What to Do About Rising Gas Prices
By Ayn Rand Institute: Alex Epstein (05/25/07)
With gasoline prices at their highest point in recent years, the knee-jerk response of many is to call for the government to "do something" to force prices lower. But no matter what the price of gasoline is, such calls are wrong. All market fluctuations in the price of gasoline, up or down, are a good thing--and none of the government's business.
When customers' demand for gasoline increases relative to the supply, the sellers of gasoline raise their prices. As the producers and owners of gasoline, this is their right--and we should be glad that they exercise it. Not only do price increases encourage future production, but without such price increases, we would very quickly see shortages as customer demand for cheap gasoline far outstripped the available supply. Thanks to price increases, we can ensure our continued access to gasoline to the extent we are willing to pay for it--i.e., to the extent we value it. Most of us are willing to pay $3 a gallon for a 15-mile office commute--but might not be for a 15-mile drive to our pet's beauty salon, and so our personal consumption voluntarily decreases as prices increase.
In the realm of business, a higher price means that firms will only purchase oil or gasoline to the extent that they can make profitable use of it at those prices. An efficient airline will still be able to offer low prices while using high-priced jet fuel; a less efficient airline may not be able to. A company in China or India that uses oil to run highly efficient factories can make profitable use of oil at $70 a barrel; their laggard competitors may not be able to. Since nearly every product we use involves oil at some stage of production, we all gain vast benefits from oil being directed toward its most profitable uses.
There is no moral or economic justification for any politician or consumer to declare market prices "too high," and to use the government to coerce lower prices. To do so violates both the rights of gasoline producers and their productive customers to set voluntary prices—and, in doing so, causes destructive shortages. When shortages exist, how much gasoline one is able to get depends not on one's willingness to pay a mutually agreeable price, but on one's political pull to secure rations, or on whether one has time on one's hands to wait in endless lines (as in the 1970s).
There is only one sense in which we are entitled to tell the government to "do something" about gasoline prices: insofar as these prices are made artificially high by the government's many regulations on oil and gasoline production.
Consider oil refining regulations. Various state governments impose the absurd mandate that companies refine nearly 60 different "blends" of gasoline--despite the fact that cars using today's standard unleaded gasoline, even with the overall increase in driving, pollute very little by historical standards. Additionally, endless red tape and "environmental impact studies" forced by regulators hostile to industrial development, make new construction dramatically less profitable. The costs of such regulations are huge and raise the price of gasoline; according to the American Petroleum Institute, "the refining industry has spent over $47 billion over the last decade to comply with environmental and fuels regulations--expenditures that generally yield little or no return on investment."
Another costly set of regulations are those prohibiting domestic drilling on plentiful sources of oil. In the name of safeguarding a portion of the caribou habitat in an Alaskan wasteland, drilling is prohibited in ANWR--a potential source of 1 million barrels a day. Also off-limits is the entire Outer Continental Shelf of the United States--a far larger untapped source of oil. Chevron's recent discovery of an estimated 3 to 15 billion barrel reserve in the Gulf of Mexico invites the question: How many such troves are currently off-limits?
The government is right to take action if an oil company provably threatens or harms a person's property. But to impose huge costs on oil companies and their customers in the name of preserving untouched nature is unconscionable.
What should the government do about gasoline prices? Get its hands out of the market--and keep them off.
Alex Epstein is a junior fellow at the Ayn Rand Institute.
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