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September 2000
Volume 18, Number 9

Oil or Tax Gouging
Christopher X. Coyne

The economic ignorance of politicians and bureaucrats never surprises me, and the recent events concerning rising oil prices are no different. Recently Sen. Dick Durbin (D- Illinois) accused the oil industry of "gouging" the public stating "It's an increase directly attributable to profit-taking by the oil companies." EPA Secretary Carol Browner said "The oil companies . . . owe us an answer." So it went throughout the Clinton administration and Gore campaign, as spokesman after spokesman issued condemnations wrapped in fallacy.

Let's try logically to work through the economic forces that translate into the rising oil prices. There are five steps in the gas life cycle from refining to the pump. The initial stage is exploration-looking and/or drilling for oil. Economic forces that play a role in this stage include scarcity and weather. Next the oil is transported either by pipeline or boat. 

The production stage is third. At this stage, the oil is refined. Environmental laws impose additional costs in the refinement/production process. Next is distribution from the refinery to the gas stations, which is accomplished via pipeline and truck. The final stage is consumption-the actual transfer of gas to the automobile at your local gas station. 

Keep in mind that cyclical for- ces play a role here. Historically, demand for gasoline increases during the summer due to increased vacations and travel. Oil companies have this process down pat. For the most part, they have related costs under control although some of the aforementioned economic forces may cause fluctuating costs. Given this, we must look elsewhere for the price increases. 

A major player of course is OPEC, a cartel of 11 countries that produces 40 percent of the world's oil. If OPEC decides to restrict output, the price will undoubtedly go up. This is in addition to any of the other economic factors discussed above, such as weather, transportation costs, production/refinement, environmental laws, etc. 

Consider the notions of "price gouging," "profit taking" or other acts of an "anticompetitive" nature (as our friends at the DOJ like to call them). First, as Rothbard showed, anything a company does is anti-competitive since it does such to get ahead of and "hurt" the competition. To think that all oil companies are acting in unison (read: cartel) to raise prices is dubious at best. It is wellknown (as Rothbard demonstrated in Man, Economy, and State) that cartels will eventually fail because there is great temptation for a member to "cheat" and charge a lower price to increase profits. 

This logic should put all at ease about OPEC as well as the oil companies. 

Finally, if the oil companies are in fact raising their prices, so what? Isn't it their right to charge as they see fit just as it is our right as consumers to not purchase gas because we deem the price to be too high? Classifying "price gouging" as illegal is a blatant violation of property rights. The oil companies are the producers of the good, and therefore the rightful owner. As such they have the right to charge whatever they can get away with. It's amazing that the critical concept which Rothbard developed so well in Man, Economy, and State is still not widely understood. It is not the producer who sets the price, but rather the consumer (read: marginal buyer and seller). The conclusion is obvious: "price gouging" is an economically illogical concept. 

So why is the price of gas so high? There is one other factor that is rarely mentioned as a major cause of high gas prices-the government. Politicians rarely mention the taxes that they impose on gas or the costs of environmental legislation so dear to their hearts (especially the Goreites). The federal punishment for driving in 1980 was 4 cents a gallon. As of 1993, under the Clinton regime, the gas tax reached 18.3 cents per gallon. Tack on state and local penalties for operating your vehicle and you face taxes of 40 to 50 cents per gallon. Add to taxes the costs of environmental restrictions and restrictions on imported oil and you have the makings of an artificially inflated price. 

The point is this: there is an unmentioned pipeline from the consumer's wallet at the pump straight to the House Transportation Committee's coffers. Bureaucrats want to have their cake and eat it too. They want to tax the consumer as they see fit, tack on a myriad of environmental regulations and simultaneously keep the price low. And if prices rise, the blame is simply shifted to the producer as "price gouging." 

To Ms. Browner I say that the government owes us some answers. And Mr. Durbin should address the issue of tax gouging by him and his cohorts on Capital Hill. I've even got a solution. Reduce the tax to 4 cents to the gallon, or better yet, scrap it completely and privatize the roadways. Not only will gas be much cheaper, but we'll save a whole lot of tax dollars which are wasted by the 73 members of the House Transportation Committee. 

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Christopher X. Coyne works for J.P. Morgan as an analyst. He can be reached via email: coyne_christopher@jpmorgan.com.

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