What is it about oil price spikes that befuddle politicians?
This is especially true of Democrats, but Republicans, too, have had moments of confusion about oil.
In fact, Republican President Richard Nixon was, when it came to energy, very confused. Most notably, he didn’t realize that his own policies were responsible for many of the bad things that happened during the 1973-74 energy “crisis.”
That he also learned nothing from the crisis is clear, but he was not alone. As I explain in my 2013 book “US Energy Policy and the Pursuit of Failure,” most politicians and bureaucrats learned nothing or, worse, the wrong lessons.
The underlying story they adopted was wrong: We weren’t running out of oil and gas; OPEC was not about to take over the world; and we didn’t need a “moonshot” for alternative energy (something just about every politician starting with Nixon has called for at one time or another).
The 1970s are remembered mostly for lines at service stations as people waited for a few gallons of gas. But it is also remembered for enormous price increases. Since we haven’t had gas lines since 1980, the claim of an energy crisis typically involves price spikes (or more drawn-out price surges) to oil and especially gasoline. Here’s what Democrats did when prices soared at the pump back in the 1970s:
- Blamed the oil companies.
- Requested investigations of the oil industry.
- Called for a “windfall profits” tax against energy producers.
- And appealed for laws against “price gouging.”
Sadly, much of what was proposed back then to deal with the crisis has continued to be advocated. The script in 1973-74 and 1979-80 was repeated again in 1990, 1996 and from about 2000 through 2008. Now it’s happening again.
The script has played poorly. The oil industry has been investigated, but to the chagrin of many politicians each investigation turned up nothing illegal.
In 1980, Congress passed a windfall profits tax and that experience should suggest why another one would be foolhardy.
Such a tax is based on a government determination of what the price of oil should be. Any legislation that is based on a government determination of price for a commodity is a bad idea.
Those prices are never “correct”; actual market prices for any commodity will change by the minute. Even if government gets it right today (which is unlikely) it may take months for the legislation to pass, undoubtedly causing the price determination to be wildly wrong. The result is likely a shortage one day, a glut the next.
Meanwhile, the windfall tax does nothing to help consumers. More likely it hurts them because the tax has to be figured as a cost of production. As such costs rise, sellers will produce less.
As for price gouging laws, there are two main problems: First, no one can actually define what constitutes price gouging. Some legislators have tried, but the choices of gouging thresholds are always arbitrary.
Second, anti-gouging laws can have serious consequences. Most such laws deal with price hikes in an emergency. But the result of anti-gouging law is not stable prices, but rather it is shortages at the worst times. Those who need the products most will find empty shelves (or gas pumps) because the product is too cheap and the price doesn’t take account of an extreme increase in demand. The existence of such laws may also lead retailers to close during an emergency for fear they’ll be tagged as “gougers.”
Past failures notwithstanding, President Biden is calling for an investigation of the oil industry; members of Congress are demanding a new windfall profits tax; and several anti-gouging bills have been introduced in Congress.
Don’t expect anything positive to come from this. But anticipate when oil prices come down (which they will) the same politicians will take credit for it.
Peter Z. Grossman is the author of several books on energy including “US Energy Policy and the Pursuit of Failure” (2013). This column was provided by InsideSources.