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Who is gouging whom?

By David Holcberg
web posted March 12, 2007

On February 28, 79 members of the House of Representatives introduced a bill instituting criminal and civil penalties on any corporation or individual found guilty of gasoline "price gouging." But the real gouger driving up gasoline prices is not the private sector, it is our government.

To "gouge" means to extort, to take by force--something that oil companies and gas stations have no power to do. Unlike a government, which can forcibly take away its citizens' money and dictate their behavior, an oil company can only make us an offer to buy its products, which we are free to reject.

Because sellers must gain the voluntary consent of buyers, and because the market allows freedom of competition, oil and gasoline prices are set, not by the whim of companies, but by economic factors such as supply and demand. If oil companies could set prices at will, surely they would have charged higher prices in the 1990s, when gasoline was under one dollar a gallon!

Because oil companies and gas stations cannot set their prices arbitrarily, they must make their profits by earning them--by efficiently producing something that we value and are eager to buy. In so doing, they assume great risks and expend enormous effort. Over the decades, oil companies have created a huge infrastructure to produce and distribute gasoline by investing hundreds of billions of dollars in prospecting, drilling, transporting, stocking and refining oil.

In the absence of political factors like the 1973 OPEC oil embargo or the Gulf Wars, the net effect of oil companies' pursuit of profit has been to drive the price of oil and gasoline, not up, but down. The price of a gallon of gasoline (in 2006 dollars) fell from $3 in the early 1920's to $2.50 in the 1940's to $2 in the 1960's to under $1.50 in the 1990's. This downward trend is all the more impressive because it required the discovery and exploration of previously inaccessible sources of oil and because it persisted despite massive taxation and increased government regulation of the oil industry.

When we see the price of gasoline today, we should not accuse oil companies of gouging, but rather thank them that prices are not much higher.

The true culprit that we should condemn for driving up prices is the government, which has engaged--with popular support--in the gouging of both the producers and consumers of gasoline.

Federal and state governments have long viewed gasoline taxes as a cash cow. In 2003, for instance, when the average retail price for a gallon of gasoline was $1.56, federal and state taxes averaged about $0.40 a gallon--which amounts to a far higher tax rate, 34 percent, than we pay for almost any other product. (Contrary to popular belief, gasoline taxes do not just pay for the roads we drive on; less than 60% of the gas-tax-funded "Highway Trust Fund" goes toward highways.)

Along with high taxes, environmental regulations--justified in the name of protecting nature from human activity--have dramatically increased the production costs, and thus the price, of oil and gasoline.

The government, for example, has closed huge areas to oil drilling, including the uninhabited wilderness of ANWR and the out-of-sight waters over the Atlantic and Pacific continental shelves. This of course significantly reduces the domestic supply of oil.

The government has also passed onerous environmental regulations that make it uneconomical for many old refineries to keep producing (50 out of 194 refineries were shut down from 1990 to 2004) and discourage new refineries from being built (no major refinery has been built in the last 30 years).

Regulations such as these push the surviving refineries to operate at almost full capacity, creating a situation where any significant reduction in the production of some refineries (e.g., from a hurricane) cannot be compensated by increased production in others. Exorbitant spikes in prices, which many attribute to oil companies' "gouging," are actually caused by government constraints.

If we want to stop the irrational forces that have been driving up the price of gasoline and our cost of living, we must demand that our elected officials eliminate the regulations and excessive taxes that restrict the producers of oil and gas. It's past time to stop gouging oil companies--and ourselves. ESR

David Holcberg is a media research specialist at the Ayn Rand Institute in Irvine, Calif. The Institute promotes Objectivism, the philosophy of Ayn Rand--author of "Atlas Shrugged" and "The Fountainhead." Contact the writer at media@aynrand.org. Copyright © 2007 Ayn Rand® Institute. All rights reserved.


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