- The Washington Times - Saturday, May 27, 2006

In recent weeks the political class in Washington, proving once again it is incapable of understanding the rudiments of supply and demand, has been throwing a bipartisan conniption over the price of gasoline. The low point probably arrived in April, when the two leaders of the Republican-controlled Congress, House Speaker Dennis Hastert and Senate Majority Leader Bill Frist, wrote to President Bush begging for the Federal Trade Commission to “investigate any potential collusion, price-fixing or gouging in the sale or distribution of gasoline … in wholesale and retail markets.” While that investigation is now ongoing, the FTC last week released the results of its congressionally mandated investigation into gasoline pricing in the wake of Hurricanes Katrina and Rita. Joining the pile of FTC studies that have reached identical conclusions during the past 30 years throughout both Republican and Democratic administrations, the latest FTC investigation revealed the following:

m The best evidence available throughout our investigation indicated that companies operated their refineries at full sustainable utilization rates … Our investigation uncovered no evidence indicating that refiners make product output decisions to affect the market price of gasoline … The evidence collected in this investigation indicated that firms behaved competitively.”

m “Our investigation revealed no evidence that companies export product from the United States in order to raise domestic prices.”

m “• ur investigation did not uncover evidence suggesting that [refinery] expansion decisions resulted from refineries, either unilaterally or in concert, attempting to acquire or exercise market power. Rather, the evidence suggested that the rate of capacity growth was a response to competitive market forces that made further investment in refining capacity unprofitable.”

m “The evidence we obtained during our investigation did not suggest that pipeline companies made rate or expansion decisions to manipulate gasoline prices.”

m “Inventory levels have declined since at least the early 1980s, covering periods when the real price of gasoline was declining and increasing … Our investigation did not produce evidence, however, that oil companies reduced inventory in order to manipulate prices or exacerbate the effects of price spikes due to supply disruptions.”

m “The evidence did not reveal a situation that might allow one firm (or a small collusive group) to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.”

m “In light of the amount of crude oil production and refining capacity knocked out by Katrina [oil, 27 percent; refining capacity, 13 percent] and Rita [oil, 8 percent; refining capacity, 14 percent], the sizes of the post-hurricane price increases were approximately what would be predicted by the standard supply and demand paradigm that presumes a market is performing competitively . .. Evidence gathered during our investigation indicated that the conduct of the firms in response to the supply shocks caused by the hurricanes was consistent with competition … Refiners deferred scheduled maintenance in order to keep refineries operating. Imports increased and companies drew down existing inventories to help meet the shortfall in supply.”

In the prepared statement of the FTC presented on Tuesday to the Senate Committee on Commerce, Science and Transportation,FTC Chairman Deborah Platt Majoras delivered a brilliant analysis of the indispensable role played by the price mechanism in any market economy. It represents the consensus view on price theory available in any standard economics textbook. As the latest bipartisan congressional tantrums illustrate, however, there is an oversupply of economic ignorance on both sides of the aisle in both chambers of Congress. Like the FTC’s conclusions, therefore, this superb analysis deserves to be quoted at length.

m “Prices serve a crucial function in market-based economies. They are signals to producers and consumers that tell how to value one commodity against a another, and where to put scarce resources in order to produce or purchase more or fewer goods. If these price signals are distorted by price controls, consumers ultimately might be worse off because producers may manufacture and distribute an inefficient amount of goods and services, and consumers may lack the information necessary to properly value one product against another … Thus, if there is a ‘right’ price for a commodity, it is not necessarily the low price; rather, it is the competitively determined market price … [A]ny type of price cap, including a constraint on raising prices in any emergency, risks discouraging the kind of behavior necessary to alleviate the imbalance of supply and demand in the marketplace that led to the higher prices in the first place.”

m “Consumers understandably are upset when they face dramatic price increases within very short periods of time, especially during a disaster. In a period of shortage, however — particularly with a product, like gasoline, that can be sold in many markets around the world — higher prices create incentives for suppliers to send more product into the market, while also creating incentives for consumers to use less of the product.

Higher gasoline prices in the United States after Hurricanes Katrina and Rita resulted in the shipment of substantial additional supplies of gasoline to the United States from foreign locations. If pricing signals are not present or are distorted by legislative or regulatory command, markets may not function efficiently, and consumers may be worse off.”

The cost of preventing the price mechanism from working its magic, the FTC warned, could be “long gasoline lines and shortages,” neither of which seem to be occurring today.


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