By Brian Carnell

Monday, July 17, 2000

Over the past 20 years, gasoline prices have tended to follow the typical pattern for a mature commodity -- gasoline has tended to oscillate in a 3-4 year cycle between high and low prices. Every time gas prices hit their highest levels, people and politicians whine about price gouging and lack of competition in the oil industry, and those complaints are forgotten after gasoline prices inevitably start their downward movement.

The July issue of Mother Jones includes an article by Russell Mokhiber and Robert Weissman arguing that this latest spike in gasoline prices is due entirely to consolidation and mergers within the oil industry. According to Mokhiber and Weissman, such consolidation inevitably leads to higher prices and the only way to achieve lower gas prices over the long haul is for the government to initiate antitrust actions against oil companies. Unfortunately their view of increased gas prices is extremely superficial.

As Mokhiber and Weissman point out, 18 months ago the two largest suppliers of gasoline, Mobil and Exxon merged. At that time industry analysts claimed that the merger would have no effect on gas prices. Now, the duo say, such consolidation is behind rising gas prices.

If true, it is kind of odd that Mobil and Exxon waited until now to raise prices. After all prior to the recent dramatic increase of gas prices, U.S. consumers enjoyed gas prices that reached record low levels. That certainly did not help the profits of companies involved in the gasoline industry. Mokhiber and Weissman do not use the figure, but others have went around claiming the oil industry must be price gouging because their profits jumped 500 percent in the first quarter of 2000, but that only looks astonishing precisely because first quarter 2000 profits are being compared to previous quarters when the price of gasoline was selling at record or near-record lows throughout most of the country.

Like other observers, Mokhiber and Weissman are especially concerned about the sudden spike in costs in Midwest gasoline, dismissing the oil industry's claim that the cleaner fuel mandated for cities such as Chicago is responsible for much of the increase. According to Mokhiber and Weissman,

That's also true, but the Environmental Protection Agency -- noting that the oil industry has had six years to prepare itself for the implementation of cleaner fuel standards that the industry helped negotiate -- says the cleaner-burning gas should only cost 4 to 7 cents more per gallon.

First, the notion that bureaucrats are experts on just how much it costs to put their regulations in place is laughably absurd. The EPA and other agencies have a long history of telling the American people that this or that regulation or change will only cost a tiny amount of money, only to see the actual cost skyrocket.

Second, both the EPA and Mother Jones article ignore the larger infrastructure issues facing the gasoline industry. Gasoline prices in the Midwest shot up, for example, after two breakdowns in the supply line occurred. First, problems emerged at one of the few refineries that produces the clean burning fuel, and then a major gas pipeline for the Midwest broke in Michigan. The result was that the amount of gasoline the industry could get into Midwest gas stations fell very quickly. As a result gas prices shot up just as quickly, especially for the clean fuel mandated by the EPA. Add rising oil prices to that mix and the result is very predictable -- a temporary surge in gas prices.

It is ironic that Mokhiber and Weissman call for further government regulation when existing regulation is largely responsible for the brief increase in prices. Regulations that require different formulations of gasoline to be sent to different parts of the country will inevitably lead to price increases, especially when combined with regulations that have stopped construction of new refineries cold and diminished investment in pipeline capacity and other infrastructure (much the same thing has happened in a related industry, power generation, where the every changing regulatory landscape has diminished investments in adding power generating infrastructure).

Mokhiber and Weissman's "solutions" are downright bizarre. Basically they want a windfall profits tax "to put an end to the industry's gain from consumer's pain due to OPEC and other input costs increases." This is an odd thing. One of the few valid insights of what I loosely call the environmental left is that in many instances consumers do not pay the real cost of the resources they use which tends to create wasteful use patterns. Mokhiber and Weissman, on the other hand, want consumers to be shielded from the costs of inputs such as oil.

Furthermore, they advocate a return to price controls on gasoline which are even worse. First, they do not work as anyone who remembers the huge gas lines of the 1970s knows. Second, they go even further toward shielding consumers from the real costs of the goods they consume. Mokhiber and Weissman ask, "Why should industry regulate the market instead of democratic government authorities?" Precisely because democratic government authorities have every incentive to please one group of economic actors over the other (whether it is consumers or gasoline companies), and ignore the many varied problems of supplying gasoline. Across the board, government control of prices results in goods being priced either too expensively (for example, the price control-like power exercised over sugar) or too low (for example, government pricing of water far below market prices in the western United States).

The reality is that basing regulations and price control schemes based on gasoline prices over the past 6 to 8 months is a ridiculous way to conduct business. If instead we look at the average price for gasoline in the United States over the past 5 or 10 years, the story is completely different -- even with the regulations on oil and gas companies, a gallon of gasoline can be bought in the United States more cheaply than almost anywhere else in the world. The temporary pain caused by brief fluctuations in the market price of gasoline is more than offset by the long term trend of lower gas prices. Further regulation or price controls in the gasoline market would effectively end the cheap energy ride that Americans have been enjoying for almost two decades now.

Source:

The Solution to Rising Gas Prices: Antitrust Action. Russell Mokhiber and Robert Weissman, Mother Jones, July 7, 2000.

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