June 27, 2006 | Commentary on Energy and Environment

Is anti-gouging anti-consumer?

Congress wants the Federal Trade Commission to go after oil companies for price gouging on gasoline. But the FTC doesn't think it's a good idea.

Over the past year, Congress has introduced dozens of bills designed to target high gasoline prices. Some are good, such as proposals to allow more domestic oil production in Alaska and in offshore areas, as well as efforts to streamline regulations that raise refining costs.

But many proposals would impose the kind of price controls that led to the shortages and gas lines last seen in the 1970s and early '80s. Apparently, some lawmakers missed the lesson of those days: that Washington can't simply force down the price at the pump.

The market price of gasoline is the price where supply and demand balances out. That price is uncomfortably high now because of strong global demand for oil and refined products, combined with supply barely adequate to meet that demand.

But high prices lead to solutions. They encourage producers to increase supplies and consumers to cut back on unnecessary driving. Over the longer term, they may even create opportunities for alternative fuels. This explains why oil and gas prices fluctuate and why no increase ever has proved permanent.

Now, some have lost patience with this process and seek to short-circuit it. But that only leads to demand outstripping supply at the mandated price - which, in turns, leads to shortages, gas lines and rationing.

The temptation is great. Consumers paying $3 or more for a gallon of gas may like the idea of government stepping in and reducing it to $2. They are less likely to appreciate passing gas station after gas station with "closed" signs in the window.

Fortunately, efforts to bring back price controls have stalled in Congress. But legislation to outlaw price gouging - the Federal Energy Price Protection Act of 2006 - has passed the House by a 389-34 margin.

Anti-gouging legislation is price controls by another name. It's not needed: Existing antitrust laws already forbid oil companies from engaging in monopolistic practices or colluding with competitors. And it won't work for a variety of reasons - not the least of which is that it's not entirely clear what price gouging is.

The term implies a price unreasonably higher than market forces can justify. But how can we know what prices are justified? Oil companies endured accusations of gouging after Hurricane Katrina. But the storm knocked out offshore wells, refineries and pipelines. Given the supply disruptions, who can say what was reasonable in the days immediately after the storm?

The legislation the House approved passes the buck on this. It would require the FTC to come up with its own definition of price gouging, then enforce it and mete out penalties that could exceed $3 million per day per violation.

Yet the FTC is not exactly a firm believer in the cause. The agency recently released a report in which it exonerated the oil industry of price gouging in the weeks after Katrina and Rita.

The report goes on to say that it would be difficult for the agency to define price gouging and thus difficult to provide direction to companies on how to comply with the law.

It concludes that a price-gouging law that doesn't 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 kinds of problems.

It's somewhat unusual for a government agency not to favor a vast expansion of its authority. That's what makes the FTC's reluctance to become the price-gouging police is particularly noteworthy. Congress should heed the agency's advice before proceeding on price-gouging legislation.

Ben Lieberman is a senior policy analyst at The Heritage Foundation (heritage.org), a Washington-based public policy research institute.

About the Author

Ben Lieberman Senior Policy Analyst, Energy and Environment
Thomas A. Roe Institute for Economic Policy Studies

Distributed nationally on the Knight-Ridder Tribune wire on 06/22/2006