May 3, 2006

May 3, 2006 | WebMemo on Energy and Environment

One Good Idea and One Bad Idea for Dealing with $3.00 Gas

Congress has a variety of proposals that deal with high gasoline prices, but it is easy to distinguish the good ones from the bad.  The good ideas recognize that free market solutions offer the best relief for consumers over the long run. The bad ideas resort to meddling with the free market, either through taxes, regulations or other forms of government interference. Today, the House voted on two bills dealing with gas prices, one good and one bad. Unfortunately, Members decided that interference with the free market offered Americans better relief at the pump.


H.R. 5254: A Good Idea to Increase Refining Capacity

Compounding the high price of oil is the high price of turning that oil into gasoline.  This is exacerbated by refining capacity that barely meets the growing demand for gasoline. Even under the best of circumstances, refiners strain to provide enough fuel, especially during the high-demand summer vacation season. When refineries are damaged by hurricanes or other adverse events, there is no cushion of spare capacity. 


Regulations, along with other factors, prevent the expansion of refinery capacity. Costly and time-consuming environmental regulations make construction of a new refinery all but impossible and hamper expansions of existing ones. In some cases, environmental regulations have proven counterproductive by discouraging facility upgrades that could reduce emissions. These regulations should be streamlined so that the domestic refining sector can better respond to the needs of a growing economy. 


H.R. 5254 contains some useful provisions for streamlining the refinery permitting process and is worthy of support. This legislation, however, failed to garner the necessary two-thirds majority to pass.


H.R. 5253: A Bad Idea to Impose De Facto Price Controls

Washington can't repeal the law of supply and demand. Today, however, lawmakers tried to do just that by passing a bill that places restrictions on "price gouging."


The market price of gasoline is dictated by price at which supply and demand balance out. Right now that price is high, but that is the market reality at this time. Trying to force the price below the market level only means that demand will outstrip supply at the mandated price. Accordingly, attempts at price controls in the 1970s inevitably led to shortages-gas lines, rationing, and stations running dry.  Despite today's pain at the pump, most Americans would prefer that gas be available at the market price than unavailable at a lower price. 


H.R. 5253 does not set specific price controls, but it proposes new restrictions on "price gouging." Under this bill, the Federal Trade Commission would create a definition of price gouging and then enforce it.  This measure could act as a price control. Depending on the definition, producers could fear changing the market price in times of shortages, such as those after Hurricane Katrina, because they could be second-guessed by regulators and then subject to legal liability.  If so, the same kinds of shortages that explicit price controls cause would result.


Today, the House considered two measures designed to alleviate the pain at the pump. Unfortunately, lawmakers voted down a measure that could have provided relief from high prices and instead passed a measure that will further regulate an industry already burdened by regulations. The House's decision to pass a bill on "price gouging" will offer Americans no real relief from high gas prices and could have serious consequences.  

Ben Lieberman is Senior Policy Analyst in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

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