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Let demand determine price at pump

By Mr. George Dick

Kentucky Attorney General Greg Stumbo announced he intends to investigate and prosecute those who are “profiteering” from Hurricane Katrina.

Before he begins wasting taxpayer money and harassing gas-station owners, I wish he could tell us what separates “profiteering” from profits.

He might suggest that profiteers make “excess” profits, exploiting natural disasters for their own selfish gain by gouging consumers.

Stumbo, like many politicians, illustrates a lack of understanding about economics by attacking the business sector for raising prices and seeking more profits.

In a market economy, prices serve to instantly tell us what we must give up to get something else. Prices simply offer information – they are neither good nor bad – and are determined by supply and demand.

How we distribute the scarce resources of our planet, including our precious time, is factored into the price of all goods and services.

No one forces us to buy gasoline at high prices. We can choose to walk, ride a bike, take the bus or carpool, and some do. Using less will reduce the demand for gasoline, and tends to lower prices.

Profits are the market’s signals to help entrepreneurs decide where to invest their time and resources. By seeking to maximize profits, businesses create more supply, which also tends to lower prices.

Over time, the price of gas stabilizes and may start to decline. When prices and profits fall, will Stumbo decry the gas war and resulting bankruptcies?

The alternative to allowing the market to set prices is having the government do it. But such centralized command and control of the economy proved spectacularly unsuccessful in the Soviet Union and everywhere it has been tried throughout history.

Government price setting will likely lead to shortages (evidenced by rationing and queues), waste (think price supports and government cheese) and dissatisfied consumers with little choice.

Witness the violent stampede that took place in Richmond, Va., when the school system sold off valuable laptops for $50 each. Not only did taxpayers lose out; so did the unfortunates who were trampled.

The truth is that government officials like Stumbo can no more control the cost of gas than they can the fury of nature.

President Richard Nixon tried to limit profiteering by Big Oil during the 1973 oil embargo, when he convinced Congress to pass the Emergency Petroleum Allocation Act, which forced price controls upon oil producers and attempted to coordinate the allocation and distribution of gasoline on a national level.

The result was rationing that resulted in long lines of cars waiting hours at the pump to buy a few gallons of gas. Fistfights were common as tempers flared. The economy went into recession. Our dependence on imported oil actually increased, as domestic producers – forced to sell at pre-embargo prices – cut back production.

To be sure, the cost of gasoline doesn’t go down when the government artificially lowers the price. If the government sets a price below the total cost of supplying gasoline to customers, retailers will not replenish their supplies and will allow their tanks to run dry. As a result, consumers will appreciate lower prices but will find there is no gasoline to buy.

Stumbo suffers the fatal conceit of believing that government knows better than the market what the price of gas should be and how much profit gas stations should make.

Frankly, I don’t know why he's so timid. Why doesn’t he just mandate gas stations sell gasoline at $1 per gallon? Or better yet, since we live in a democracy, perhaps we should vote on how much profit gas stations should make.

The absurdity of these proposals reveals the truth: Government interference in the marketplace doesn’t solve pricing problems; it causes them.

Hurricane Katrina is a tragedy that, given time, individuals and free markets will overcome. Short-term economic disruption and price hikes cannot be avoided.

Let us not compound our problems by asking government to do something it has no right or power to do. Otherwise, nature’s freak calamity will evolve into a permanent man-made catastrophe.

–George Conrad Dick of Louisville is an analyst for the Bluegrass Institute, Kentucky’s free-market think tank.

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