Cures that really are Worse than the Disease

As gas prices increase, many people have offered solutions to the problem. But unfortunately, many of these solutions would only aggravate the problem.

Recently, Bill O’Reilly has criticized the oil companies for high gas prices. His complaint is that as gas prices have gone up, oil company profits have also gone up. Now both are at record highs. O’Reilly’s solution would be for the oil companies to give up 25% of their profits so that gas prices would come back down. This idea, of course, is ridiculous.

It is wrong to assume that if oil companies reduce their profits by 25% then gas prices would also be reduced by 25%. The truth is that only a very small portion of amount you pay for gas results in profit for the oil company. So O’Reilly’s idea would not do much good.

In fact, it would do more harm. Oil companies do not hoard their profits, they invest them. Those profits are used to develop more supply. So, O’Reilly’s plan would result in a decrease in exploration, meaning gas prices will increase even more as supply fails to keep up with demand.

O’Reilly also points to oil companies’ record profits as proof that these companies are engaging in price gouging. But that would mean that all the oil companies are colluding, even companies like Citgo, which is owned by Venezuela’s Socialist government. It is unlikely that not one of the many oil companies would break away and lower its prices to capture market share and gain even higher profits. That, in fact, is what usually leads to the fall of cartels such as OPEC.

A more plausible explanation for high gas prices and record oil profits is demand. As demand outpaces supply, prices increase. Likewise, as oil companies are able to sell more of their product, their profits naturally increase.

Another equally ridiculous idea is to have everyone in the nation pick one oil company, say Exxon-Mobile, and stop buying gas from them for a year. By the end of the year, the company will be out of business, teaching all the other companies a valuable lesson. There are many problems with this idea.

First, this plan will only cause higher unemployment as those who work for the targeted company are laid off. Unemployment hurts the economy in three ways. First, the talents and skills of the unemployed worker are not being put to use. Second, the unemployed worker is not receiving a paycheck and so he is not spending his money, which means firms who would normally sell goods and services to him (and their employees) are suffering. And, the unemployed worker will receive unemployment benefits from taxpayers, adding to the already high burden shouldered by them.

Second, since the targeted company is out of business, it would not be engaged in the search for more supply. More sources of oil, especially domestic sources, are exactly what we need to solve this problem.

Third, fewer firms in the industry means less competition, and that only ends up hurting the consumer.

Some have also asked whether these higher gas prices will hurt the economy. One very good answer I have heard is no, because the expanding economy both here and abroad is the cause of higher gas prices. High gas prices hurt the economy in the 1970's because the prices were driven by an artificial decrease in supply. Today, it is not supply that is causing these higher prices, it is demand. So the economy will not be hurt because the economy is the cause in the first place.

High price is merely the market’s way of dealing with scarcity. We don’t pave our roads with gold because it is too expensive. It is too expensive because it is rare. Price rations scarce supplies, thereby preventing shortages.

The great thing about the Capitalist system is that it isn’t a system at all. Capitalism is natural, and like anything else in the natural order it seeks balance, in this case balance between supply and demand.

–J.E. Heath
per-fidem.org

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