The new Salem witch trials

Congress should blame itself, not imaginary 'price gougers,' for the run-up in gasoline prices, says Fortune's Alex Taylor.

By Alex Taylor III, Fortune senior editor

NEW YORK (Fortune) -- Gasoline prices hit an all time high of $3.227 a gallon just before the Memorial Day holiday, and once again, Congress has taken the easy way out. Instead of doing anything substantive about the United States' unquenchable thirst for gasoline, it has gone searching for phony villains - and found them in the personage of mysterious "price gougers."

The U.S. House of Representatives has passed a bill that would ban sellers of gasoline from charging prices that are "unconscionably excessive," or take "unfair advantage" of consumers. Nowhere does it define exactly what it means with those terms. Creating a fictional solution for a serious problem gives everybody a way out without having to make tough choices. Even the normally sensible Christopher Shays (R-Conn.) couldn't resist pandering to voters of the Nutmeg state by sending a letter to President Bush, directing him to "get a handle" on potential gas price gouging."

Everyone is certain that it's blue skies ahead for Chrysler. Fortune's Alex Taylor asks, Is there less here than meets the eye? (Read the column.)

There are lots of reasons why gasoline costs so much these days, but price gouging isn't one of them.

In fact, if any lawmakers (or their staff ) made an effort to read publications put out by their very own government, they might find that out. As recently as a week ago, the Government Accountability Office (GAO) reported to the House Oversight Subcommittee on "Factors that Influence Gasoline Prices." They were, in descending order:

  1. Crude oil prices;
  2. Higher demand;
  3. Limited refinery capacity;
  4. Declining gasoline inventories;
  5. Government regulation.

Note that price gouging is not among them.

Congress might have looked to the Bush Administration for leadership on this issue, but it would have found none. Like Congress, the White House has been trying to shift the responsibility for higher gas prices on to somebody else - mostly the auto companies. It wants them to build more cars that run on ethanol, gasoline-electric hybrids and hydrogen-powered vehicles.

Nice idea, but easy answers are usually the wrong ones, and they are in this case, too.

  • Ethanol itself is one source of the current gas price spike. Refiners have been shifting capacity out of gasoline to deal with increased demand driven by government subsidies.
  • Hydrogen is a joke because making it consumes more energy than it produces, and it creates all sorts of distribution and storage problems. Technical issues seem likely to keep hydrogen the energy of the future for a long time to come.
  • Gas-electric hybrids do show promise. As lithium-ion batteries are developed that are optimized for automotive use, they are more flexible to use and easier to recharge. Physics continues to interfere, however - hybrids are inherently heavier and more expensive than automobiles with single powertrains.

As for gouging, it is hard to imagine a commodity whose price it would be more difficult to manipulate than gasoline. There is competition all along the supply chain - from the wildcatters who drill to the independent gasoline retailers who compete with the majors like Exxon (Charts, Fortune 500) and Shell (Charts).

To be sure, the competition is slightly less robust than it used to be. The GAO identified more than 2600 mergers during the 90s that increased market concentration in refining and marketing. After examining eight of these mergers, it determined that they resulted in prices rise in the wholesale price of gasoline between one and seven cents a gallon. Not a huge amount, but not trivial either.

Arguing about the impact of mergers or blaming price gougers, however, is missing the point entirely. Pricing is the way free markets allocate scarce resources. The only way to bring down the price of gasoline is to use less of it.

And how do we do that? Put economics to work again. Raise the price and shrink demand. The government should phase in a tax on gasoline to give drivers an incentive to travel fewer miles and use the revenue to develop mass transit and increase research in alternative methods of propulsion.

Doing anything else is a waste of time and energy - and only increases the cynicism voters feel about the courage and resolve of their elected representatives. Top of page