Gasoline gouging

by Rob Horning

21 May 2007


A column by Edward Andrews in Sunday’s New York Times cast a gimlet eye at the notion that consumers need to be protected from price-gouging oil companies.

if the oil industry is so powerful, why did it let gasoline prices fall through the floor throughout the 1980s and part of the 1990s?
For that matter, why did it let gasoline prices fall sharply after they spiked in 2005 and 2006?
Many Democrats, and a much smaller number of Republicans, remain convinced that there is a villain.
One freshman senator — Bob Casey, Democrat of Pennsylvania — has introduced bills to tax the “excess profits” of oil companies when oil sells for more than $50 a barrel.

I used to much more sympathetic to the logic behind Casey’s proposal, seeing profit as something unfairly extorted by the powerful, who exploit a particular moment in time. If you isolate gas prices from everything else in the economy, mayb eyou can make some kind of case for some “natural” level of profit beyond which a company becomes unduly rapacious. But ultimately, there is no coherent logic for where to draw the line regarding what level of profit is excessive, particularly when you consider a corporation’s guiding principle of maximizing value for stockholders. I’m not saying that excuses all forms of greed a corporation exhibits, but the whole reason for organizing corporations, though, is to produce entities capable of overriding mere human morality by dispersing ethical responsibilities across an institution. Where you stand toward this depends on how you view the prosperity such amorality produces along with the callous indifference to human needs.

Anyway, one can’t isolate the significance of the price of gas from the rest of the economy; it indicates not merely the demand for gas relative to its supply, but the value of gas relative to other energy options and other goods generally. Were we to make gas cheaper than the market would bear, this would distort signals across the entire energy economy, and tend to reinforce the inefficiencies that are already making gas inexpensive, requiring more state intervention to inhibit gas-price inflation, and so on, and the next thing you know we are on the road to serfdom. Okay, well, maybe not, but if the market can bear the profit margins oil companies want to pursue, it’s a signal not of their greed (after all they are only doing exactly what’s expected) but of a drastic overreliance on gasoline best addressed through other means. Expensive gas makes other forms of energy seem more cost-efficient; obviously this compensatory fact is not true if the state intervenes to upset the price system. Taking a windfall tax on oil companies’ excess profits and investing it in alternative energy seems sort of a backwards way of accomplishing what the market’s logic would push for anyway. (Maybe I have been reading too much economics.)

Also, environmentally minded liberals should be aghast at the idea that gas prices would be lowered by state fiat, which essentially means the government would be (further) subsidizing rampant carbon emissions rather than incentivizing conservation like it pretty obviously should be. It’s not quite a Pigovian tax, internalizing the external damage wrought by gasoline consumption, but it at least has the similar effect of discouraging consumption and dislodging the stubborn inelasticity of gas demand. Yes, higher gasoline prices more severely afflict the lower and middle classes who are trapped by a species of path dependency into needing gas-burning autos to maintain the standard of living they are used to, but the cycle needs to be broken somewhere. And is there any aspect of society that is not improved by people using their cars less often?


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