“Price Gouging�: Setting the Record Straight
The Washington Post reports that the House of Representatives this week overwhelmingly passed a measure imposing severe penalties for “price gouging,� an alleged phenomenon it was unable to define and has left to the Federal Trade Commission to define. Once the Federal Trade Commission figures out what price gouging is, it is authorized to impose fines of up to $150 million for wholesalers and $2 million for retailers. Two year jail penalties for both retailers and wholesalers are also authorized, though presumably imposition of jail time would still require a jury trial in an actual criminal court, not a mere hearing before the FTC.
The causes of the recent run up in gasoline and crude oil prices are not hard to find. There is a rising global demand for crude oil, in large measure because of rapid economic expansion in China and elsewhere in Asia. At the same time, the supply of crude oil is sharply restricted by the fact that most of the world’s supply has been nationalized by various governments. This greatly reduces incentives and the ability to find and develop new oil supplies. And this applies in large measure even to the United States, in which vast land areas are owned by the Federal government, which has progressively reduced the ability of the American oil industry to develop petroleum deposits on government-owned land. The leading examples, of course, are the North Slope in Alaska and the continental shelf in the Gulf of Mexico and off the coast of California. These problems of government-caused lack of supply are compounded by threats to the existing supply in Iran, Nigeria, and Venezuela.
Besides these problems affecting the price of crude oil, there are also special, additional problems affecting the price of gasoline. One is the fact that since 1976, because of environmental regulations, not a single additional oil refinery has been constructed in the United States. As a result, according to Oil and Gas Journal, total oil refining capacity in the US today is less than it was in 1981: 16.8 million barrels per day versus 18.6 million barrels per day. Add to this the devastation of Hurricane Katrina, from which Gulf Coast refinery operations have not yet fully recovered. Add to that, the further problems caused by the government’s compelling the production of specially reformulated gasoline, to meet environmental requirements. (For an excellent account of these problems and how they further restrict the supply and raise the price of gasoline, see the April 28 posting by Ben Zycher on his blog “The Reform Club.)
And then, serving to drive up not only the price of oil and gasoline, but prices throughout the economic system, is the increase in the money supply caused by the Federal Reserve System. This increase, and the prospects for further increase, have become so substantial that they are more and more reducing the desirability of owning dollars. This further adds to the rise in prices, as dollars previously held are unloaded into the market and are then spent rather than held by those who receive them.
If Congress were serious about rising prices, it would return us to the gold standard. It would also eliminate the obstacles it has placed or allowed to be placed in the way of expanded oil and gasoline production. And rather than investigate oil companies, it would investigate the environmental movement and its policy of operating as a persistent pest, which uses the judicial system and government regulatory agencies to come between man and the actions he needs to perform to support and promote his life.
This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site www.capitalism.net is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.
Comments (8)
banker
I hope someone does not post a comment about the law of supply and demand not being applicable in this case because of....
Many people say minimum wage laws are somehow not subject to supply and demand laws; I wonder if someone will say that about price gouging laws.
Published: May 7, 2006 4:43 PM
Albatroz
Prof. Reisman,
I made a first, necessarily quick, reading of your book's chapter on resources and energy. I am not a physicist and therefore I am not competent to pass a valid commentary on the physical science aspects of your propositions. But I wonder if we would not find out that the amounts of energy needed to exploit "resources" beyond certain depths would grow so quickly - maybe exponentially - that the trade off between spent energy and retrieved resources would soon become negative. Or, seeing it from a different perspective, the cost of extracting those resources would make this a totally uneconomical proposition. If that were so, it would be a more rational proposition to recycle and limit ourselves to renewable resources. Maybe I will someday ask one of my physicist friends to make the necessary calculations.
Published: May 7, 2006 5:28 PM
M E Hoffer
troz:
If you happen to be unaware, of the large amounts of oil & gas deposits within the 200-mile boundary of the American continental shelf, just say so. Those reserves are well within reach of even yesterday's technology and are merely untapped for no other reason than Government Fiat.
Mr. Reisman,
You do a fine job placing the blame where it is a richly deserved, at the doorstep of the US FedRes.
