Gas price "gouging"

Blogs are meant to be frequently updated, so I'm going to try to do a little (shorter) something every day even if it's not a complete treatment of the item in question. Today, I'm thinking that there's so much to get to with the PBS special that a radical shift of topic might be refreshing, so here goes…

I recently had a liberal friend of mine forward me a canvassing email from www.moveon.org, a liberal political activist site, asking me to electronically sign a petition supporting an anti-price gouging bill that was in discussion in Congress at the time. The legislation, much to my dismay, was passed, but the email conversation with my friend would make a great cut and paste here. I have heavily edited the original email to refine my arguments, to take out elements that should remain personal, and continue to establish my own internet persona. If I decide to post his replies, I'll edit even more carefully so less personal and more generally useful arguments are made, and so his persona is less applicable to his real personality and more applicable to a general mindset.
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To my liberal friend,

Let's be up front with each other: I have no doubt you mean well but I really don't appreciate it when you try to get me to sign on to things you know I don't agree with. In fact, I truly think you yourself are signing a petition without understanding even the basic facts and principles behind it.

There should be no doubt to you that almost anything from moveon.org would be highly suspect and completely unpalatable to me, but in case you're not sure WHY I would oppose such a petition, let me be blunt again: I support capitalism. It's the best system the world has found to balance the freedom of individuals and the needs of individuals because as long as trading remains free, anyone can use their talents and hard work any way they like to do something that pleases their fellow man (although sometimes "pleasing" them is immoral, which I don't condone), and both people in a trade benefit (you pay me money, I like it; I give you something you want more than your money in exchange for the money, you like what I gave you--we both win). This is basic economics, and the principle has been around a long time, has a very long track record of working everywhere it's tried.

If you would take some thought to understand even more about basic economics, you'd know what a sad rhetorical trick it is to even talk about price "gouging". If there's a disaster and there's a scarce resource, the ONLY way to get it to people FAIRLY (in other words to make sure the people that really NEED it GET it) is to jack up the price radically. Otherwise people who DON'T need it that bad will be able to cheaply buy it (say a generator), until they're all gone, and then it's horded by people who don't need it so badly. In other words, capitalism takes care of distributing resources BETTER than a government can when it tries to control markets with price fixing, etc.

I recently heard Jim Quinn from the Quinn and Rose morning show on Pittsburgh's FM 104.7 retell a story from hurricane Andrew that makes this point brilliantly. The hurricane devastated parts of Florida, and immediately people without power had tremendous need for very scarce generators. The first few hours after the storm, those who already had generators were taken care of (hospitals, other needy people, etc.) by their own foresight and preparations. But those who hadn't planned ahead, and still had need were forced to deal with people in the area who had surplus generators. These capitalists had something to rent, and were glad for the circumstances to provide them with a tremendous opportunity to make many times what their normal profit margins were. Of course, I don't have the actual numbers here in front of me, but since this is simply an illustration, ball-park figures should suffice. So let's say that the normal daily rate for renting a generator was $50. Immediately after the hurricane, let's say renters decided to charge $500 per day. You may think that's unfair, since people NEED that electricity, but putting your emotions aside for just a minute, imagine how different people would react to the reality on the ground. Of course many would be steaming mad (except the generator owners, of course), but no matter what they FELT about the matter, they still had a choice: deal with it or not. The dentist who would use the generator for running his air conditioning would probably think: "that's too pricy for me, I don't need it that bad, I guess". But the butchery owner with $20,000 worth of meat in his freezer might think: "that's tough, but it doesn't matter what it costs anymore, if I want to keep my meat's value, I better pay whatever it costs. Do you see how the instantly high price NATURALLY weeded out the people who didn't NEED it as badly? Do you see how the "gouging" really resulted in HELPING people prioritize between their wants and their needs? I don't mean within their own minds (although that too), but AMONGST each other! In other words, instead of FIGHTING over a scarce resource, the high price PEACEFULLY resolved the issue of who needed the generators more. Again, you might think you're being merciful to advocate that EVERYONE who claims a need to a generator be given the ORDINARY price, but that's really misguided because you'd be taking away from the butcher who needs to save his food (that YOU'LL be needing later, I'm sure) to give to the dentist who just wants the luxury of comfort.

There may be even better example of this principle which illustrate even better how immoral it would be for a government agency to decide FOR people who needs what more than who, but I think this will stand for now. The controls would be immoral because of two things: 1. Bureaucrats can never accurately predict the precise needs of everyone in order to be fair to everyone, so they just have to decide based on rough guidelines that become rigid rules with no room for personal variations or even variations in the situation, 2. Ultimately if they fail, it's a big giant oops to people who have suffered or even died from unmet needs, but in reality the bureaucrats making the decisions are not accountable for them, and have no responsibility.

