A few days ago, I was thrilled to find a gallon of gasoline — even better, a 90 octane ethanol-free fuel that was 20 cents a gallon cheaper than what was advertised — for $4.99 per gallon.
Double-win for me.
But even with that, I was paying nearly $50 to fill up my tank.
Those numbers aren’t uncommon as fuel prices soar. Lots of blame has gone around, but it comes down to the fundamentals of the economy — too little supply and too much demand.
Naturally, there has been a lot of hand-wringing from elected officials, realizing that backlash against inflation and especially high gas prices will likely be voiced come November.
As Thomas Sowell once said, “No one will really understand politics until they understand that politicians are not trying to solve our problems. They are trying to solve their own problems — of which getting elected and re-elected are №1 and №2. Whatever is №3 is far behind.”
Interestingly, the same people fretting about high gas prices were, a few years ago, telling me United States gasoline was too cheap, that it needed to be more expensive like it is in Europe, to nudge people to drive less. That’s embedded in the Green New Deal being proffered by Democrats. And that’s largely been the Biden administration’s goal, even if they don’t explicitly state it. Although sometimes they do — both president Biden and energy secretary Jennifer Granholm have recently encouraged people to buy electric cars as a response to high gas prices.
There are multiple issues there, ne being power grid capacity. But the biggest is a typical Keynesian fallacy, the idea that the main role of the economy is to foster consumption (or aggregate demand, to use Keynes-speak), which in turn fosters employment. Thus, it is our patriotic duty to discard what we have and buy new things — the shiny new thing right now being electric cars — to ensure jobs and economic growth.
That line of thinking ignores opportunity costs and a number of other economic realities, but has persisted for nearly a century, embodied in Jimmy Durante’s hilariously awful “Give A Man A Job” propaganda during the New Deal era.
Back to the original point — high gas prices. There are multiple reasons for them, but they largely come down to a few factors. One is pent-up demand being high after two years of pandemic-fueled lockdowns and people not wanting to travel due to fears of falling ill. Now that COVID seems to have moderated into milder variants and vaccines are readily available for those who want them, travel demand is back up. But the other factors are on the supply side. One, obviously, is the Russo-Ukranian War, which has led to multiple countries, including the United States, sanctioning and embargoing Russian exports. Russia is one of the world’s largest oil producers, so any sanctions will impact the world’s supply of oil, thus driving up the price.
The second has been a long march by environmentalists in the United States to limit the supply of oil to try to push fossil fuels. Idealism is great, but the rest of us live in the real world. Drilling leases have been curtailed and there hasn’t been a large-capacity oil refinery built in the United States since 1978.
With the federal government facing angry constituents, it’s expected to “do something.”
There have been lots of “somethings” — starting with an ill-fated attempt to try to ban “price-gouging” — which by banning gasoline being sold above a certain price, would ban gasoline being sold at all if its cost to produce and acquire is greater than the “legal” sale price.
To paraphrase my late friend Steve Horwitz, in a legendary CNN appearance discussing emergency pricing but is apropos to many situations involving price controls, the choice isn’t between cheap plentiful gas and expensive plentiful gas. The choice is between cheap gas that’s not there and expensive gas that’s actually available.
Thus, calls for “price-gouging laws” won’t actually lower prices. They’ll just create shortages and prevent the price signals from doing their jobs — encouraging more production and directing that production to where it’s most needed. Economist Antony Davies points it out pretty succinctly: “Price controls don’t fight inflation. They transform inflation into shortages.”
The administration is finally coming around to the reality that more supply is needed to reduce prices. And so Granholm is making the rounds to harangue oil companies to increase supply. But here’s the problem — that runs completely counter to the administration’s stated goal to reduce, and eventually eliminate, fossil fuel consumption. California is already attempting to ban the sale of gas-powered vehicles by 2035, something that will almost assuredly be followed by other left-leaning states.
“Today, we need that supply increase. Of course, in five or 10 years — or even in the immediate — we’re also pressing on the accelerator to move toward clean energy,” Granholm told CNN’s John Berman. “We need to see this increase right now. We’re asking oil and gas companies to diversify and be able to produce other means of clean energy.”
She’s speaking out of both sides of her mouth in the same sentence. We need you to increase supply now, but not in five or 10 years. But here’s the problem. Oil companies have been converting to more renewable products, following the signals from the administration, and as a result, refinery capacity has dropped by a million barrels a day in three years, according to GasBuddy’s Patrick DeHaan.
An increase in supply to meet current demand would be great if it were sustainable. A refinery is not a small investment. The time required to build a refinery and get it online, even fast-tracking an EPA permitting process that has prevented the expansion of refinery capacity for 44 years, would take several months. The capital required would need to see returns over several decades just to recoup the initial capital cost. Otherwise, it would be a significant loss. If an oil refiner could confidently look out over the horizon and see demand at a similar level in 20 or 30 years, it would make sense to build capacity now. That’s how prices work — high prices signal producers to provide more supply while simultaneously encouraging consumers to conserve.
And when the administration, in conjunction with some state governments and many governments in Europe and other parts of the world, are actively working to move consumers away by pushing a transition to electric cars, it makes sense as to why refiners are not pushing to immediately expand capacity. While it could lead to short-term relief at the pump, it would lead to significant long-term losses for the suppliers.
That’s the reality of government intervention — often, they only see the short term benefits (and the short-term is usually the next election) and ignore the long-term costs. That’s especially the case if the long-term costs are being borne by someone else.
Price controls, angry letters to CEOs, “windfall taxes” — which would only make prices higher and do nothing to stem inflation — none will fix a problem that is decades in the making.
Haranguing and passing symbolic laws based in economic fantasy are not the solutions. Increasing supplies are — and that means acknowledging that fossil fuels are still cheaper and more efficient than the alternatives. When the alternatives become better options, a transition away from them will happen naturally. They doesn’t need the heavy hand of government to happen, and in fact, the heavy hand of government is counterproductive, causing pain in the short run and a painful transition in the medium-to-long term.