Copyright 2000 The Kansas City Star Co.
THE KANSAS
CITY STAR
June 27, 2000, Tuesday METROPOLITAN EDITION
SECTION: OPINION; Pg. B7 ;E. THOMAS McCLANAHAN
LENGTH: 780 words
HEADLINE:
Demand drives gas prices
BYLINE: E.
THOMAS McCLANAHAN; Sunday Opinion editor
BODY:
Last
week, President Clinton said "there is no economic
explanation I can think
of for the run-up in (gasoline) prices."
Oh, come on. Think real hard.
Could it have something to do with rising crude oil
prices?
Or the pipeline problems that disrupted supplies in the Midwest?
Or the fact that no new refinery has been built in the United
States in a
generation?
Or the cold winter in some regions, which forced refineries
to
produce heating oil longer than usual, reducing gasoline supplies for
summer driving?
Or new rules that mandate reformulated gasoline in
the top dozen
or so polluting cities, increasing the costs of fuel
production while
fragmenting markets?
Add it up, and you have rising
demand - the summer driving season
is upon us - meeting constricted supply.
The result is higher prices.
Some people believe rising prices are
caused not by markets
reflecting changes in supply and demand but by
conspiring corporate
executives. This refutes the old saying that the only
certainties in
life are death and taxes. Actually there's another: As night
follows
day, rising fuel prices will generate accusations of "gouging."
Vice President Al Gore, for example, has demanded an
investigation
into supposed antitrust violations by oil companies.
Big Oil's profits are
"outrageous," he says.
Gore hopes voters will forget that he has been a
long-time
advocate of higher fuel taxes and pushed hard for the
reformulated-gas rules that have contributed to the recent price
spike.
Environmental Protection Agency officials insist these rules -
which
took effect June 1 - should have added only about 4 cents to
the cost of a
gallon of fuel. While it's tough to make such estimates
with precision, a
recent report by the Congressional Research Service
says the new rules
probably boosted Midwest prices by more than 10
times that amount.
Meanwhile, activist groups have been hauling out phrases not
heard
since Jimmy Carter worsened a crude shortage with gasoline
rationing. Last
week on "The News Hour," a woman from Public
Citizen murmured about "market
failure" and called for - brace
yourself - a "windfall profits tax."
Oh, that would help. By all means, let's penalize those who would
seek to profit by increasing the nation's supply of fuel.
Popular
outcry against rising prices for essential commodities is
a familiar pattern
in history. Centuries ago in Britain, grain
dealers were widely despised.
Whenever prices went up, people assumed
collusion.
One English king
even outlawed middlemen on the odd assumption
that forcing consumers to buy
grain directly from farmers would
ensure more honest dealing and lower
prices. This is the logic of the
windfall profits tax in its purest form: If
you don't like the
prices, wipe out the industry.
In practice,
however, it's extremely difficult to get away with
collusion. And as an
explanation for prices that prevail throughout
entire regions, it's
laughable.
What the critics are saying, in effect, is that sellers got
together in a room and agreed to jack up prices or agreed to hold
back
supply to prop up the price with an artificial scarcity. But
this would mean
some suppliers are choosing to accept lower sales
today in the hopes of
making equal or higher profits in the future.
News reports say
refineries are running flat out and supplies are
tight, but let's assume for
a moment that the "collusion" scenario
is valid. If so, it's a risky bet for
the colluders. Prices seem firm
now, but if they fall unexpectedly, the
potential rewards would
vanish: The co-conspirators might be stuck with
costly inventory
they'd be forced to sell at lower prices.
Moreover,
the gougers face the problem of ensuring the full
participation of all
sellers in a given area. If the scarcity isn't
real, competing sellers may
profit by cutting prices and grabbing the
colluders' customers.
As
for the world crude market, one reason for the current
shortage is that many
marginal producers were driven out of business
a couple of years ago when
prices cratered. For some, the memory is
still fresh.
Eventually,
high prices will call back that capital, exploration
will pick up and
supplies will increase. Oil is a commodity. Its
price will fluctuate. Of
course, when the price drops the laws of
economics are always restored. As
everyone knows, falling prices are
caused by supply and demand, not
collusion.
E. Thomas McClanahan is a member of the Editorial Board. His
column appears Tuesdays. To reach him, call (816) 234-4480 or send
e-mail to mcclanahan@kcstar.com.
LOAD-DATE: June
27, 2000 
