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September 12, 2005

Price-Fixing on Gasoline: Control Yourself

By

Recent gasoline-price spikes have given new meaning to the phrase "pain at the pump." And with demand from India, China and elsewhere growing, and the failure of the United States to open a single new oil refinery since the 1970s, supplies could remain tight and prices elevated for some time.

Which means lawmakers will want to show they're "doing something" and try to rein in prices.

But this would be a mistake. The answer is not to set limits on wholesale prices, as Hawaii is attempting to do, and it's certainly not to enact a system of price controls for oil and gas like the federal government did in the 1970s.

In fact, lawmakers in Hawaii and anyone on the mainland who attempts such a solution needs a history lesson about the last time government attempted to control energy prices. Many blamed -- and still blame -- the OPEC oil embargo and the effects of the Iranian revolution. But for the most part, we were our own worst enemies.

Long lines of cars snaked away from gas stations all over America because we lost faith in the power of markets to correct these problems, and we took shortcuts that only made things worse. By setting prices below market levels, the government, first under President Nixon but later under Presidents Ford and Carter, made it unprofitable for oil companies to respond to high prices as they normally would -- by increasing production.

This led to inadequate supplies and fuel shortages. Then, rather than lifting the price controls, government tried to fix the problem by imposing allocation controls. Soon, we had centrally planned programs determining how much of various fuel types to produce, how much to send each state and how much various categories of purchasers were allowed to buy.

"Scattered shortages led to hoarding and panic buying and worse shortages yet -- and those gasoline lines," wrote one energy analyst at the time. "No other consuming country cooked up this kind of purgatory for itself."

In trying to help, in trying to "do something," government gave us the worst of both worlds: higher prices and shortages.

Hawaiians are about to find out just how effective price controls can be. Thanks to a 2004 law set to take effect this month, Hawaii will institute controls on the wholesale price of gasoline. The idea is to force gas stations in Hawaii to charge the same as those on the mainland -- despite much higher delivery costs and state taxes.

But if retailers can charge what they want, and the controlled price falls below the market price, expect the same thing to happen that occurred in the United States in 1973 and 1979. Gas lines appear, and, since the price at the pump is not controlled, prices spike.

It's been a long time since the United States went down this road. Many of today's drivers are too young to remember odd-even days, 10-gallon limits and "Out of Gas" signs. Were it not so predictably sad and economically devastating, one would be tempted to give thanks that the people of Hawaii are willing to demonstrate the folly of government controls on gas prices yet again.

What we can give thanks for is that oil and gas production on the Gulf Coast is beginning to return to normal after Hurricane Katrina. This will quiet calls on the mainland for government price controls on oil and gas. President Bush has done the right thing to speak out against gouging, but it's wrong to imply that government intervention might be at hand.

Using the bully pulpit, the moral authority of the presidency, to urge merchants not to exploit a tragic situation is right. Using the power of the office to arrest market forces in the process of correcting is not.

Ben Lieberman is Senior Policy Analyst in The Roe Institute at the Heritage Foundation.

Distributed nationally on the Knight-Ridder Tribune wire

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