Should the government institue price controls on gasoline?

Question

Free market strategy holds the concept that prices will be driven by supply and demand. It further supposes that price controls are not necessary because a proper competition model will keep prices in check. Most people do not have an option on whether or not to buy gas like they do with other products. When the stations all have roughly the same price in a given area there is also no real competition in the marketplace in which to spur lowering of prices. So is gasoline really a free market product? If not, should government step in and impose price controls based on the fact that the marketplace will not act responsibly on it's own?

Bayou Brigadier: That's all well and good, and I agree with the concept, but oil companies are not following. Price per barrel is lower, supplies are higher, demand has not greatly increase, but prices are rising. This paradox cannot be rectified against the free market model.

Super Ruper: No it is not a suggestion of socialism, is it a question of whether the free market is functioning properly in this area. You argument is weak, because I am not asking for a handout from anyone and I am not asking the taxpayers to buy my gasoline. Nice try, just doesn't wash.

Bayou Brigadier: You are making some assumptions which are not correct. I do not feel that I have a right to low cost anything and I am also not against drilling anywhere. The question is about whether gasoline truly fits the free market model based on the fact that most of us really do not have a choice about whether or not to buy the product. The public can control market forces in areas where there is choice, even if the choice is not to buy, but this market correction does not exist with gas because you cannot choose to do without. By all accounts domestic gas supplies are high. Oil supplies are high. Demand has not signifigantly increased. The oil companies condition us to pay higher prices based self imposed factors like summer driving. They over inflate the price then lower it later, but it never reaches the previous low set when all factors were the same by comparison. We in turn feel like they are cutting us a break because we have become accustomed to the higher price.

Answer 1

It's been tried, and it failed. Price controls do not work. You want to see the price of gas fall, remove all the taxes. No one gets upset that Microsoft charges 350 dollars for Office pro, but everyone with an opinion thinks Big Oil is out to gouge them. Find out what your local sate charges in taxes. Last time I checked the Federal rate was 18.4 cents a gallon. Arizona throws on another 18 cents a gallon. If politicians really cared about us they would repeal this tax today! The oil companies in this country are the true freedom producers. Freedom you can touch. Freedom you can see everyday!

Answer 2

Gasoline has become a commodity that is controlled by a few select companies, and the CEOs and other executives of said companies earn absolutely ridiculous salaries and pensions.

I think a price cap would be an interesting way to go in this country, but I think it would hurt our relationship not only with oil companies (who have major ties to the Republican Party, espeically), as well as Middle Eastern countries from which crude oil is imported.

This brings up a few points. For one, do gas company executives honestly deserve so much money? Second, maybe, instead of price controls, shouldn't the government be exploring alternative energy more?

I definitely agree with the statement, though, that there is no real competition in the gasoline market.

Answer 3

If we could produce all of our gasoline in the US then government controls would have a lot more meaning. But when we import most of our gasoline which is bought on the open world market any price controls we want to put on the oil would be ineffective. The price of gasoline can be manipulated buy the oil companies but buy and large the price is driven more my speculation on the dangers of the world by the futures market. The futures market can drive up the price based on fears but it has been proven that it avoids the downfalls of crisis.

Answer 4

This whole situation regarding the price of gas is a condundrum. True, in a free market society, supply and demand determines price. However, with gas, people cannot just stop using gas as its become an absolute necessity. So demand will drop little as prices rise to any level. So the supply and demand model is flawed in this instance because the consumer cannot change their habits, responsible or not, and at that time government should step in and protect the consumers.

Answer 5

Since the US is one of many countries importing oil, how do you keep oil coming in if those who are selling to us can make more selling it to other countries? Big oil makes much of their money in exploration and other projects. Oil is only one piece of their income. If your goal is to penalize the big oil companies, it will backfire just as it did in the 70's. Hawaii has some form of price control on now and guess what? Their gas prices are as high as anywhere else. As long as we're dependent on a foreign product, we'll have to pay the price until there is a substitute. Nothing brings about alternatives faster than a high price that has to be paid.

Answer 6

No way. Price controls are not good for anything.

If the market price of gasoline, falls to or below the natural price of gasoline, due to government price control, the incentive to produce more will disappear.

If I owned a gas company, and I was forced to sell my product at the natural price, instead of the market price, I'd withhold my capacity, for the sake of not losing money, and end up driving the price up!

Stay away from price controls!

Answer 7

"It further supposes that price controls are not necessary because a proper competition model will keep prices in check."

