Sometimes the simplest solution is the best one, but not in the
case of high gasoline prices. Previous federal efforts to simply
outlaw high prices through gasoline price controls have a bad track
record, actually hurting consumers rather than helping them.
Several pending bills seek to reduce gas prices by prohibiting
"price gouging," essentially making it a crime to charge too much
for gasoline. Any such attempt would again backfire and
exacerbate the pain at the pump.
Repealing the Law of Supply and Demand
The market price of gasoline is the price at which supply and
demand are balanced. Currently, that price is uncomfortably high,
largely due to stubbornly high crude oil prices and barely-adequate
refining capacity in the face of strong U.S. and global demand for
gasoline. But high prices eventually lead to solutions because they
give producers extra incentive to increase supplies and give
consumers extra incentive to cut back on unnecessary driving. Over
the long term, they can even create opportunities for alternative
fuels. This is why oil and gas prices fluctuate over time, and no
past increase has ever been permanent.
But some are losing patience with this process and want to use
price controls to force the price below market levels. That only
means that demand would outstrip supply at the mandated price. This
is why attempts to impose price controls in the 1970s led to
shortages and gas lines.
Consumers paying $3.20 per gallon may like the idea of the
government stepping in and setting a limit on the price-until they
realize how hard it would be to actually find gas at the
As Bad As Price Controls
Fortunately, Congress is not seriously considering imposing price
controls directly. However, there are several pending measures that
would outlaw price gouging. This approach would likely cause the
same problems as price controls.
These bills feed off consumer anger over high gas prices and
suspicion that oil industry misconduct is somehow to blame.
Existing antitrust laws already forbid oil companies from engaging
in monopolistic practices or colluding with competitors to suppress
supplies and raise prices. The new bills propose to add "price
gouging" to the list of illegal activities.
Price gouging is a term often used but never clearly defined.
The new bills use vague and arbitrary terms like "unconscionably
excessive." This could include justifiable and unavoidable price
increases caused by market conditions, such as the disruptions
caused by Hurricane Katrina. The bills would impose civil and
criminal penalties, including imprisonment. Thus, while the
definition of price gouging is subjective and vague, the penalties
would be severe. The chilling effect would result in fewer market
participants and lower supplies--just the opposite of what is
needed--particularly in emergency situations such as
Federal Trade Commission Voiced Strong
Because these bills put the Federal Trade Commission (FTC) in
charge of enforcing price gouging, it is worth noting what the FTC
itself thinks of the idea. Last year, the FTC published a
comprehensive report, "Investigation of Gasoline Price Manipulation
and Post-Katrina Gasoline Price Increases." The report was the
result of the latest in a long series of congressionally mandated
FTC investigations of the oil industry and looked specifically at
the reasons for high gasoline prices in 2005, both before and after
hurricanes Katrina and Rita. As with previous FTC reports on this
topic, the report found no evidence of antitrust violations,
concluding that "the evidence collected in this investigation
indicated that firms behaved competitively."
With regard to the post-Katrina jump in prices, the FTC
concluded that it was due to supply disruptions, not market
manipulation: "In light of the amount of crude oil production and
refining capacity knocked out by Katrina and Rita, the sizes of the
post-hurricane price increases were approximately what would be
predicted by the standard supply and demand paradigm that presumes
a market is performing competitively."
Most importantly, the FTC warned against price-gouging
legislation: "Our examination of the federal gasoline price gouging
legislation that has been introduced...indicates that the offense
of price gouging is difficult to define." The FTC adds that "the
lack of consensus on which conduct should be prohibited could yield
a federal statute that would leave businesses with little guidance
on how to comply and would run counter to consumers' best
The FTC concludes that a price-gouging law that does not account
for market forces would be counterproductive. "Holding prices too
low for too long in the face of temporary supply problems risks
distorting the price signal that ultimately will ameliorate the
problem." In other words, price-gouging restrictions could act as
de facto price controls and cause the same problems. For
example, if suppliers to the post-Katrina gasoline market feared
being targeted for price gouging and so kept prices artificially
low, the shortages could have been prolonged and caused even more
hardship for consumers.
In fact, some of the actions that caused gasoline prices to
return to pre-Katrina levels within 10 weeks of the hurricane, such
as bringing in extra gasoline from unaffected areas into the
shortage areas, could be considered price gouging. If price-gouging
measures were enacted, gasoline suppliers would likely play it safe
and forgo such actions the next time, to the detriment of
The FTC has made it clear that price-gouging laws have the
potential to do more harm than good. At the very least, Congress
should consider the opinions of the very agency it wants to enforce
its misguided price-gouging policies.
Ben Lieberman is
Senior Policy Analyst in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation.
H.R. 1252 (Federal Price Gouging Prevention Act), S. 94 (Gasoline
Consumer Anti-price-gouging Protection Act), and S. 1263 (Petroleum
Consumer Price Gouging Protection Act).