and develop new oil supplies. And this applies in large measure even to the United States, in which vast land areas are owned by the Federal government, which has progressively reduced the ability of the American oil industry to develop petroleum deposits on government-owned land. The leading examples, of course, are the North Slope in Alaska and the continental shelf in the Gulf of Mexico and off the coast of California. These problems of government-caused lack of supply are compounded by threats to the existing supply in Iran, Nigeria, and Venezuela.
Besides these problems affecting the price of crude oil, there are also special, additional problems affecting the price of gasoline. One is the fact that since 1976, because of environmental regulations, not a single additional oil refinery has been constructed in the United States. As a result, according to Oil and Gas Journal, total oil refining capacity in the US today is less than it was in 1981: 16.8 million barrels per day versus 18.6 million barrels per day. Add to this the devastation of Hurricane Katrina, from which Gulf Coast refinery operations have not yet fully recovered. Add to that, the further problems caused by the government's compelling the production of specially reformulated gasoline, to meet environmental requirements. (For an excellent account of these problems and how they further restrict the supply and raise the price of gasoline, see the April 28 posting by Ben Zycher on his blog "The Reform Club.)
And then, serving to drive up not only the price of oil and gasoline, but prices throughout the economic system, is the increase in the money supply caused by the Federal Reserve System. This increase, and the prospects for further increase, have become so substantial that they are more and more reducing the desirability of owning dollars. This further adds to the rise in prices, as dollars previously held are unloaded into the market and are then spent rather than held by those who receive them.
If Congress were serious about rising prices, it would return us to the gold standard. It would also eliminate the obstacles it has placed or allowed to be placed in the way of expanded oil and gasoline production. And rather than investigate oil companies, it would investigate the environmental movement and its policy of operating as a persistent pest, which uses the judicial system and government regulatory agencies to come between man and the actions he needs to perform to support and promote his life.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author's web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.