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.