NCPA - National Center for Policy Analysis


October 26, 2005

While President Bush urges Americans to drive less, other politicians want government to push gas prices down. Yet, price controls have disastrous effects, says Doug Bandow, a senior fellow with the Cato Institute.

Instead of government intervention, Bandow says we must address the real reasons why gasoline prices have recently increased. The emergence of China and India as industrial powers has transformed the market; another reason prices are high - and have spiked in response to the damage inflicted by hurricanes Katrina and Rita - is pervasive regulation.

Most importantly, says Bandow, it is extraordinarily difficult to build oil refineries because of environmental regulations. These regulations, backed by activist who mix demonstrations and lawsuits, create delays and inflate costs:

  • The number of refineries and their total capacity are lower today than in 1980, and the last new refinery opened in 1976, even though gasoline consumption has jumped 25 percent since then.
  • Today, the United States must import 10 percent of its gasoline as well as 57 percent of its oil; thus, even the temporary closure of several refineries by hurricanes Katrina and Rita sharply inflated pump prices.

High prices might be painful, but they are the most efficient way to distribute goods in short supply. Quite simply: Prices rise when supplies fall. That signals consumers to use less and sellers to supply more, says Bandow.

But price controls short-circuit the adjustment process and intensify shortages. That was the experience during the mid-1970s gas "crisis." Citizens in the world's wealthiest country sat in gas lines because the federal government allocated supplies and restricted prices. Only when President Reagan lifted price controls did supplies jump and prices fall, says Bandow.

Source: Doug Bandow, "Price-Gouging in the Public Interest,", October 24, 2005.


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