Gas Pains - and Adam Smith's Elixir - Capitol Hill Coffee House

It's a puzzle. A mystery...no, a full-blown conundrum. In any event, it makes no sense. Seems the more marketplace freedom, the more choice is available, the more people long for their shackles of regulation and control.

The communications and information fields come to mind. The dismemberment of Ma Bell brought lower prices, greater choices - and a ten page telephone bill that led consumer "advocates" to bemoan the "failure" of deregulation. The cellular-telephone industry, likewise, brought choice and value - and a hue and cry for the "need" for government oversight.

All of this comes to me as I watch the price of gasoline spiral upward - and watch these self-styled Protectors Of The Public request, nay, demand, that government "regulators" put an end to such "gouging."

Well, I don't like paying $2 a gallon for gasoline any more than anyone else. I liked paying 97 cents a gallon much better, and I'd like it even better if they'd pay me to haul the stuff away.

But that's not the way the world works. Something that people want, is going to cost. The price rises as people want it more than it's available.

I don't know whether the rise in price is tied to shortage, increased demand, the price hike in raw crude, or whether the oil companies are making a killing. I'm neither a petroleum analyst or an economist.

I am, however, an American at least partly of New England Yankee stock, and as thus have inherited a flinty-eyed understanding of free-market workings. And it's the marketplace that determines, in the end, the selling price. Of anything and everything...the price is where the seller and the buyer agree on the sale.

It's as simple as that. You want to buy my home? Make me an offer. If you want my property as much as I want your money, we have a sale.

The price will fluxuate with need. Catch me when I'm vulnerable and need money, you'll find a cheaper selling price. Conversely, if my land, only my land, fills your need - for a highway or Wal-Mart or gold mine - than you can expect my asking price to reflect that.

But if you want to buy it at a price I don't like, then you better bring a court order - because I'm going to bring a boom-stick.

This holds true for my humble little hovel; and it's true of the gasoline in the tanks of the gas station up the road. It isn't yours until you buy it; and until then, it's your choice, to buy or not buy.

You may think it's not the same situation. Of course it is. That gasoline, in many cases, isn't owned by the oil conglomerate whose sign is on the pole; it's owned by Paul Pumpjockey - who bought it on credit or borrowed money, to sell and make money.

So he can feed his kids and pay the rent.

And whether it's owned by Paul the lowly gas-boy, or by Halliburton Oil, really doesn't matter. It's about private property - and the right to keep it or sell it or dispose of it at will.

If you don't like the price that Halliburton asks for, you can go up the street to the Occidental station and see if the price is any better. Chances are, it won't be.

Collusion? More likely it's that both Paul Pumpjockey and the manager of the company-owned Occidental station are reacting to the same market conditions. Supply and demand; availability and cost of the product.

If you don't like it, you don't have to buy. You don't have to use as much. You don't have to keep the high-consumption personal lifestyle to which you've grown accustomed.

Hard to change? Painful, inconvenient? There...you've made your choice. That gas to you is still worth more, at $2.25 a gallon, than a savings with a change in your lifestyle.

If that sounds cruel and callous, it's because the market is cold and impersonal. Economic laws aren't like homicide in California or perjury in Washington. Economic laws are rigid and not broken without dire consequence.

Yes, conceivably we could set maximum prices for the sale of gasoline. We could create another Kafkaesque bureaucracy to "manage" petroleum prices.

What is going to happen immediately will be...shortages. Because the "regulatory" price will be set too low; and it won't pay to bring product to market.

Give that a thought. The first response is corporate greed! But...isn't "greed" just a pejorative for a natural human tendency? Every day, hundreds of people decide their job just isn't worth it anymore at what it pays. They leave for another...often even before finding another.

This is the exact same. Suppliers decide there's no point in providing product if it's done at a loss. If it's not producing adequate profit, they won't expand production to match the increased demand that lowered prices bring.