This is not true. It supposes that demand will drive prices up, in order keep supply-demand in equilibrium. Higher prices also can increase capitol in order to supply more product to meet the demand, although this can take time.

Price control is a recipe for disaster because it eliminates the incentive for conservation, and makes it impossible to balance the supply-demand balance.



*******************************************************************
Supply is high compared to what? In the last 15years, producers of every kind of products have moved to the new age model of "just in time delivery". Yes, the Japanese innovated warehousing and developed concepts to minimize warehousing costs. Based on inventory data for the last 10 years, oil inventories are high, but based on longer historical data, inventories are not so great. Furthermore, while oil inventories seem high, gasoline inventories are not so high. High inventories of oil are nice and well, but until it is refined, oil will not fill up your car. Did you know that a new refinery has not been built in the U.S. in the last 30 years? Did you know that the historical return on assets for refineries has been about 4% (yes, less than government bonds).

Keep in mind that oil is a finite resource. While it is possible to find new sources, the incremental costs are much higher to produce.

In any case, price control is a complete and total recipe for disaster. If as you claim, inventories are high, the price should correct rapidly.

As a side note, I find it interesting that the same people that feel that cheap gasoline is their birthright, are also the same people that oppose opening up restricted areas to drilling.

Answer 8

The market is driven by supply and demand- there are speculators which dictate the trading price based upon the speculated value of a barrel of crude oil. Remember the price itself is world wide- basd upon world supply- world demand and also for seeable troubles or ease of future trade. Instead of creating price controls how about we allow the oil companies to drill in alaska- on land which was specifically set aside for drilling- and drill in the Gulf of mexico- where cuba has already begun drilling and selling to China.

Answer 9

When you place price controls on any product, you interfere with free market forces. The outcome of price caps on gasoline will be that the supply of gasoline will dry up. No entity will be able to bring any product to market at a negative profit.
Just look at what is happening in Venezuela right now.

Answer 10

The price of gasoline has less to do with supply and demand than it does with inflation. You are not considering what has been term on the currency market as the petrodollar. Let's review a little history.
During the 1960s, the US government issued a lot more currency than there was gold in the treasury's reserve to back it up. At that time, most of the currency of foreign countries were just fiat, backed up by US dollars in that country's reserves. France, fearing the collapse of its currency becuase the US issued more dollars than gold, demanded gold for the US dollars it held in reserve in 1971. This started a run on Ft. Knox. Nixon reacted to this by taking the dollar off the gold standard.
Without gold, some other standard needed to be established to place a value on the dollar. The Federal Reserve system was already over extended as was the U.S. treasury.
To create value, private banks were allowed to start trading currency exactly the way stocks were traded on the NYSE. This was the birth of the international currency market. Countries needed to buy and sell currency in order to import foreign goods. At that time, the US was the major producer of world products. Lots of countries needed to purchase dollars in order to buy US trade goods.
The other major producer of international commodities was OPEC. Every country needed to buy oil from OPEC. Nixon struck a deal with the OPEC nations at the time. He promised US military protection to all OPEC countries against a Soviet invasion if the OPEC countries demanded payment for oil in US dollars. This demand for dollars to buy OPEC oil increase the demand for the dollar on the currency exchange and helped support the value of the dollar.
The downside to Nixon's agreement was that OPEC felt the dollar in the early 1970s was worth a lot less. OPEC then raised the price of crude to a level they felt was the value of the dollar. You know the result of that.
To continue, OPEC oil is still traded on the international market in US dollars. OPEC continues to raise the price of crude in respect to what they feel is the value of the dollar.
I'm sure you noticed, crude prices stayed level during the 1990s when the federal budget was under control. Crude prices didn't start rising until large federal budget deficits arrived during Bush's term.
The federal government, thru deficits, is putting more money into circulation than the economy is producing. This devalues the dollar. It's the same principle that applies when a corporation issues more stock. The value of a share of stock comes down becuase there is more stock to divide the assets of the company.
In other words, it's inflation.
Oil prices are going up because of inflation, not supply and demand pressures. Since petrodollars, or the international oil trade, is one of the supporting legs of the dollar's value, when more dollars exist it dilutes the value of each dollar.
That's inflation, pure and simple.
The worst part of this inflationary cycle, which has been caused by reckless government spending, is that the FOMC has been increasing interest rates to slow down the need of the private sector to bring more dollars into circulation thru economic expansion. In other words, the private sector is punished rather than the government.