Thursday, September 04, 2003

Rights and Reason: Disconnect on gas prices

Bruce Bartlett observes California Lt. Gov. Cruz Bustamante's call for price controls on gasoline yesterday at the Washington Times:

Last week, Mr. Bustamante proposed amending the California state constitution to allow the Public Utilities Commission to regulate gasoline prices. "Californians are being gouged," he charged. His proposal would require oil companies to justify price increases and regulate their profits in the state.

The price control plan has universally been condemned on economic and legal grounds. "It's a terrible idea," says energy expert Philip Verleger. He warned that it will lead to gas lines as oil companies export gasoline production from California refineries to other states and reduce imports of gasoline from Canada, the Caribbean and others places that now serve the California market.

The state would have no power, even if the constitutional amendment were adopted, to compel oil companies to keep supplies in the state or bring gasoline in from elsewhere. Any effort to do so would be a violation of the commerce clause of the U.S. Constitution and surely be thwarted.

Says law professor Anthony Sabino, "Gasoline and the business of selling gasoline is part of interstate commerce that belongs to Congress to regulate, if at all." He added that Mr. Bustamante "is either very ignorant of the law or he's getting incredibly bad advice from his advisers or it's a publicity stunt."
The first thing I thought of when I read this story was how such a proposal would violate the rights of the oil producers. Too bad that wasn't the first thing on Bruce Bartlett's mind. This is how Bartlett tackles the pro-price control premise:

Unfortunately, the movement to control gasoline prices is not limited to California. Last year, Hawaii enacted a law giving it the power to regulate gasoline prices. It is scheduled to go into effect next year. In Washington, Rep. Edward Markey, Massachusetts Democrat, and Sen. Joseph Lieberman, Connecticut Democrat, have been pressuring the Energy Department to take action against high gasoline prices.

Apparently, neither has bothered to learn the facts of the situation before lashing out at the oil companies — always convenient whipping boys for liberal politicians. If they checked, they would see that real (inflation-adjusted) gasoline prices are about where they have been for most of the last 20 years. The recent runup is from a historically low level. Even so, they are still substantially lower than they were in 1981: $1.79 per gallon now versus $2.74 then. And contrary to popular belief, oil company profits are not rising. According to Business Week, the profit margin in the oil industry is only 5.4 percent, compared with 6.4 for all industries.

The main reason why gasoline prices rise and fall is because of fluctuations in the world price of oil, which oil companies have little control over since they import most of it from places like Saudi Arabia. California, however, has deliberately imposed higher costs on itself by requiring that gasoline sold there be specially formulated to reduce pollution. With a limited number of refineries able to produce the kind of gasoline California demands, prices there have long been higher than in the rest of the country.
Note the absence of a moral argument. Bustamante and like-minded others are wrong, but only in so much as they don't understand that oil companies earn less profits on average than other industries.

What if oil companies earned 50% profits? What if oil prices were, on average, higher today then they were in the past? Would it then be acceptable for Bustamante and his ilk to regulate the price of gas? I think not.

Bartlett is right more often then he is wrong, but this most recent column of his was little more than a waste of ink.

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