Your challenge to the U.S. Congress is well served and truly a Shibboleth of the highest order. Next up should be those quasi-corporate subsidiaries of the Executive Branch, that Alphabet-Soup of Usurpers, of the Legislator's proper power, and unabashed trammelers of the 10th Amendment(at the very minimum).
Published: May 7, 2006 6:25 PM
Artisan
This price gouging thing is the most absurd scariest news I've read in a long time. Sounds like Hitler looking for the new "Jewish trade practices" that would be the "cause of the nation's moral decadence". When is all this going to stop?
Published: May 8, 2006 2:27 AM
George Reisman
Dear Prof. da Silva:
Under capitalism, the real costs both of the various chemical elements and compounds and of energy tend progressively to fall. There can be cases in which the fall in the real cost of energy (and other elements of cost as well) is insufficient to make it worthwhile to extract sufficient additional quantities of chemical elements or compounds fully to satisfy market demand. In such cases, the market price of recycled material will be sufficiently high to make recycling pay. An excellent example is the high price of gold and silver, which makes it worthwhile for dentists to have traps in their sinks that capture the shavings from old dental fillings.
However, it is absurd to compel recycling in cases in which it does not pay in terms of price and cost comparisons. When it is possible for a worker sitting in the cab of a modern steam shovel to extract 20-ton loads of ore in a few minutes, the resulting price of the element or compound will almost certainly be too low to make it worthwhile for people to spend their time ferreting through their garbage to find items to recycle that contain that element or compound. Compelling them to do so is extremely wasteful in such a case: it wastes people's time and labor.
What it pays to recycle and what it pays to mine is always to be determined by a comparison of price and cost in the two cases. And this relationship can change over time, in which case, changes in behavior may be appropriate, and will take place voluntarily if they are, because it will be worthwhile to make the change.
So, for example, if the market price of recycled aluminum or recycled plastic bottles ever got to be high enough so that the money I could obtain by gathering them up and setting them aside made it worthwhile for me to do so, I would do it, without any law compelling me to do it. But today, it is simply not worthwhile, at least not for me, or for the immense majority of people in the United States.
Most people in my neighborhood have three different-colored garbage pails, in which they are supposed to deposit three distinct categories of garbage. I have three garbage pails all of the same color—just general refuse. And I don't spend a second on separating types of garbage. However, I sometimes have moments of dread that such recycling will be made compulsory—that the government will find out that I am not "cooperating." If that time ever comes, I may end up going to jail, because as a matter absolute philosophical conviction, I am not going to live as a fool and save bits of worthless garbage, no matter what the government says.
Published: May 8, 2006 12:23 PM
Anonymous
It disturbs me that the older I get, the more convinced I am that I was wrong; Ayn Rand's fiction did not overstate the extremes to which bureaucratic rule would eventually be taken. What I took for over-simplification to make her point when coming from her villains has become everyday rhetoric.
Published: May 8, 2006 4:09 PM
AnonIsEnough
Anony-bro,
In ever more vivid Technicolor everyday. I feel, some days, now, seemingly more recent, that I'm tripping through the pages of Atlas Shrugged here in our very own sur-reality..
Published: May 8, 2006 5:06 PM
Albatroz
Prof. Reisman,
You state that "the real costs (...) of energy tend progressively to fall".
As far as oil is concerned - even at constant prices - this is not happening at the moment. And shortage of oil will end up by forcing us to adopt alternative - and more expensive - sources of energy. But that is not really the point. The point is that by having to look for new resources in places less readily exploitable, you will have to use increasing amounts of energy to obtain the same amount of resources. Even if energy costs were not to rise, extraction costs would.
Then on what recycling is concerned, there is another point to it. Getting rid of increasing amounts of garbage. If this aspect alone would justify recycling, then certainly it is worthwhile recovering what can be recovered from that recycling.
Quality of life is not only a matter of economics and income. It is also preserving the beauty around us. Let's suppose that there were enormous amounts of oil on the Grand Canyon. Would you favour destroying that extraordinary scenery to recover that oil?
Published: May 9, 2006 7:28 AM