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Commentary By Max Schulz

Pandering at the Pump

Few things reveal the intellectual bankruptcy of Republicans in Washington 12 years after the Gingrich Revolution as much as the actions taken by congressional leaders and the White House in response to the recent hike in gasoline prices.

As prices have soared to more than $3 per gallon, the Republican establishment has fueled hysteria by rallying around the idea that the higher costs are the result of dark forces at work in the economy.

House Speaker Dennis Hastert and Senate Majority Leader Bill Frist sent a letter to President Bush Monday demanding that his administration get to the bottom of this outrage. Yes, they hurriedly offered, supply and demand are factors in the run-up in prices, especially growing demand in India and China. But the real problems, according to the top two Republicans on Capitol Hill, are things far more sinister: “price-fixing, collusion, gouging and other anti-competitive practices.”

Mind you, these aren’t the ramblings of backbenchers hungry for attention. Hastert’s and Frist’s letter represents the official thinking of the majority party in both houses of Congress. Its most shocking feature is a call for “Federal law enforcement agencies and regulators” to get involved, all in the interest of protecting consumers and, ahem, free markets.

The two leaders want the Federal Trade Commission, the Justice Department, and the Commodities Futures Trading Commission to root out those bad actors among gasoline retailers, market traders and speculators, refiners, and other energy firms who are working to fleece the American public.

Senate Judiciary Committee Chairman Arlen Specter, meanwhile, has been railing against intolerable “concentrations of power” on the part of energy companies like ExxonMobil and Shell. Specter has raised the possibility of antitrust investigations and windfall-profits taxes. The clear implication is that consumers are being overcharged at the pump.

Hastert, Frist, and Specter should know better. Americans are suffering high prices not because of a vast-yet-intricate conspiracy of global energy executives, Wall Streeters, and the owners and attendants of the nation’s 168,000 filling stations. If such a conspiracy indeed existed, and if these people and institutions had the power their critics are saying, then they simply never would have let the price of oil fall to $10 per barrel, as it did as recently as 1998.

The real culprit — or, to us a better word, explanation — is supply and demand, period. There is one global market for crude oil, and the price fluctuates. The world consumes 80 million barrels per day, a figure that has been growing steadily for years. As the oil appetites of developing countries have grown, along with the appetites of our own roaring economy, so has the pressure on suppliers all over the planet to meet rising demand. Accordingly, the price of oil has climbed and climbed and climbed. The average price of a barrel of oil in 2003 was $28. This week a barrel cost more than $70. The price of crude accounts for upwards of 50 percent of the cost of a gallon of gasoline. As crude prices have spiked, so, naturally, have gasoline prices.

One would hope that President Bush, who worked in the petroleum industry and presumably understands the market’s fundamentals, would bring some clear thinking to the current energy debates. Instead he is taking up Hastert and Frist on their demagogic request. News reports suggest that the president will order a federal probe into whether prices are being illegally manipulated.

In a sense, Bush, Hastert, Frist, and Specter are right in that gasoline prices are artificially inflated by market distortions. But it’s not the ones they are fingering. Instead they should investigate the plethora of federal and state policies that help drive up the cost of gasoline to painful levels.

Take taxes. According to the Energy Information Administration, federal excise taxes are 18.4 cents per gallon, while state taxes average about 21 cents per gallon. That’s a bite of more than 10 percent of the total cost when gas is at $3 per gallon. (With lower prices, the bite is even higher.)

Then there are the numerous federal and state clean-air regulations that drive up the cost of gasoline. During the 1990s specialized blends of gasoline were required for different parts of the country. Today more than a dozen different blends are used, depending on the region. This puts extra pressure on refiners, and adds to the price at the pump. The requirement in last year’s energy bill to add eight million gallons of ethanol into the nation’s gasoline supply will further drive up costs.

Finally, there are the prohibitions against domestic production of oil and gas that Congress has failed to remove. Conservative estimates suggest the United States has more than ten billion barrels of crude oil in Alaska’s Arctic National Wildlife Refuge. There are untold amounts in the waters off the coasts of Florida and California. But federal policies prohibit energy companies from bringing those resources to market.

If we want to knock down the price of $70+ crude oil, the best place to start would be by expanding our own production, not by running to regulators and government lawyers to investigate spurious charges of price gouging.

This piece originally appeared in National Review Online

This piece originally appeared in National Review Online