Peter Rodgers on price-gouging legislation

Rodgers writes:

With the passage of energy legislation in both the House and Senate, Congress has embarked on its latest effort to root out the alleged oil industry conspiracy that makes filling up the family SUV a $75 experience. Amidst charges of “price manipulation,” both the House and the Senate have passed Anti-Price Gouging legislation that is supposed to send oil industry executives to jail for ten years for charging prices that are “unconscionably excessive” or take “unfair advantage” of “energy emergency” conditions. Lawyers and judges likely will spend years pondering the meaning of these words, and it is entirely unclear whether anyone ever will go to jail or pay a fine for such vaguely defined conduct. However, for Representative Bart Stupak (D-MI), the author of the House bill, it’s an easy proposition. Price gouging, he explains, is just like that (in)famous definition of pornography, in that “consumers know it when they see it.” And, after all, who will pity those well-paid oil executives if, despite not happening to see it the same way, they end up making license plates.

President Bush says he will veto the proposed law, because it amounts to a return to the price controls of the 1970s and will cause gas lines. Whether he does so or his veto can be overridden by the Congress remains to be seen.

The proposed legislation seems unlikely to change the dynamics of the retail gasoline markets or result in any meaningful savings. The economists tell us that gasoline prices, while often volatile, especially in the summer, fundamentally are the product of supply and demand conditions. Refineries in United States operate at high levels of capacity and are subject to outages due to stringent environmental requirements. The supply of imported gasoline meeting U.S. clean gasoline specifications is shrinking, especially as Europe, formerly a major source of marginal imports, develops its own clean gasoline requirements. In recent years, prices have spiked due to weather conditions, including several hurricanes. Demand by gasoline-thirsty consumers is highly inelastic, which means that whenever supply shrinks, prices rise dramatically.

But, assuming for sake of argument, that consumers are the victims of unsavory tactics by oil companies, there already are plenty of laws on the books to address bad oil company behavior. To begin with, the states have taken so-called price-gouging prevention into their own hands. Over half of them have enacted laws to proscribe abusive gasoline pricing. A federal price-gouging law thus largely would be superfluous in these states and would add an element of confusion as to who may punish the bad guys.

At the federal level, collusive behavior by oil companies that fix or manipulate oil prices already is a crime under traditional antitrust laws. The Federal Trade Commission has been investigating pricing and competition issues in the petroleum industry for decades. For better or worse, the FTC has found scant evidence of abusive gasoline pricing by big oil.

Separately, the Commodity Futures Trading Commission has used the tools it perfected during the investigations of Enron’s cheating in the California power markets to pursue “price manipulation” in other energy markets and certainly could do so in the case of gasoline price manipulation. For instance, in 2006, the CFTC filed a important complaint against BP for scheming to earn illegal profits in the U.S. propane market. Shortly afterward, a BP trader plead guilty to felony market manipulation. Other company executives are said to be under criminal investigation by the Justice Department, and most observers believe that BP itself will be hard-pressed to avoid multi-million dollar penalties to resolve the civil case against it.

Price-gouging legislation, while theoretically addressing the symptoms of today’s tight markets, does nothing to solve the fundamental causes of high gasoline prices. Congressman Stupak’s law will not rein in America’s appetite for big cars and unlimited driving. It will not help build a barrel of new refinery capacity to produce incremental gasoline. And it will not alleviate the difficulties brought about by environmental laws that reduce the amount gasoline flowing to the market.

Finally, if the issue troubling Congress is energy industry profits or even profiteering, vaguely articulated price gouging prohibitions will do little if anything to cure the problem. Congress knows how to take back undeserved profits from oil companies, having enforced a windfall profits tax on the industry for eight years beginning in 1980. Putting aside the wisdom of such a tax, Mr. Stupak and his colleagues certainly can find a way to take away excessive profits earned on gasoline.