Law of supply and demand at work
May 10, 2006 | 0 0 comments | 16 16 recommendations | email to a friend | print
Have no fear, Kentucky motorists! General Stumbo is on the trail of the sinister, faceless gas-gougers who have haunted the fevered imaginations of tub-thumping populist politicians for the past three decades.

The attorney general announced Wednesday that he’s issued subpoenas to 43 oil companies, wholesalers and gas stations he suspects may be gouging consumers. A guess is that’s about 500 fewer subpoenas than he’s served on the governor’s office during his probe of the alleged hiring of Republicans by Republican officials, but, hey, at least the AG is broadening his view of illegal behavior.

Inspector Stumbo may uncover evidence of massive price-fixing and other nefarious activities by Big Oil and its cohorts, the little gas station operators. But it should be noted that Congress has ordered at least a dozen investigations of gasoline price gouging and not one of those probes has produced evidence of a conspiracy to defraud motorists.

Stumbo is not the first state attorney general to take an interest in gouging. Many states have probed for gouging during the annual spring spikes in the price of gasoline. Those probes haven’t turned up anything more significant than isolated incidents of retailers taking advantage of motorists’ fears of gasoline shortages.

Stumbo launched his investigation last August when gas prices soared after hurricanes Katrina and Rita knocked out more than 10 percent of the nation’s refining capacity. Most of the damaged refineries have been repaired, but motorists now are suffering from a man-made disaster - the federal government’s stringent but largely ineffective air-quality rules.

Environmental regulations requiring the sale of blended fuels in areas with high pollution levels go into effect at the outset of the summer driving season. These fuels are supposed to reduce pollution, but studies indicate they have a limited impact on air quality.

“Boutique” fuels are more costly to produce than the gasoline sold during the rest of the year. They also put a strain on the overstretched refining system, forcing refineries to temporarily shut down while shifting to the production of the special blends. The refiners have to use different processing equipment and arrange for separate shipping of the boutique fuels.

Adding to these production challenges is the patchwork of state requirements for blended fuels. The refineries have to produce more than a dozen different fuels for sale in urban areas. President Bush recently called attention to this problem, suggesting that the nation could get by just fine with fewer localized fuel blends.

The air-quality rules would have little impact on prices if the nation had adequate refining capacity. But no new refineries have been built since the early 1980s, in large part because complicated environmental regulations have turned the permitting process into a long, costly waiting game.

Every spring since the late 1990s, when the most recent Environmental Protection Agency blended fuel regulations went into effect, gas prices have risen sharply as the refineries change over to the production of special fuels. This year the price crunch is more severe because of jitters in the world oil market about political troubles in key oil-producing nations such as Nigeria and Venezuela.

The current worldwide supply of oil is just sufficient to meet the demand. That makes the market vulnerable to any major disruption in oil production.

General Stumbo’s investigators won’t find the operative law here - the law of supply and demand - in the Kentucky code. But they should understand how it works: When the supply of a commodity is much larger than the demand, prices drop and consumers benefit. This is what happened with oil from the mid-1980s to the late 1990s. Conversely, when the demand is roughly equal to the supply, prices tend to be volatile, and consumers generally have to pay more for the commodity.

This is the law of supply and demand at work, not illegal price gouging. Adjusted for inflation, the price of gasoline today still is more than $1 per gallon below the historic highs of the 1970s. The oil companies are gladly raking in huge profits from the spike in prices, but the producers’ profit margins remain fairly modest compared with other industries. In 2005 Yahoo enjoyed a 45 percent profit margin; Big Oil’s profits were less than a third of that hefty percentage.

Stumbo could help to enlighten the public about the annual price spike by exploring the connection between the federal air-quality rules and $3 per-gallon prices. The rules aren’t a conspiracy, either - it can be argued that they represent the public’s wishes as expressed through the political process.

At minimum, Stumbo and other opportunistic politicians should stop beating up on the oil companies and the gas retailers. This demagogic tactic raises unrealistic public expectations of a political deliverance from high gas prices and diverts attention from the real issues affecting the nation’s supply of gasoline.

Here’s a suggestion for the attorney general: Why not haul some officials from the EPA before a jury of motorists and have the bureaucrats explain the nation’s crazy-quilt blended fuel regulations and the impact they have on the hated oil industry?
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