- The Washington Times - Thursday, March 13, 2003

The recent surge in gasoline prices has triggered the typical American response politicians portraying themselves as voters' protectors against the evils of the market. Of particular note has been public servants' scrambling for air time and column space by demanding an investigation into whether higher gas prices reflect collusion. But it is all consumer advocate imagery devoid of substance.
Absent a smoking gun documenting conspiracy, which is already illegal, not to mention impossible if the government was really protecting us, collusion is unprovable from the available price data. The reason is that the evidence of collusion is higher prices, but multiple political and market forces, with hard or impossible to quantify effects, have been pushing up gas prices. There is no way to accurately subtract the magnitude of those effects from the actual increase in market prices, particularly because the relevant costs are forward-looking, rather than historical, to demonstrate collusion.
Events in Iraq, Venezuela and elsewhere have increased crude oil prices, and with it the price of gas. And the decision to add to the Strategic Petroleum Reserve has done the same. But any alleged collusion among refiners has nothing to do with that.
Of more importance to the retail gasoline market is the uncertainty about future oil supplies. A refiner who plans to stay in business will have to replace any oil used up in current gas production, so that the relevant cost of that oil is what it is expected to cost in the near future, not what the oil they are now processing cost yesterday. But no investigator can know what that cost "really" is in the face of the present uncertainty (where war jitters add to weather forecasting, the proper timing for seasonal gasoline blend switchovers, etc., as complicating factors) . As a result, no possible relationship between the present or past cost of oil and current retail gasoline prices can demonstrate gouging or collusion.
California's cleaner gas mandate has also raised refining costs, as well as isolating California from most short-term outside sources of gasoline, since they do not conform to California's "recipe." Again, there is no way to establish exactly how much prices per gallon should rise to cover the added billions of refining costs, because that would require knowing how many total gallons will be sold, the rate of return companies "should" earn on investment, how long before California forces them to reformulate again, throwing some refinery investment away, etc.
These changes and more would have to be both understood and accurately quantified before any analysis of gasoline prices capable of establishing collusion could be done. This has not and probably cannot be done, given the multiple interacting market forces at work. But that has not stopped the political scapegoating of "big oil" in search of the conspiracy theory vote, for a simple reason. The mere accusation puts the burden of proof on oil companies, who cannot disprove the ill-defined charges beyond a shadow of a doubt any more than their accusers can prove them. But the posturing buys politicians more exposure and more votes in the next election.
If there is collusion, it should also show up in unusually high profits for refiners. But oil-refining profits have long been marginal, at best, which is also demonstrated by the substantial fall in U.S. refining capacity over the past two decades ("greedy" firms don't rush for the exits of highly profitable lines of business). This is anything but proof of successful collusion. As Salomon Brothers oil industry analyst Paul Ting said during an earlier episode of gouging and collusion accusations that recur every time gas prices spike: "Are oil companies gouging, making unconscionable profits? The indications are that on the refining and marketing side, the earnings have actually been abysmal."
What should we make of a government collusion witch hunt that cannot possibly prove what it is looking for, and which ignores clear evidence of abnormally low profits? It seems, more than anything else, to demonstrate that rather than relying on the government to protect us against the evils of the market, we need to rely more on the market to protect us against the evils of grandstanding government policies.
And after the 1970s, we shouldn't need this reminder. After all, while the market price of gas rises when underlying conditions of supply and demand warrant, only the government can create blocklong gas lines.

Gary M. Galles is a professor of economics at Pepperdine University in Malibu, Calif.



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