L. Neil Smith's
Number 237, September 7, 2003

Pretty Close to the Mark

Stop Bustamente's Political Gouging!
by Todd Andrew Barnett

Special to TLE

California Lieutenant Governor and gubernatorial candidate Cruz Bustamente obviously thinks he's a man on a crusade to protect consumers from "greedy" oil company executives. This same man, by the way, has publicly declared his support for troubled Democratic Governor Gray Davis who is being recalled by the voters due to his disastrous fiscal spending policies (a $38 billion deficit plaguing the state!) and his reckless intervention in the state's energy market (an intervention which resulted in the recent California Energy Crisis).

Obviously, Bustamente is also the one who opposes the California recall election, but is making use of his time to score political points with the voters by crying wolf on gas prices in his state. It is true that gas prices have gone up, but have they gone up as high as he says it has?

Oh please! He thinks that he's an expert on the marketplace, as if he's the one holding the trump card to bring sanity back to the oil market. Not that it matters to him or to anyone else, but he couldn't produce and sell a barrel of oil to save his soul.

Bustamente, appearing before a group of supporters and reporters in a parking lot adjacent to a gas station selling gasoline for more than $2 a gallon on Labor Day weekend, says that the State of California must "regulate" gas prices. He says that the commodity ought to be under the direct thumb of the state's own Public Utilities Commission (PUC). Not only that, he claims that, in order to keep the alleged "price-gouging" oil industry in check, the only way to do it is to ratify a state constitutional amendment which, if passed, will enable PUC to oversee the operations of the companies as it already does with other commodities. Oh, and did I forget to mention that Democratic California Senator Joe Dunn is the mastermind behind the proposed amendment — currently being touted as SCA 13?

In an absurd display of demagoguery, Bustamente says, "Californians are being gouged, and under the current law we are powerless to do anything about it." But does he have a point?

No, not at all!

While it is true that gas prices have gone up in California, there's a reason for it: the short supplies and the low inventories due to the booming holiday weekend season. Has it ever occurred to him that when more people travel on the roads, there is more immediate demand for gasoline, which lessens the supply of that resource? And when that happens, it causes prices to spike but only temporarily? When demand goes up, supply goes down, resulting in the increase of the price. Ergo, the high price tells consumers to economize whatever resources they have left. When demand goes down, supply goes up, resulting in the decrease of the price. Ergo, the low price tells consumers not to economize whatever resources they have left. This is a simple case of Economics 101. No one has any reason to be alarmed.

The other reason why the prices have gone up is that inflation — that is, the increased monetization of our currency — has not caught up with the price in time. When the federal leviathan increases spending at all levels, it induces prices to spike artificially, thereby causing a negative ripple on the economy. Whether people understand it or not, it has everything to do with whether the increase in the gasoline prices is in concert with the other costs of goods and services. According to the Energy Information Administration, gas prices in California, now currently standing at $2.101 a gallon, have gone up approximately 18 cents from last week when the price was standing at $1.92 a gallon. However, the agency's own data shows that gas prices, on and off, have been steadily declining, in spite of the latest temporary increase. In other words, gas prices, when adjusted for inflation, have been consistently moderate.

What also causes gas prices in California (and in some other states) to climb is the reformulation of gasoline. It is quite expensive to reformulate fuel, simply because EPA regulations, in accordance with the provisions of the Clean Air Act Amendments of 1990 (a federal decree which was signed into law by former President George H. Bush), make it costly to use, especially when there is no valid economic and environmental incentive to do it. The idea behind the reformulation mandates is to make the air much more breathable than it has been in the past by reducing the levels of smog and benzene, even though it is supposed to add only 4 cents to the price. But that is nothing but statist poppycock. Thanks to the regulations (which took effect on June 1st, 2000), the price of gasoline has soared (it has increased the price per gallon by 25 cents) and the levels of smog and benzene have gone up (the reformulation process evaporates the unburned fuel because of the simple evaporation of ethanol and have skyrocketed the smog and benzene rates). Not only that, they have also created monumental compatibility problems (this occurs in areas where market conditions are constantly changing).

Gas taxes are also a significant contributing factor to higher gas prices — especially the prices in California. Perhaps Bustamente should have taken into account that the state's gas tax in California increased from 9 cents a gallon to 18 cents a gallon on January 1st, 1994 (a 9 cents increase). That alone doesn't sound like much, but when you have 43 different gasoline taxes on a barrel of oil and a federal gas tax standing at 18.4 cents a gallon, customers are paying above normal market price levels than they ought to be paying. If any enterprise is gouging the gas-consuming public, it's the socialist enterprise we call government — not Big Oil.

And by the way, if the federal and state gas taxes were rolled back, oil entrepreneurs would be given the incentive to not only maximize their profits, just to increase their supplies, but they would find it more profitable to build more refineries relative to the supply of their commodity. That would be a good thing — not a bad thing.

However, a politician like Bustamente doesn't want to admit any of these things. He's not interested in the public interest (remember, it's just an act). He's only interested in buying votes. That's too blatantly obvious.

What's even more insulting is the charge that oil CEOs are willfully and shamefully trying to rip off gas consumers via "price gouging." But that is nothing but a socialist invention. That's just it: "price gouging" doesn't exist. It never has and it never will. Prices work in conjunction with the supply and demand of a commodity. The clever mechanism we call the price communicates to consumers that the availability of a resource is limited. After all no company in its right mind could produce more supplies than what consumers wanted because the exorbitant investment would be over what consumers would normally pay. To that company, it would be tantamount to financial suicide. On the other hand, no company could produce less than what consumers would want, because the lack of investment under what consumers would pay would tell consumers to go elsewhere and would be unprofitable. To a company, that would be a path to bankruptcy.

The laws of supply and demand also remind us that the world in which we live is saturated with scarcity. Scarcity tells us that human desires and wants are always surpassing the amount of resources required to produce that commodity. It also tells us that we cannot manufacture unlimited supplies of a commodity simply because we can't have everything we would like to have. This is a fundamental aspect of life. Human nature, which enacts the natural forces around us, is constantly preventing us from having unlimited supplies of every resource. Because of this, we must make certain sacrifices in exchange for something we want. This is what trade-offs are all about. If we want more televisions, we'll have to make do with fewer microwaves. The trick is to tell producers what they ought to make. Socialism — a political and economic system that transfers ownership of all resources and commodities to the state and repeals the price mechanism — is inherently flawed and can and will never succeed in practice simply because central planners are incapable of deciding what to produce based on consumers' needs and preferences. Even if they tried, they couldn't successfully do it.

When Bustamente says he wants to "regulate" gasoline prices, what he's really saying is that he wants price controls on the industry — from the production and distribution end to the retail sales end. If these price controls were slapped on the industry, imagine the increase in the prices as well as the shortened supply of gasoline. It would become a nightmare come true!

If he's so worried about high gas prices, then he could alter his campaign platform, which would clamor for the repeal of all state gas reformulation regulations and all other regulations of gas, the state's gas tax and all other hidden state gas taxes, the federal gas tax, and all restrictions on oil drilling. He could also open his own oil company and build his own refineries, thus putting his money where his mouth is. But will he do that? Nope.

Cruz Bustamente has appointed himself to the role of judge, jury, and executioner. With the public cheering on for the oil companies' lynching and in Caesaresque fashion, he's more than happy to throw the book at them.

Unsurprisingly enough the court of public crucifixion is now in session.

copyright © 2003 by Todd Andrew Barnett. All Rights Reserved. Permission to reprint any portion of or the entire article is hereby granted, provided that the author's name and credentials are included.

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