High gas prices are no cause for federal meddling

May 21, 2004|By Steve Chapman

CHICAGO - Back in the 1970s, younger Americans might be surprised to learn, government bureaucrats controlled all prices in the economy. I'm not talking about the economy of the Soviet Union or Cuba - I'm talking about the economy of the United States. If a company wanted to raise its prices, it had to ask for permission from a federal agency, which didn't always agree.

The experiment was a disaster, and it cured most politicians of the urge to meddle in such matters. They learned they weren't qualified to decide the correct price of any commodity. Except one: gasoline.

John Kerry says gasoline prices are too high because of policies pursued by President Bush, who apparently has forgotten that setting them is part of his job description. The Democratic presidential challenger said Mr. Bush should stop buying crude oil for the government's Strategic Petroleum Reserve and persuade oil-producing nations to sell more oil, both of which would reduce pressure on prices.

Mr. Bush is not in the best position to complain about the criticism. During the 2000 campaign, he blamed the Clinton administration for rising prices and said if he were president, he would ... persuade oil-producing nations to sell more oil. But the government of Saudi Arabia has a baffling habit of doing what is best for Saudi Arabia, not what is best for the United States.

Senate Democrats have gone so far as to demand that the administration start releasing a million barrels a day from the strategic reserve. But if the government were to do that, one of two things would happen: Prices would not fall much, or they would.

Energy economist James Williams told the Los Angeles Times, "In terms of the impact on the price of gasoline, it might be a penny a gallon." If we haul out the heavy artillery and it uncorks a BB, OPEC will only feel emboldened.

The other possibility is that opening the reserve would indeed push down prices. Contrary to first impressions, that would not be a good thing, either.

The beauty of the market economy is that rising prices tend to be self-correcting. They stimulate investment, which in time raises output. But if the government threatens to step in every time prices jump, oil companies will see no point in trying to expand reserves or boost production.

The paradox is this: The surest way to get lower prices tomorrow is to put up with higher prices today, and the surest way to get higher prices tomorrow is to insist on lower prices today.

This is a matter not of theory but experience. When Ronald Reagan scrapped price controls on oil and gasoline in 1981, critics said prices would soar. They did, but not for long. Supplies rose, consumption fell and prices began a long decline, which left us all swimming in cheap gas and spoiled beyond belief.

In reality, today's prices aren't that high. Two dollars a gallon may sound onerous, but after adjustment for inflation, it's less than we paid from 1979 through 1985. If the cost feels excruciating, though, motorists will burn less fuel, which will help to bring down prices.

Alarmists say trusting the market is folly because the normal rules of supply and demand don't apply. They say oil is a finite resource, there is no spare capacity in oil-exporting nations and we are close to the peak of what the world can produce. At the same time, demand is rising inexorably because of economic growth in places such as China. Meanwhile, American motorists will keep driving their gas-guzzlers, because they have to get where they're going.

But all these claims are faulty. If prices stay up, oil companies will start pumping in fields that are not profitable at lower prices, and they will pour money into exploration to locate new fields. High prices will also slow economic growth in China - and in countries that buy from China.

As for petroleum-addicted American drivers, they actually will respond to pain at the pump. Lots of driving is discretionary, not imperative. Trips can be canceled, errands can be consolidated and public transit can be used. Motorists can also buy more fuel-efficient vehicles. Even among people with lots of money and very little sense, high gas prices have altered behavior: Sales of the Hummer H2 have dropped for eight months in a row.

In the next few months, prices may rise even higher, but not much can be done about that. With sound policies, though, the trouble will pass. George W. Bush and John Kerry can do something to help: nothing.

Steve Chapman is a columnist for the Chicago Tribune, a Tribune Publishing newspaper. His column appears Tuesdays and Fridays in The Sun.

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