NCPA - National Center for Policy Analysis

Gas-Price Politics

May 2, 1996

There are legitimate reasons for the recent steep climb in gasoline prices that have nothing to do with imagined chicanery in the oil industry, experts say.

Since February, average gasoline prices at the pump have risen about 15 percent, prompting President Clinton to announce the sale of 12 million barrels of oil from U.S. strategic reserves, into an American market which consumes 16 to 17 million barrels of oil a day -- leading experts to predict that the sale will not affect prices in the long run.

For a long-term impact on oil prices, analysts believe the most effective reform would be to lift the 4.3 cents-per-gallon gas tax which Clinton levied in 1993. Critics of the tax note that federal and state gas taxes have soared 72 percent in the past decade -- to nearly 40 cents a gallon. That costs U.S. households about $422 every year.

But why the price increases?

  • During this winter's record-setting cold weather, U.S. refiners shifted output to heating oil to meet demand, at the expense of rebuilding gasoline stocks.
  • Also, a series of refinery accidents and the demands of environmental rules kept refineries from raising capacity to meet demand.

Nevertheless, these realities seem not to have impressed the president, who is looking for culprits in oil industry executive offices. Experts suggest this reveals a basic distrust or misunderstanding of how the free market works; that he thinks price changes are not a sign of the shift in supply or demand, but of market failure. They point to the President's recent tinkerings in the cattle market as evidence:

  • As ranchers faced the dual problems of higher feed-grain prices and lower beef prices, Clinton speeded-up government orders of beef for school lunches -- in an effort to raise beef prices.
  • This action -- taken against the interests of consumers -- also flies in the face of farm reforms the president just signed into law, which were designed to get the government out of the business of setting farm prices.

Economists note that the free market is already moving to correct the problem of high grain prices. The record prices -- brought on by drought -- have already caused farmers to plant wheat in record amounts. The price will likely decline when that wheat is harvested.

Source: Perspective, "Oil, Beef and Markets," Investor's Business Daily, May 2, 1996.


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