So...eventually these regulators will quietly be satisfied with industry justification for higher prices. And there the prices sit...at a level too high for real consumer savings; at a level too low to attract new players or new investments.

Neither new competition nor new sources of supply come to be. The end result is a stagnant industry; and more shortage from a limited output.

The end result is the repeat of the "fuel crisis" of the 1970s, born of the regulatory craze of the 1960s. What we got, what a culture always gets as a result of vilifying private initiative and glorifying false-populist attempts at government control, is fewer people working to increase availability - and more people working to tear down their attempts.

Reagan...remember him? He oversaw deregulation of the petroleum industry. Consumer advocates, the ones who cheered when Jimmy Carter called Mobil "the most irresponsible corporation in America," predicted an impoverished America.

Instead, by 1985 gasoline prices had fallen to 59 cents a gallon, from $1.12. Because deregulation made possible a recovery on investment, on work on new discoveries and new recovery technologies.

So the supply of crude, and ultimately gasoline, was increased. Which did something all the regulation, all the demonizing of Mobil and other oil producers, couldn't do.

It dropped the price...to half what it had been. Value for the consumer...it was the "unseen hand" described by Adam Smith 200 years before. Not by government regulation - but by Big Oil's selfish, greedy desires, which had the side effect of value for the customer. Smith:

"The natural effort of every individual to better his own condition ... is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations." (The Theory of Moral Sentiments, Part VI, Section II, Chapter 2)

But, you ask, what about "gouging?" What about this unfair pricing?

What about it? What is a "fair" price for gasoline, anyway? My elderly mother is fond of remembering that in 1935, gasoline was 5 cents a gallon. Which is true - of an era where a guy working at the Ford plant made $5 - a day.

Gas was 79 cents a gallon in 1977. The average American wage was $9780, according to a table on the Social Security Administration's website.

Today, gas is, let's say, $2.25 a gallon. And the average wage last year was $34,065 - from the same SSA table.

Do the math. The average guy, making the average wage, has to workless hours to buy the same quantity of gasoline than in 1977, or 1935. And that's the only test that counts.

Yes, the price has spiked. We had reaped a bounty brought about by deregulation; and geopolitical instability coupled to our failure to continue to exploit American oil sources, has finally borne its fruit. Political instability and reliance on foreign purchases, brings higher prices.

This ought to be good news for the conservation crowd. For years they have been arguing for measures to reduce use. Their program seems to center around "voluntary conservation," which of course is going to fail. Moral suasion, absent a clear emergency, always does.

Now here is economic pressure for conservation. Nothing will dissuade purchase of an SUV more than unaffordable operating costs. Yet, the same groups who want SUVs banned, also want government regulation of petroleum pricing.

Think of the irony. Government didn't give us gasoline. Government didn't bring the automobile to the market. But there's a segment of the public who hold purchase of gasoline at an arbitrary price as some sort of "right" - to be guaranteed by the coercive power of government.

That is a sure way to arrest progress in the energy industry - just as it arrested development in the landline telephone industry, just as it's kept innovators out of the transportation industry, with expensive-to-meet safety and emissions regulations.

No, the way out of this is in the palm of Adam Smith's unseen hand. Let the Arabs rise their prices, for a commodity which they've played no part in discovering or developing. Let the oil companies charge what they will. Let them price themselves out of the market, if that's their pleasure or if that's the realities of refining cost.

And let innovative developers react. While an allegedly "conservative" President is stumping for pouring taxpayer funds down the sinkhole of government research into hydrogen cars, Honda of America has brought out a car powered by natural gas - refueled from a tap in the consumer's own home. That's innovation.

But nowhere in all of this do I see a solution based on price regulation, or punishing regulation of an industry on which we rely.

Indianapolis, Indiana

May 13, 2005

* * * * * * * *

JustPassinThru is a non de plume for a blue-collar middle-class Everyman, who lives and works in the Midwest

====================================