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June 19 2008

Strong Arm Tactics Won't Help Consumers At the Pump

Carrie L. Lukas

Other than being over age 25 and a resident and citizen of the state, there are no qualifications to be a Member of Congress. If you can get the votes, you can become a Member. Yet anyone listening to recent discussions on Capitol Hill about gasoline prices can be forgiven for assuming hubris and economic ignorance are also required.

A headline-making exchange between Representative Maxine Waters and John Hofmeister, president of Shell Oil Company is just the latest and most egregious example. During questioning, Rep. Waters asked the oil executive to "guarantee" that the price of oil will go down if oil companies are granted authority to drill off U.S. shores. When Mr. Hofmeister failed to offer such a guarantee, Representative Waters issued a threat: "And guess what this liberal would be all about? This liberal would be all about socialize...basically taking over and the government running all of your companies."

It's a breathtaking moment of honesty from a member of Congress. So much for concerns about the limits of government authority; so much for respect for private property and free enterprise. Rep. Waters shares the worldview of most of the world's dictators: if industry can't produce the desired results, then government should simply seize their property.

Beyond the totalitarian impulse, the exchange reveals Ms. Waters's ignorance about the role prices play in the economy. In a free market, prices help ensure that supply meets demand. The demand for energy has been growing, not just here in the United States but around the world. Unless supply keeps pace with demand, prices must rise. Rising prices send important signals to both consumers and producers: high prices offer producers an incentive to invest in producing more supply, while consumers are encouraged to buy only what is necessary, preventing shortages. The oil executive cannot promise that the prices will be lower in the future because he cannot know exactly how much demand will increase compared to supply.

Rep. Waters may think that if the federal government seized control of the energy industry, prices would fall, but she'd quickly learn (as did the Soviet bloc) that the laws of supply and demand are tough to escape.

Many will dismiss this exchange, made by one of the more radical, leftist Members, as out of step with the rest of the Majority. Yet the actual legislation that has been offered and passed in the name of bringing down oil prices reflects the same economic ignorance, and even shades of the same authoritarian impulse.

The "Gas Price Relief for Consumers Act," for example, has a nice sounding title, but actually will do little to advance the cause of lowering gas prices. The legislation would empower the U.S. government to sue foreign governments under U.S. antitrust laws. Of course, the government would have a tough time enforcing any decisions rendered against OPEC countries. Such action would be more likely to encourage retaliation then to actually encourage an increase in oil production.

The law would, however, have a real effect here at home, since the newly created antitrust task force at the Department of Justice would have massive new oversight authority over domestic producers. Forcing domestic energy companies to comply with additional document requests and new regulations would do nothing to encourage additional production here either-to the contrary, it would act as another drag on the industry and discourage new production.

Another piece of legislation championed by the House Majority, the "Energy Price Gouging Act" would create new penalties, fines, and possible jail time, for anyone in the energy supply chain found to inflate the price of energy "artificially." The federal government already has the power to investigate charges of price gouging, so this legislation would do little other than to discourage companies to do business, particularly in times of disaster or when supplies are short and price increases are an economic necessity.

The big losers from this ham-handed approach to policy are consumers. While there are certainly many factors at work in energy markets, supply and demand remain the basic factors that determine price. The problem we face today is that while demand for energy has grown dramatically, supply has not.

Many policymakers-particularly those on the Left who want to be seen as both environmentally friendly and a champion of the little guy-are uncomfortable with this simple fact. They damn the energy companies for high prices but work with environmental groups to prevent additional exploration and refining capacity. They're used to cognitive dissonance, but don't want voters to make the connection between their policies and its consequences.

If drivers are hoping for relief at the pump this summer, it's not going to come from Capitol Hill.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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