Bill O’Reilly displays both economic ignorance and aweing naivette in about a five minute span.

It’s always bizarre to hear the same people bitch about both the lack of fuel conservation and “price gouging” by gas stations. Gas stations charge what it will cost them to replace each gallon of gas they have in the ground. Right now, that’s quite a bit. So they’ve raised their prices. But those high prices will also keep people from unnecessarily topping off tanks, or filling up multiple cars, in anticipation of higher prices. They promote conservation. Gas is scarce right now, at least in the short term. Gas prices reflect that. If you make those prices artificially lower — be it through price controls or O’Reilly’s pie-in-the-sky voluntary scheme — gas stations will be selling at prices lower than what it will cost them to replace what they’ve sold. They’ll lose money, and probably either shut down for the short term, or go out of business entirely. That creates shortages.

What critics call “gouging” is the market’s way of ensuring we have gas in reserve during a shortage. It’s a way of making sure that if you really need gas, and are willing to pay for it, it will at least be available for purchase. The 1970s proves that politicians disrupt these mechanisms at their peril.

The real oddity here is that the best way to make Americans conserve gas is to let market mechanisms drive prices higher as fuel grows scarce. People will naturally find alternatives to driving (or, in the macro, to gas-powered transportation) as prices get higher. Yet each time gas prices go up, politicians begin clamoring for ways to keep them artificially low. Then they tax us to subsidize research into alternative energy sources because, they say, we’ll never find alternatives on our own so long as there’s plenty of oil.

UPDATE: This fellow explains the “gouging” phenomenon in handy, anecdote form. And Jane Galt has more.

This entry was posted on Friday, September 2nd, 2005 at 3:22 pm by Radley Balko and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.