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Republicans Target "Economic Crimes"

04/26/2006William L. Anderson

Should anyone doubt that the Republicans have become the sworn enemies of the forces of supply and demand, as well as free enterprise, the following statements should change the minds of most skeptics:

Congressional GOP leaders on Monday formally called on President Bush to launch an investigation into possible price gouging by oil companies, as gas costs shot up nearly 25 cents a gallon in two weeks.

"Anyone who is trying to take advantage of this situation while American families are forced into making tough choices over whether to fill up their cars or severely cut back their budgets should be investigated and prosecuted," House Speaker Dennis Hastert, R-Illinois, and Senate Majority Leader Bill Frist, R-Tennessee, wrote in a letter to President Bush. "Therefore, we believe that Federal law enforcement agencies and regulators should take every available step to ensure that all Federal laws protecting American consumers from price-fixing, collusion, gouging and other anti-competitive practices are vigorously enforced."

Once upon a time in that former country known as the Soviet Union, much of the law centered around the existence of what the government called "economic crimes" or "speculation" (a code word for "free enterprise"). Today, we see the top lawmakers in the United States trying to take a page out of the USSR in calling for prosecution — and, one would suppose, imprisonment — of oil company executives because gasoline prices have risen drastically at the pump.

Lest one think that Frist and Hastert are not serious, the following should remind all of us that they are serious about wanting to criminalize the latest episode of price increases:

"Anyone who is trying to unfairly profit by forcing American families to make tough choices over whether to fill the car up with gas or severely cut back on their budgets should be investigated and prosecuted," said Ron Bonjean, spokesman for Hastert.

Unfortunately, we are seeing an annual affair, although the recent statements by the Congressional leaders have served to ratchet up the rhetoric — and possible consequences both for business leaders and for consumers. Six years ago, when we had the first of what now are annual spring price spikes in gasoline prices, I pointed out that the Clean Air Act Amendments of 1990 were chiefly to blame for the problem.

Moreover, members of Congress, when one clears through the fog of false statements, intuitively know that they carry much of the blame. Included in the Frist-Hastert threats was the following:

Hastert and Frist asked Bush to direct the Justice Department and Federal Trade Commission to investigate the rising oil prices and also will request that certain areas be exempt from having to use a more expensive but cleaner blend of gasoline. (Emphasis mine)

If one wishes to hear an economic explanation of why we are seeing the sudden increases at the pump, such explanations are available, and, furthermore, they tend to make much more sense than the latest press release from the Frist-Hastert tag team or Sen. Charles Schumer, who, like his Republican counterpart Arlen Specter, is calling for new anti-trust legislation and the destruction of present oil firms.

What we are seeing today is nothing less than the culmination of bad policies, beginning with the US foreign excursion in Iraq and environmental policies at home, complete with political favoritism being lavished upon the corn/ethanol lobby and culminating with more political favoritism, this time for the trial lawyers lobby. Let us begin.

That the conflagration in the Middle East is affecting the price of crude oil is a no-brainer. From the war in Iraq to the current tensions involving Iran, not to mention places like Nigeria and Venezuela, it is not surprising that oil traders are nervous and are bidding up the prices of futures contracts for oil delivery. By affecting the supply of crude oil, it is hardly surprising that these real issues are being reflected at the pump by higher gasoline prices.

However, the situation with crude oil explains only part of the current puzzle, and that is where Congress and the Environmental Protection Agency are playing a key role. The Clean Air Act Amendments of 1990 required gasoline refiners to include mixtures to (allegedly) enable gasoline to burn more cleanly during the warmer months. In fact, beginning with the gasoline price spikes of April, 2000, price increases at the pump have been an annual "rite" of spring, complete with statements of outrage from politicians who are convinced that all this is a nefarious plot by oil executives. Not to be outdone, Congress mandated even more ethanol mixes in the "energy bill" it passed during the summer of 2005, which has continued this economic madness.

