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No Worry about Gas Prices

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Isn’t it funny that people get upset when the laws of economics operate as expected? Gasoline and crude oil prices have risen lately in response to higher demand and lower supply. So what do people do? They frantically call on the government to do something. Truckers drive their rigs en mass to Washington as though this were France.

Neither the Republicans nor Democrats know what to do. Both are looking for a government response, when what we need is to let the free market operate. Republicans, especially those in Texas, like high crude oil prices because it makes their oil worth more. There was brief talk about rolling back the increase in the gasoline tax that President Clinton pushed through in the early 1990s, but the Republicans dropped the idea. At any rate, canceling the Clinton tax would make about a 4-cent-per-gallon difference at most. Prices would not necessarily fall, since demand supports the current price. But ending the gasoline tax entirely would increase profits to the dealers, encouraging them to bring more supply to market. It would even encourage new stations to open. All this would lower the price, but not right away.

Some Democrats, strangely, seem happy with the price increase. But their motives are suspect. The Gore wing of the party would like to see the gasoline engine vanish, so for them, any increase in the price of fuel is a step in that direction. The vice president is also a candidate for president, however, so he fears that rising gas prices will dampen the economy, the biggest asset his campaign has going for it. That’s why his mentor, President Clinton, sent Energy Secretary Bill Richardson to the Middle East to plead with the leading OPEC nations to increase supply.

It is embarrassing to see a representative of the United States begging others to cut their prices. The men who run the oil industry in Saudi Arabia, Kuwait, and the other OPEC nations are attempting to maximize their revenues, just as the rest of us do. Begging them to do otherwise for the sake of the U.S. economy is pathetic. It is true that the U.S. government bailed out Saudi Arabia and Kuwait after the Iraqi invasion. But that doesn’t mean they should run their oil industries like charitable foundations. All U.S. military support and political support should be withdrawn from the Middle East. But the reason isn’t oil. The reason is that an imperial policy is unbefitting a free country.

The best solution to rising oil prices is the free market. Contrary to what many people think, OPEC doesn’t have unilateral power to set prices. If its members restrict production beyond a certain point, the rest of us respond by buying less gasoline and heating oil, using substitute products, and doing things more efficiently. Meanwhile, entrepreneurs and inventors are encouraged by high prices to search for innovations that enable us to use less oil. Since the price rises of the 1970s, the U.S. economy has become dramatically more efficient in its use of oil.

The one thing the U.S. government can do is stop interfering with the growth of domestic oil supplies. Restrictions on off-shore drilling and development of the oil fields in Alaska inhibit the free market’s natural ability to respond to change. If OPEC is able to wield “monopolistic” power (although this is grossly overstated) it is because the U.S. government restricts OPEC’s American competitors. It also restricts oil sales from a major OPEC member, Iraq, under the economic embargo, which starves children to spite Saddam Hussein.

We can expect to see prices begin to fall in the coming months no matter what the Clinton administration does. There are reports already that the OPEC members are violating their production agreements, which is par for the course for them. Their showy quota-setting meetings in Vienna can barely mask the fact that each country has an incentive to “cheat” and sell more than it agreed to sell. Again, producers act to maximize their revenues.

The best thing for us to do is pressure Washington to get out of the way. Then we should sit tight. Gas is still cheap in real terms, and it will get even cheaper if we are free.

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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.