Thursday, September 8, 2005

Capping gas prices will hurt consumers

Similar market manipulation failed in the 1970s

The Detroit News

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Gov. Jennifer Granholm, U.S. Sen. Carl Levin and the other politicians who are calling on President George W. Bush to cap gasoline prices are wasting taxpayer time and money.

Contrary to good sense, simple economics and recent history, they are seeking the regulation of gasoline prices and limits on profits for the oil and gas industry, alleging the companies are profiting from the Hurricane Katrina disaster.

This sounds a lot like the 1970s, when Presidents Richard Nixon and Jimmy Carter tried to manipulate petroleum markets through price caps and windfall profit penalties.

What happened then will occur again if similar tactics are tried. Demand for oil products continued unabated because consumers were insulated from the true cost. But supply fell because the caps and penalties proved to be a disincentive for increasing production.

The result was shortages that became a hardship for the consumers the measures were intended to protect.

It wasn't until President Ronald Reagan scrapped the strategies of his predecessors that oil supplies and prices stabilized.

For her part, Granholm is choosing political pandering over solutions that are within her control. She criticizes Exxon Mobil Corp. for bringing in $7.64 billion in net income between April and June.

But she doesn't mention the windfall the state of Michigan is reaping from taxes on gasoline.

Michigan is one of only a handful of states that adds sales tax to gasoline. That 6 percent tax percent levy even applies to the federal highway tax, so in effect, Michigan is taxing a tax.

Granholm has resisted calls from state lawmakers to cap the state sales tax on gasoline. But she's all for caps on perceived oil industry profit gains.

The state is no different than the oil companies -- when the price of gasoline rises, so does its revenue.

Levin joined the chorus this week by introducing legislation that "would provide the president the authority to temporarily freeze the price of gasoline and other refined products at or below the levels that prevailed before Hurricane Katrina." Violators could be subject to a penalty of three times the amount of money made on the higher prices.

If enacted, the controls would put the brakes on the only hope for bringing down gasoline prices -- increasing supply.

That's something the politicians can help with by easing fuel the blending rules that strain the production capacity of oil refineries, streamlining the permitting process for siting new refineries, and removing restrictions on responsible oil and gas exploration.

However tempting it is for politicians to meddle in the oil and gas market, anything they do will only make a bad situation worse.