With gas prices, we should let the free market work

by Tom Arneberg, Community Columnist

A couple of weeks ago I heard on the news that the attorney general of Virginia had subpoenaed the records of some oil companies to determine if they were "price gouging" their customers. Then, a week later, some Minnesota gas stations were in trouble with the state government for setting their prices too low!

What ever happened to the free market?

I realize that complaining about high gas prices is just common courtesy in conversations, like talking about the humidity. But I'd like to get serious for a minute here.

First, when an article talks about the "record" price for gasoline, it usually fails to account for inflation. In today's prices, gas started at $3.00 per gallon in the early 1900s and reached a low of around $1.50 in the 1990s. So the current $2.00 per gallon is squarely in the middle of the chart.

Second, are gas price fluctuations really that big a deal to the average consumer? I listen with disbelief at the predictions of summer travel plans being changed due only to high fuel costs. We are planning a trip of at least 2000 miles to Colorado and back this summer. Our 8-cylinder "Arnebus" can only get 15 miles to the gallon, due to its weight (conversion van) and load (seven passengers) and engine size (needed to pull our pop-up trailer). (Before you criticize our fuel economy, I'll bet we get more miles per gallon PER PERSON than most people get!)

We should go through about 2000 / 15 = 133 gallons of gas. So even with our miserable mpgs, if gas went up FIFTY CENTS a gallon, it would only increase the cost of our trip by $65. This pales in comparison to the other costs of a family vacation, as other travelers well know, and sure wouldn't cause us to cancel our trip.

Third, did you know that a full ONE FOURTH of the price of a gallon of gas goes to taxes? That's 49.5 cents a gallon in Wisconsin, above the national average of 43 cents. In 1980, taxes were only 14 cents a gallon. Worse, gas taxes don't all go back into road construction; much of them go to the general fund. Taxes, of course, are immune to free market pressures, and do require government vigilance to keep down.

Fourth, have you noticed that the price of gas varies wildly from state to state? In addition to state tax differences, this variation is also because different states have legislated different requirements for their gasoline. This unnecessary regulation puts roadblocks in the natural flow of gas around the country, but lawmakers are never forced to confront the true effects of their rules. (The latter tangent could be a whole column in itself, but I want to get to my main point.)

Fifth, and most important -- since when did we stop trusting in the free market? When my kids complain about a store charging too much, I always ask them what the purpose of that store is. The purpose of any business is one thing, bottom line: to maximize profit. That may seem greedy or indulgent, but history has shown that the most efficient distribution of resources results from this predictable behavior of every person and company seeking to get the best returns for their investment of time and labor. This is the "invisible hand" that Adam Smith talks about in his influential 1776 book, "The Wealth of Nations."

In other words, I strongly believe that there should be no ceiling or floor price on gasoline (or anything else), artificially imposed by government authority. If a gas station starts charging too much, then a neighboring gas station with cheaper rates will inherit its customers. This competition puts natural pressure on all gas stations to keep their prices low.

In the bigger picture, if ALL gas prices go way up due to supply problems overseas, then people will start to conserve more to lower their own costs. Meanwhile, the higher prices will give incentive for riskier exploration of oil reserves, and even at some point may be high enough to justify developing alternative forms of fuel.

If you still think that the government should control gas prices, I have a hypocrisy test for you. Have you ever sold a house for more than you paid for it? Isn't that price-gouging?! It's strange that even people who want prices controlled will want to maximize their own personal profit when selling a house or car -- they want to "gouge" their "customer" with the highest price that the market will bear.

In the long run, the free market is always the best approach. Let's allow it to work, and tell our government officials to spend their time with concerns other than trying to make companies be "fair."

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You can reach Tom at toma@arneberg.com.