Tuesday, May 08, 2007

Gas Gouging Legislation

Peak Oil Law Center: Gas Gouging Legislation

Summer driving season is almost upon us, and with low gasoline inventories (especially in some areas like Denver) we can expect two things this Summer—higher gas prices, and calls for the government to “do something” about gas gouging. 81 percent of consumers seem to think that gas prices are "unreasonable."

It’s becoming an annual exercise in trying to explain the basics of free market economics. Don’t get me wrong—our global economy is anything but a perfectly free market, and often free market rationale is simply wrong (though usually for failure to properly account for future costs, structural costs, and marginal values in pricing, but don’t get me started on that). One case where the free market works admirably well on a micro-level: distributing a scarce resource to those who most need it through dynamic pricing of that resource. In the case of gas, so-called “gas gouging” is one of two things: price-fixing, or free market pricing. Price-fixing is certainly anti-competitive, and is exactly the kind of thing that governments should address—for example, if all the gas stations in an area formed a cartel and agreed to raise prices by 50%. The kind of coordination required to pull off such a feat is quite visible, however, and would immediately run afoul of existing anti-trust laws. There is no need for new legislation to address this, and quite frankly, this is not why gas prices will be high this summer. The other kind of pricing—when a free market raises prices to reach an equilibrium between supply and demand—is highly beneficial to consumers. It ensures that gas is available—you may have to pay more for it, but if it isn’t worth the price to you, then don’t drive. At least if it is worth the price, you won’t find yourself in a two-hour line because of rationing, or simply find the pumps out of gas.

With rising energy scarcity, and the ongoing failure of America to take adequate measures to address the problem of Peak Oil, we can expect this annual exercise in populist proposals for gas gouging legislation to intensify. While there are some signs that politicians will resist the pressure—witness former Colorado Governor Bill Owens’ veto of just such a bill last June—these populist flames are already being fanned by local news reporting. Maybe journalism majors should be required to take a course in economics? I wonder who they’ll blame when they begin reporting on the plastic yellow “out of gas” bags covering gas pumps? My guess is that it won’t be the consumer, though that’s where the blame belongs. Gas gouging legislation only substitutes one negative—high gas prices—with a worse negative—no gas.

On a "canary in the mineshaft" note, energy investment banker Matt Simmons seems to think that a full-blown gasoline crisis this summer will be the opening bell for true Peak Oil-related problems (Warning, PDF. See page 40). Also of interest, another refinery fire yesterday--it's as if these places are full of flammable liquids or something... at least no one is actively trying to blow them up in the US. Yet.


donald said...

Yeah, about that "don't drive" comment. Most people don't have a choice outside the large cities with good public transit in the East Coast. There are pretty strong limits to how much someone can change their fuel consumption levels. Millions of people can't afford to buy a new car, move closer to work or find a job closer to home, etc. The perception of being "gouged" comes from feeling that they don't have a choice.

So don't be so cavalier in condemning the populist cries. They aren't being gouged by the immediate situation, maybe. But they're being gouged by the urban development policies promoted by government, industry and developers for decades and written into every roads budget.

Don't know the rest of your positions, just found your site through another weblog. Do you also recommend real investment in stronger municipal transit, so that people do have the choice not to drive? Better bus lines, light rail? Even something to promote carpooling?

Jeff Vail said...

I do advocate investment in mass transit solutions, but more as a stop-gap to radical relocalization of production, along with rezoning to create pockets of density to make walking/bicycling possible. And your point that people *have* been gouged by past policies is well taken.

I realize that most people "think" they don't have a choice about driving--the truth is, the demand elasticity for driving is just very, very low, but it is there. Even people with no equity in an exurban home with a commuter job downtown that is the only way to have a hope in the world of making their mortgage payment have a choice. It might not be a very palatable choice, but given the geological reality of oil production that is about to smack Americans in the face, it might be the most palatable of realistic choices. My personal opinion is that, for many if not most, alternatives and stop-gaps (such as mass transit) either won't come in time, or will never replace our current dependence on gasoline.

JCamasto said...

It's awfully difficult to conceive or (or implement) a mass transit system or strategy that could daily satisfy a couple hundred-million unique start locations, crossed with another hundred-million unique destinations - which is what the automobile provides.

Not without a radical reworking of housing, communities, lifestyles, expectations, and on and on...

nulinegvgv said...

actually, it's already been conceived for us.

The Smart Jitney: Rapid, Realistic Transport

PDF warning

EJH said...

While I appreciate the market forces responsible for prices, do you think some steps should be taken to prevent "gaming" of the system, or artificially reducing supply to incease prices (ie suspiciously being forced to close refineries or pipelines nearing a peak period)? Absent those steps, what is preventing companies from manipulating the market?

auntiegrav said...

Pretty good post. Economists think they have such a hard time explaining how higher prices for gasoline are the result of a 'free market'. They didn't have any problem explaining to farmers that low prices were the result of 'free markets', and that we had too many small farms. It's time we realize we just have too many economists.
Most people drive to work to jobs that don't do anything useful so that they can afford a car to drive to work.
Half the cars on the road should be immediately parked, and the other half should be HOV. Welcome to the short-lived age of Descent.

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