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Bush Gasoline Policy Avoids Mistakes of the Past |
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Written On: November 25, 2005 |
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In the aftermath of Hurricanes Katrina and Rita, activists, pundits and some in Congress lobbied for price controls and rationing to combat skyrocketing gas prices. Fortunately, President Bush had the good sense to let the market adjust. As a result, prices at the pump are dropping, supplies are increasing and frustrated motorists aren’t stuck in long lines at service stations.
Katrina and Rita were two of the most powerful storms ever to hit the Gulf Coast. In late August, Katrina damaged or destroyed at least 20 oil rigs in the Gulf of Mexico and shut down 95 percent of the region’s oil and natural gas production. To put this in perspective, Katrina shut down one-third of America’s energy supply. A little more than a month later, just as those facilities were coming back on line, they were hit again by Hurricane Rita.
Gasoline prices shot up and by Labor Day they topped $3 a gallon in some places as supplies temporarily dried up. In the process, oil company profits jumped. Even though prices dropped fifty cents a gallon by Thanksgiving, some Republicans and Democrats in Congress are now calling for a windfall profits tax, price controls, tariffs and other government mandates.
U.S. Chamber of Commerce President Tom Donohue says the critics are ignoring several important facts. First, the forces driving oil prices are largely outside the control of the American oil industry. Crude oil prices have risen from $10 a barrel six years ago to almost $60 today. Secondly, demand for oil has risen as the economies of developing countries such as China and India have grown. And finally, Donahue points out that the rate of return in the oil industry is actually far less than in other industries, such as banking, real estate or computers. “Oil industry profits are big because the industry is big,” notes Donahue.
Also lost in all the headlines is a U.S. Congressional Budget Office report that hurricane-related damage to oil company facilities and equipment will range from $18 to $31 billion – not including lost production income. Even so, the American Petroleum Institute predicts oil companies will reinvest another $86 billion in marketing, refinery expansions, oil exploration and production next year.
At the height of the media furor over gas prices, oil industry executives were summoned to Washington, D. C. to appear before Congress in televised hearings. They sat there like students called to the principal’s office as members of Congress railed against high prices and industry profits.
Those oil executives could have pointed out that many of those same politicians were partly to blame for the problem. Even though the U.S. imports 58 percent of its oil, we have virtually banned domestic oil exploration off our coasts, we haven’t built a new refinery in 30 years, and many in Congress vehemently oppose drilling in one-tenth of one percent of the Arctic National Wildlife Refuge in Alaska.
Thankfully, through it all, Bush bucked the critics’ calls for government to intervene. Instead, he wants to increase domestic exploration and refining capacity while increasing support for alternative energy research. That strategy, he believes, will go a long way toward solving the pricing problem.
Contrast that to actions by Presidents Nixon and Carter in the 1970s. The 1973 Arab oil embargo and the 1979 Iran hostage crisis exposed the vulnerabilities of our energy-dependent economy.
In 1973, Nixon called on service stations to ration gas sales to 10 gallons per sale. That created long lines of livid motorists waiting to get their allotment of gasoline. And with the average car getting 10 miles to a gallon, gas lines became a symbol of our national energy policy. In the end, rationing was a failure. Gas prices skyrocketed from 30 cents a gallon to $1.20 in five months, and Nixon junked the plan in April 1974.
Government intervention doesn’t work. Market forces do. Because of rising gas prices, more motorists are turning to hybrid cars, and research into alternative fuels such as hydrogen is surging as higher prices make those alternatives more competitive.
Economics is driving these changes and innovations – that’s the way it should be. Government controls only make things worse and ultimately fail.
It’s not rocket science, it’s “Economics 101.”
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