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Government Should Ignore Gas Prices

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Now, let’s see if I have this straight: just as the economics textbooks say, when the demand for gasoline went up and the supply fell, the prices went up. So, the Clinton administration told the Department of Justice to investigate.

Investigate what? It doesn’t matter. Any time a politician wants to score brownie points with a large segment of the public, all he needs to do is rail against the oil companies, even if they are behaving in an entirely predictable and reasonable manner. They are guilty till proven innocent, even though in the American system, the reverse is supposed to be the case.

The price of gasoline is up. Textbook explanations abound. The bitter winter here and in Europe prompted the diversion of crude oil to the production of heating fuel at the expense of gasoline. The coming of spring launched the driving season. Economic growth in the developing world has increased the consumption of oil. Energy analyst Daniel Yergin points out that uncertainty about whether Iraq will soon resume oil sales has also tightened short-run supplies. So, demand is up, and supply is down.

What would you expect prices to do?

Crude-oil prices went up 25 percent recently, and gasoline prices followed. Now, crude prices are falling. Gasoline prices should, again, follow. There’s nothing for the government to investigate. Should we be suspicious that all the companies did the same thing at the same time? Good economics teaches that the market tends to converge on one price. That makes perfect sense. If two prices prevail, entrepreneurs will buy in the cheap market and resell in the dear one. That’s the process that produces a single price.

Look at it this way: if you notice that everyone walking down the street has an open umbrella, you can deduce either that they have colluded or that they are all responding to the same conditions. Which is more likely?

As Yergin points out, oil is a commodity, which means that one barrel is pretty much like any other. The market is thus highly price sensitive. Buyers quickly switch to lower-priced sources whenever they have the opportunity. In a crisis new production comes on line. The oil market has been marvelously flexible and resilient, with the consumer always being the winner.

In fact, there is only one thing that can really produce hardship for consumers: the government. The long lines and other oil troubles of the 1970s were the result of government policies. Price controls, first imposed by President Nixon, kept the self-correcting market process from operating. Prices were held below the level the market would have set, discouraging producers from finding and bringing to market new oil that would have then caused prices to fall.

How do we know that? When price controls were finally ended by President Reagan, the world was suddenly awash in cheap oil. Allowing for inflation, the price of gasoline has been lower than at any time since World War II. Remarkable, considering that during the oil crisis twenty years ago we were constantly told that oil was disappearing and that high prices were here to stay.

The politicians are having a field day with gasoline prices. That’s hypocrisy for those, like Vice President Al Gore, who usually complain that gasoline is too cheap. President Clinton has decided to sell 12 million barrels from the Strategic Petroleum Reserve. That small quantity will have no effect. Besides, there shouldn’t be a Strategic Petroleum Reserve. If a government bureaucracy is putting oil away for a rainy day, it will only discourage entrepreneurs from doing so. I would trust entrepreneurs risking their own money over a bureaucracy any day.

Meanwhile, the Republicans are calling for repeal of Clinton’s 4.3-cent gasoline tax hike. Good idea – the whole gasoline tax should be repealed. But where were the Republicans last year? Why did they wait for public complaints about the price before bringing up the tax issue? Those phony defenders of free enterprise end up being price manipulators – just like the Democrats.

It’s time for the government to exit the oil industry entirely. We can’t afford more of its costly shenanigans.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.