Oil refiners have complied with congressional directives using either Methyl tert-butyl ether (MTBE) or ethanol. (Furthermore, MTBE has been found to leach into water tables, creating taste and odor problems, making it less desirable as an additive because of the liability involved. Congress has refused to grant oil refiners immunity from MTBE lawsuits, thus throwing a sop to the trial lawyers' lobby. Ethanol, on the other hand, cannot be moved via pipeline and, thus cannot be mixed into gasoline at the refinery, unlike MTBE.) Both additives supposedly help fuels burn more cleanly (that is, burn more completely, leaving less waste), but their effectiveness is questionable:

Oxygen helps gasoline burn more completely, reducing harmful tailpipe emissions from pre-1984 motor vehicles. In more modern vehicles, the emissions reduction is negligible.

We need to read this carefully, because if Congress is claiming that oil executives are guilty of criminal fraud and conspiracy (the favorite two sets of charges levied by federal prosecutors), then we know that Congress as a whole is a body of liars and maybe even criminals (with a few exceptions, like Rep. Ron Paul of Texas). Congress is requiring a set of expensive mixtures in gasoline in the name of environmental protection, yet researchers have found no proof that these mixtures provide that protection. Furthermore, when the consequences of these foolish policies have affected consumers, instead of admitting to the damage they have done, members of Congress, as well as the Administration, point to business executives, declare them to be criminals, and threaten to imprison them. This is the height of cynicism.

No, the purpose of this latest monstrosity from Congress (dutifully signed by President George W. Bush, and then administered by the Environmental Protection Agency) is to force motorists to pay more for fuel in order to increase the incomes of politically connected ethanol manufacturers, as well as corn farmers in the "red states" of the Midwest. As the Wall Street Journal recently editorialized:

There's been unconscionable behavior all right, most of it on Capitol Hill. A decent portion of the latest run-up in gas prices — and the entire cause of recent spot shortages — is the direct result of the energy bill Congress passed last summer. That self-serving legislation handed Congress's friends in the ethanol lobby a mandate that forces drivers to use 7.5 billion gallons annually of that oxygenate by 2012.

At the same time, Congress refused to provide liability protection to the makers of MTBE, a rival oxygenate getting hit with lawsuits. So MTBE makers are leaving the market in a rush, while overstretched ethanol producers (despite their promises) are in no way equipped to compensate for the loss of MTBE in the fuel supply. Ethanol is also difficult to ship and store outside of the Midwest, which is causing supply headaches and spot gas shortages along the East Coast and Texas.

These columns warned Republicans this would happen. As recently as last year, ethanol was selling for $1.45 a gallon. By December it had reached $2 and is now going for $2.77. So refiners are now having to buy both oil and ethanol at sky-high prices. In short, the only market manipulation has been by politicians.

So, let us trace this sorry story to its most recent beginnings. (1) Congress requires new fuel mixtures during the warm weather months which are costly and disrupt available supplies, but those mixtures do not make the air any cleaner; (2) The President and Congress decide to invade Iraq and now are making threats toward Iran, thus guaranteeing political instability and violence in the largest oil-producing region of the world; (3) Congress requires even more ethanol mixtures, despite the fact that it disrupts supplies and ethanol manufacturers cannot meet the goals; (4) gasoline prices spike, and members of Congress call for arrest and imprisonment of oil executives.

Something obviously is wrong with this picture.

Not surprisingly, almost all of the anger from consumers — if editorial cartoons are an indication of the direction of the rage — is pointed toward oil companies and their executives. On the other hand, members of Congress, which created this current crisis, are calling for the near-destruction of oil companies, imprisonment of executives, as well as a whole new set of taxes that would further reduce available fuel supplies — all in the name, of course, of lowering gasoline prices.

We cannot put these things into the category of bad policies made by well-meaning people. Instead, we are seeing the attempted destruction of one of the most vital industries in our country to be carried out by incompetent, venal tyrants who have no intention of telling the truth — and we have a cynical media acting as the mouthpiece.

There is a way out of this mess — reinstitute free markets in gasoline and oil — but Congress and the President of the United States, not to mention those who are politically connected, have no intention of permitting the markets to work.


William L. Anderson

William L. Anderson is Senior Editor at the Mises Institute and professor emeritus of economics at Frostburg State University in Frostburg, Maryland.