On Feb. 28, the Federal Price Gouging Prevention Act (House Resolution 1252) was introduced in Congress "to protect consumers from price gouging of gasoline and other fuels, and for other purposes." Nobody is in favor of consumer price gouging, so it's easy to make the mistake of thinking that passage of such a bill is a good idea. In fact, such federal price controls will do nothing to reduce gasoline prices in the long run. By making the production and marketing of gasoline more difficult and risky for providers, passage of HR 1252 will hurt consumers and make gasoline more expensive.
Federal price controls for gasoline do nothing to temper consumer demand or increase producer supply. Gasoline demand in the United States grows by roughly 2 percent to 3 percent per year, primarily as a result of rising economic activity. Supply/demand imbalances can become especially acute when gasoline consumption rises by nearly 10 percent during the summer driving season. (It's nice out, did you notice?)
Recent increases in gas prices have been blamed on growing demand from emerging economies like China and India, and on fears of oil supply restrictions tied to political instability in Iran, Nigeria and Venezuela. It's hard to imagine how gasoline shortages caused by federal price controls will increase political stability around the world.
In addition to restrictions tied to political instability and bad weather, gasoline supplies in the United States have tightened because of scarce refining capacity. Nobody wants a new oil refinery built in their own backyard. Building refineries that turn crude oil into gasoline takes years and costs billions of dollars. Industry data indicate that refiners were losing money as recently as 2002, providing a disincentive for investments. That's why industry data show there were only 149 U.S. refineries operating at the end of 2006, down from 216 in 1986.
High pump prices are directly tied to the escalating cost of crude. For every $1 increase of the cost of a barrel of oil, there is an average increase of about 2.5 cents per gallon in the price of gasoline. In case you haven't noticed, world crude prices are up - way up - and federal price controls will do nothing to reduce world crude prices.
Nevertheless, there is something Congress can do about consumer price gouging in the retail gasoline market. The federal tax on gasoline is 18.4 cents per gallon, and the average state gasoline excise tax is 18.2 cents per gallon. Sales taxes, gross receipts taxes, oil inspection fees, underground storage tank fees and other miscellaneous environmental fees add another 9.2 cents per gallon to the average tax on gasoline. This means that the nationwide average tax on gasoline is a whopping 45.8 cents per gallon - or about $5 to $10 every time you fill up the tank! If Congress really wanted to help consumers, they could stop their own federal price gouging and roll back gasoline taxes.
Unfortunately, that's the type of federal price gouging that remains highly popular in Washington, D.C.