- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

Fueling Misunderstanding about the Oil Market

Posted By Diane Katz On March 11, 2011 @ 3:43 pm In Economics | Comments Disabled

[1]

With gasoline prices at a two-year high, President Barack Obama today called for a crackdown on “price gouging” at the pump. Some consumers may feel relief to hear that the White House intends to protect them from supposedly unscrupulous suppliers. But the President’s energy policies are a lot more to blame for the current high prices than any market manipulation. And to the extent his “price gouging” rhetoric persists, the rise in oil prices could worsen.

Oil prices have spiked some 22 percent in the past year, amid rising demand from China and India, political unrest across the Middle East and North Africa, and inadequate refining capacity worldwide. But as documented in a recent Heritage Foundation report [2], the Obama Administration’s policies on domestic oil drilling and alternative energy also are driving prices higher and, therefore, inhibiting economic recovery.

For the President to blame “price gouging [3]” not only misrepresents the actual problem, it reveals a distorted view of the free enterprise system. Prices reflect the relationship between suppliers and consumers. If the government attempts to control prices, it risks disrupting the market signals that prompt suppliers to increase their production or consumers to cut back on their use.

In the case of oil and gasoline, higher prices induce producers to increase supply—precisely what’s needed to alleviate shortages. But, with the threat of fines and jail time if they charge “too much,” producers will be reluctant to respond to the higher market prices. Consequently, the shortages persist or worsen.

The record shows that government price controls have consistently proven to be disastrous. In the 1970s, for example, artificially low prices imposed by the Carter Administration resulted in shortages that caused gas lines a la Eastern Europe.

Numerous federal and state antitrust laws already protect consumers from price collusion, abuse of monopoly power and other anticompetitive actions. But there is precious little evidence that any such violations are occurring in the market today. To overcome the current price increase, President Obama would be far more successful by abandoning his anti-oil agenda rather than continuing to demonize the oil industry.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/03/11/fueling-misunderstanding-about-the-oil-market/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/gas-prices.jpg

[2] recent Heritage Foundation report: http://www.heritage.org/Research/Reports/2011/03/What-To-Do-About-High-Oil-Prices

[3] price gouging: http://www.heritage.org/Research/Reports/2007/05/Gasoline-Price-Gouging-Laws-Will-Not-Benefit-Consumers

Copyright © 2011 The Heritage Foundation. All rights reserved.