Just a few months ago, you couldn’t open a newspaper or turn on the television without being bombarded with angry denouncements of the greed of oil company executives.
Gasoline prices have risen to $3 a gallon and more, from a low of just above $2 last November. Consumers were feeling the pinch in their pocketbooks, and politicians were smelling blood in the water and a potent political issue for this fall’s campaign.
Democrats jumped on the issue, proposing everything from new taxes on oil company profits to a Manhattan-project style initiative to reduce the nation’s dependence on oil. Not to be outdone, Republicans jumped on the alternative fuel bandwagon, and President Bush himself declared America “addicted to oil.”
Politicians on both sides of the aisle took aim at the oil companies themselves: Democrat Senator Barbara Boxer talked of “shared sacrifices in tough times versus Oil Company greed,” and Republican Senator Trent Lott proposed voluntary—or even mandatory—profit controls on oil companies.
The thread that held together all this nonsense was based on a couple of obvious falsehoods: first, that our use of or dependence upon oil in this economy is something unnatural or created, an “addiction” that needs to be treated by massive government intervention in the economics of energy; and second, that the run-up in the price of oil was driven by the avarice of oil company executives who discovered that addiction and exploited it to their benefit.
Both of those assumptions are silly, and based upon a fundamental misunderstanding of basic economics.
Consider the first misunderstanding, that America is “addicted” to oil. It is as correct to say that America is addicted to oil as it is to say that America is addicted to corn and soybeans. Oil happens to be, on balance, an extremely economical and flexible way to generate and transport energy. It is, or at least has been, relatively cheap to use compared to other energy sources, and it is pretty much unsurpassed as a motor fuel.
In other words, Americans use so much oil simply because it is relatively cheap, abundant, and convenient to use. Pretty much the same could be said of our use of corn and soybeans. We grow so much and use so much of them because they serve our purposes well and economically.
Now of course, as the price of these commodities rise, for whatever reason, our tendency to use them changes. If oil becomes less cheap and abundant, or less convenient to use, our behavior changes. People begin to travel less, buy more efficient cars, and energy efficiency rises as a concern for more Americans. Over time, our consumption of oil will level off or drop; in fact, ever since the oil price shocks of the 70’s, the relative dependence of the US economy on oil has been dropping. On average, according to the Department of Energy, Americans are using less and less energy to produce a dollar of GDP over time.
Now consider the second misunderstanding, that oil prices rose so quickly due to the greed of oil companies bent on exploiting “oil-addicted” Americans. This assertion is even sillier than the first. While I have no doubt that oil company executives have their share of greed and avarice in their hearts, I can’t for the life of me explain why these executives were less greedy last November when gas prices averaged $2.10 than they were September 5th, when they topped out at $3.03, or today, when gas is back down to about $2.60 a gallon or less. I just bought some gas at $2.27 a gallon at my local station.
If greed were the driving force behind gas prices, why the huge swings in price? Are oil company executives less driven by greed today than 2 weeks ago?
The simple fact is, gas prices, just like the price of corn, soybeans, or any other commodity item are driven largely by supply and demand on a worldwide scale. These prices are subject to huge swings depending upon many things, including of course the worries investors have over supply shocks due to political conditions such as the Iraq war, Iranian nuclear ambitions, the whims of Venezuela’s dictator Hugo Chavez, and any number of other considerations.
Nobody expects the average politician to be a profile of courage, calmly explaining to irate citizens why price swings are a normal and expected occurrence in a volatile marketplace. But when the politicians begin proposing price controls, windfall profits taxes, huge tax breaks to ethanol producers, or even mandatory profit controls on oil companies, it's time to put on the brakes.
Time and again, experience has shown us that the best response from government is to let the market work. The oil price shocks of the 70’s didn’t give us gas lines, government supply and price controls did. Market conditions and geology didn’t reduce oil drilling in the US, the Carter-era windfall profits taxes and ongoing government restrictions on oil drilling did.
In short, rather than seeing politicians as providers of solutions to our oil price woes, Americans could rightly see them as part of the problem. Almost every solution they offer would make things worse, not better. The only beneficiaries would be the politicians, who are pretending to ride in on white horses to save consumers from the dragon of oil company greed.
All it takes to see this is a little Econ 101.
David Strom is President of the Taxpayers League of Minnesota and author of “Gasbags: What the politicians and the pundits aren’t saying about the fluctuating price of gas and oil- and what you need to know !”