The burning issue in Washington today is high
gas prices, and it won't go away anytime soon. Americans are not happy about
paying $3 per gallon at the pump, and they want something done about it.
But price controls won't work, and allegations of price gouging and "windfall
profits" amount to nothing more than congressional grandstanding. No government
official or politician is fit to define a "fair" price for gas or
a "fair" profit for oil companies. This is not the Soviet Union. The
last thing we need is centralized government planning when it comes to our precious
The price of oil, like everything else, depends on supply and demand. What
we really need to focus on is how government keeps the supply of refined gasoline
too low. This is not as easy as demanding price controls, and does not fit into
30-second sound bites. But as with so many issues, we must peel away decades
of government interference to really understand the problem.
Most people understand that federal restrictions on exploring, drilling, and
refining domestic oil have made us dependent on various questionable Middle
East governments. We should expand this into a greater understanding of how
American foreign policy increases gas prices here at home. Before the war in
Iraq, oil was about $28 per barrel. Today it is over $70. Iraq was a significant
source of worldwide oil, but its production has dropped 50 percent since 2002.
Pipeline sabotage and fires are routine; we have been unable to prevent them.
Furthermore, the general instability in the Middle East created by the war causes
oil prices to rise everywhere.
The sooner we get out of Iraq and allow the Iraqis to solve their own problems,
the better. Soaring gasoline prices are one giant unintended consequence of
the war, pure and simple.
Even so, many war hawks are seriously agitating for an attack on Iran – another
major supplier of worldwide oil. They are not concerned one bit about the impact
such an attack would have on the wallets of average Americans; their obsession
with regime change in Iran trumps all common sense. But let me be clear: An
attack on Iran, coupled with our continued presence in Iraq, could hike gas
prices to $5 or $6 per gallon.
We also must understand the effect monetary policy has on gas prices. The price
of gas, like the price of all things, goes up because of inflation. And inflation
by definition is an increase in the money supply. The money supply is controlled
by the Federal Reserve Bank and responds to the deficits Congress creates. When
deficits are excessive, as they are today, the Fed creates new dollars out of
thin air to buy Treasury bills and keep interest rates artificially low. But
when new money is created out of nothing, the money already in circulation loses
value. Once this is recognized, prices rise – some more rapidly than others.
That's what we see today with the cost of energy.
If we want to do something about gas prices, we should demand greatly reduced
welfare and military spending, a balanced budget, and fewer regulations that
interfere with the market development of alternative fuels. All subsidies and
special benefits to energy companies should be ended. We also should demand
a return to a sound commodity monetary system.
And in the meantime, let's eliminate federal gas taxes at the pump. That alone
would save Americans 18.4 cents per gallon. By contrast, oil companies only
make about 10 cents per gallon. So maybe it's government that's being greedy.
Oil prices are at a level where consumers reduce consumption voluntarily. The
market will work if we let it. But as great as the market economy is, it cannot
overcome a foreign policy that is destined to disrupt oil supplies and threaten
the world with an expanded and dangerous conflict in the Middle East. And it
cannot overcome a monetary policy destined to inflate our dollars into oblivion.