Now let's imagine the scenario after the butcher and the dentist sort out their needs. Immediately, someone 50 miles north of the hurricane zone gets the idea: "Hey, generator rentals are going to be outrageous 50 miles south of me right now. At $500/day, I can buy a brand new generator here were there are still plenty of them available, and drive it down and still make a $300 profit today alone. That's worth it to me, so here I go." Within hours, or maybe days many other people with generators converge on the spot with their own surplus generators. Now generator owners are having a hard time renting at $500/day, and have to lower their prices because there's more supply and competition for the same demand. So the prices come down, and maybe soon the dentist can afford his luxury too. Gouging made a profit irresistible to capitalists, so the market was soon flooded with generators until the prices came back down to their normal $50/day.

Now, I know it FEELS like Oil companies are motivated by GREED, and greed IS a BAD thing, but when you really think about it, the desire to make a profit is NOT AUTOMATICALLY GREEDY. Those oil companies do a VALUABLE SERVICE! They're doing something for us we LIKE, and even if we're not happy about the price, we would only buy it if it was worth MORE to us to PAY than to NOT HAVE it. In other words, to say they're being unfair by charging WHATEVER PRICE THEY WANT, is like saying it's unfair for a school to make you wait all the way through the 12th grade for your diploma. Of course you WANT it quicker, but IF you're willing to EARN IT, you have to stay all the way through.

Im not saying there's no regulation needed. There are SOME areas that governments need to regulate in order to make things fair, or maintain health standards, for example, but for the most part, the underlying principle of government should be to make things FREE, and if they're free, the FAIRNESS takes care of itself. That's the beauty of the American Way.

Now, there are several problems with this moveon.org petition. First, and most importantly, the problem with some of the activists at moveon.org is that they seem to lack this understanding of basic economics (the law of supply and demand, the mutual benefit in trade) as I've just explained it. If you introduce ANY control on a free exchange, prices ALWAYS go up. In other words, by the proven laws of economics, this legislation WILL produce the OPPOSITE RESULT of what it intends. That should be a disqualifier right there.

But to really understand where the unfairness and immorality in the gasoline prices comes in, it's not what "Big Oil" makes, it's that politicians sitting in Washington somehow think it's morally right to tell a company what its price will be even though they have no responsibility for the results of the price. On what basis should they decide? Who decides what's a "windfall profit" and what's "fair"? If you owned a business, would you REALLY want the government (bureaucrats who may or may not have actual experience in the field they're called upon to regulate - and whose entire job description is to STOP things, rather than really MAKE things) making decisions for a company that knows what it's doing and has been making profits at it for a long time? And worse, that they might force you out of business because of a forced price, and then just say oops, oh well, sorry you failed to make any money?

And how do you determine profit anyway, by dollar amount or percentage? Did you know that oil companies average around 7 CENTS of profit for every dollar? Many other businesses would not survive with such a profit margin. And here's the real kicker--do you know how much money the GOVERNMENT makes for every dollar you pay at the pump (Federal and State of PA included)? It's more than DOUBLE that (16.6 cents @$3.00/gallon, or in other words about 50 cents per gallon: http://www.gaspricewatch.com/usgastaxes.asp)!!! If you REALLY want gas prices to stay low, sign a petition requiring the government to STOP stealing your money at the gas tank!

The final thing I'll address is also a basic misunderstanding of the BUSINESS of gasoline production. To claim that the government should force "big oil" to stop earning the money they do is to aim at the wrong target. Oil companies do NOT SET the price at the pump. The price at the pump is determined first by INTERNATIONAL oil markets (most of which is controlled by a price-fixing government entity called OPEC), then by the market forces of supply and demand. If there's higher demand for the same supply the price MUST go up, and by the same token, if supply gets short price MUST go up. The problem with summer is that SUPPLY gets short because: 1. there's more demand (people vacationing, etc.), 2. our refinery capacity is fixed (no new refineries in 30 years, environmental standards for different fuels in summer also make supply short because refineries have to re-configure for the new blend, AND they're not allowed to ship the stuff across certain boundaries because of environmental rules, so they can't try to address temporary shortages with extra shipping and storage). In other words, the real target of a petition, AGAIN, should be GOVERNMENT involvement at all. If they would get out of the way for just one of those restrictions, prices would immediately react downwards.

Let's not sign petitions until we're informed, and understand the principles behind what we're petitioning for. Anything less is falling prey to emotion-targeted rhetoric, and not letting our brains decide. What "feels" right often leads to a wrong result unless you carefully think through the consequences of the action. This petition should be no exception.