Economist Argues That Market Forces Should Hold Sway in Oil Price Debate, Not Government Intervention

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Economist Argues That Market Forces Should Hold Sway in Oil Price Debate, Not Government Intervention

Steidtmann, a recognized expert on economic forecasting of retail sales activity, consumer trends, and general economic conditions, is also a regular contributor on financial matters to VNU publications, including CSNews.

There is something about rising prices for oil and gasoline that seem to bring out the worst in politicians. It’s almost like a replay of ‘That 70’s Show’ only without the bad fashion. As oil prices have soared in the past year, politicians on both sides of the political fence have called for a wide variety of responses to this perceived ‘crisis.’ These ‘solutions’ have included price controls, excess profit taxes on oil companies, oil tax rebates for consumers, increased fuel standards for cars and trucks and penalties for price gouging. It’s not like we haven’t been here before.

Price controls are probably the worst idea out there. Price controls effectively reduce producer’s incentives to bring more product to market and do nothing to discourage consumers. The result is that a temporary problem becomes a permanent crisis.

Excess profit taxes take away the money needed to expand capacity. It also assumes that the rate of return on capital for oil companies is somehow excessive when compared to other businesses. It’s not.

Oil tax rebates are a clever idea. About 45 cents of every gallon of gasoline is made up of excise taxes. But tax rebates are regressive; they do nothing to increase supply or reduce demand and were a bad idea when first proposed by President Carter back in the 1970s. They haven’t gotten any better with the passage of time.

Fuel standards for cars have been with us for some time. Fortunately, the auto industry has done a great job redefining what a car is to avoid much of the fuel standard regulation. The remaining standards, however, force the auto companies to produce cars that consumers don’t want, one of the reasons the industry is having such a hard time in the midst of a booming economy.

Pricing gouging is a little like pornography; every regulator knows it when they see it, they just can’t quite define it. Price gouging also assumes that oil companies set gasoline prices. They don’t. Prices are set in futures markets taking into account changing supply and demand dynamics. A multi-million dollar study by the Clinton administration back in the late 1990s failed to turn up much evidence of price gouging back then.

Ethanol has been around for a long time. The problem with ethanol is that without government subsidies and trade protection, it probably would not be a market competitive alternative. Ethanol also takes an awful lot of energy just to produce and it has been known to reduce gas mileage in certain vehicles.

Where do we go from here?

Policy Matters

There is no silver bullet solution to energy challenges the U.S. faces today. No single solution will bring oil prices down and reduce our reliance on foreign sources of oil that increasingly come from politically unstable regions of the world. For the last 30 years through Democratic and Republican administrations, the U.S. has grappled with trying to craft an effective national energy policy. It really isn’t rocket science. As a nation we should pursue policies that increase supply and reduce demand through conservation.

The easiest way to discourage the consumption of any product is to raise its price. Higher energy taxes would encourage consumers to seek other alternatives to driving like car pooling, more gas efficient cars, living closer to work, even telecommuting, heating their home like insulation and cooler temperatures in winter.

At the same time, we can use the revenues from higher energy taxes to encourage alternative sources of energy. The most promising of these are oil shale. The Green River Basin in western Colorado has a trillion barrels of recoverable oil, four times the current reserves of Saudi Arabia. Other potential sources include solar, wind farms, tides, fuel cells, bio-mass, and nuclear. Each has its problems, limitations and drawbacks, but collectively they represent viable future sources of energy.

The Crisis That Wasn’t

The average price of gasoline today is about $2.90 a gallon. Taking out the $0.45 a gallon for Federal and State excise taxes, the price of gasoline by volume is less today than the price of bottled water and just about as important. Once an arbiter of growth, inflation, stock prices and consumer spending, oil no longer matters that much in the current economy.

In retrospect, there was no energy crisis per se. What we had was a price increase of a basic commodity that was made worse by a series of extremely bad government policies. For retailers, the good news is that the retail economy is no longer held hostage to the passing whims of OPEC. For the broader economy, the lesson is that the market is a much better arbiter of value whether it is oil, stock prices or wages than is any government intervention aimed at managing some crisis. Productivity-enhancing policy changes more than fancy new technology lies at the heart of the current strong economy.

Got an opinion on the fuel price issue? Let us know. Email: [email protected]