Looks like we have one senator who cannot understand basic concepts from Economics 101.

Righteously incensed over the price of gas, government on all levels is springing into action.

Congress has been busiest of all, conducting hearings, holding news conferences and drafting legislation. One bill being written by Sen. Maria Cantwell, D-Wash., would make price gouging a federal offense and heavily fine violators. Another bill to be introduced in the House will call for increased fuel efficiency, and still another, to be introduced in both houses, would impose a windfall profit tax on oil companies.

So, we are now going to have a federal law dictating gas prices? Does this mean that we will see the ever-efficient federal government telling us what acceptable profits are, no doub via an efficiet bureaucratic structure akin to the Post Office?

And listen to Senator Cantwell's reasoning for her bill.

"We need to make price gouging illegal," Cantwell said Wednesday. "We need to make sure that there is a federal price-gouging law on the books, so that in times of national emergencies, oil companies aren't tempted to rake in outrageous profits."

Cantwell is seasoned by her experience with the West Coast electrical crisis of 2001, when Enron traders manipulated the market in California and drove prices to record highs across the West.

In that case, she says, government regulators insisted that spiraling prices were the result of normal market forces. Only years later was it proven that energy traders manufactured the crisis.

Cantwell sees a parallel in the price of gas.

"Oil barons are making $200 million a day in profits," she said. "There is absolutely no reason for gas to go up in Washington as the result of a hurricane."

The problem is that there were sound economic reasons for prices to go up after the hurricane. The reason was an increase in demand and a perceived decrease of supply.

Let me explain.

As Katrina smashed into the Gulf Coast, we were told to expect a decrease in production, combined with shortages. Suddenly, the value of inventory on hand went up as the expected cost of replacing that inventory also increased. A prudent businessman in such a situation raises his prices accordingly because of questions regarding the supply of his product. In this case, that meant an increase in gas prices based upon an expected increase in wholesale gas prices.

At the same time, hearing of a potential shortage, people all over the country rushed out to buy gasoline. I know I did after getting a frantic concerned ( I am reliably informed by said wife that she was NOT frantic, therefore I retract the earlier characterization in the interest of marital bliss) call from my wife about possible shortages due to the expected disruption of production in the New Orleans area. And as anyone who got a C or higher in Economics 101 knows, increased demand leads to higher prices. Station owners raised prices accordingly.

But let's look what happened.

During the last week of August, I was paying $2.52 a gallon at the corner station. By the end of that week, gasoline was up to $2.99 at the same station due to market forces. The the following Monday, they had dropped back to $2.85 -- and one local station had gas for $2.79. Yesterday I could buy gas at the place on the corner for $2.57. Given recent oil price fluctuations and minor supply disruptions, this is not an unreasonable increase from what the prices were three or four weeks ago, especially considering we are all now aware that there is no real shortage, simply a perceived one that created a panic-induced spike in prices. In other words, Adam Smith's invisible hand has worked just like it is supposed.

Maria Cantwell, of course, doesn't get this. She sees these price increases as the nefarious actions of unethical businessmen and women -- she calls them "oil barons". I call them capitalists -- and I call her a socialist. She wants us to live in a land of governent controlled prices. I prefer to live in a land of free markets. But then again, I can understand the basics of economics, and Cantwell can't.

Posted by: Greg at 11:34 PM | Comments (3) | Add Comment
Post contains 711 words, total size 4 kb.