Liberals and Gas Prices

My apologies for posting a re-run but what follows is an Op-Ed piece I wrote on December 7, 2005.  Given the latest hysteria over gas prices I thought I would dust it off for your consideration.

One of the first requirements of being an economist is that you must be - by nature - a curious person. You have to want to understand things and you must be willing to ask questions that other people might not ask, even if it offends people to ask. So here goes.

I would like to ask my readers who are liberals for some help with a problem that I am having. The problem is figuring out what you want to happen to gasoline prices.

I recall when gas prices fell below $1 a gallon a few years ago that many of you liberals were complaining about all of the SUVs people were driving. You griped about how big the SUVs were getting and you said that cheap gas had encouraged us to not only ruin the environment by belching out air pollution but had also helped pay for terrorist activity in the U.S. and abroad.

This makes sense on many levels. As the price of gasoline falls, it naturally follows that people will buy more of it - often by purchasing bigger cars. You liberals are also right that burning gas causes air pollution and if we buy things that burn extra gas, nastier things will go into the air in larger and larger quantities. Finally, you are economically correct that the more fuel we buy the more money we unwittingly send to nations that use oil revenue to finance people who want to blow us up in our SUVs. So, on all counts, your economics is airtight. Congratulations.

Now we come to 2005. Gas prices rose to more than $2 per gallon and stayed there. After the hurricanes, the average price of unleaded gas topped $3 per gallon, but did not stay there. Today, gas prices are inching below $2.25 per gallon in many parts of the country and you are mad about gas prices again.

Why are you mad this time? Oh, I understand. Now that prices are going up you are upset that the greedy oil companies are reporting record profits. You are mad about the perceived price gouging that has taken place, and you are frustrated that poorer Americans now have a tougher time making ends meet because more money for Exxon-Mobil means less money for food.

In two out of three areas your economics is solid. Yes, higher prices for a product with an inelastic demand means higher profit for the seller. Yes, the law of opportunity cost and scarcity means that if I spend more money on one thing I have less money for the other thing. The price gouging claim is a poor one. If they can gouge us because we have no choices over what we put in our car and must buy gas, why have prices fallen by 80 cents per gallon this fall? Why not keep prices at $3 since we would buy it anyway?

Every economist knows that the demand for oil is increasing due in large part to our growing economy and the appetite for fuel in China and India. We also know that supplies are tight because new refineries were last built in the 1970s and government-mandated additives has made it more expensive to make gas. Plus, the hurricanes set aside a big part of supply.

Getting back to your economics, I want to applaud you for being right about what happens when prices fall and what happens when prices rise.

What I don't understand is this. If lower prices makes the air dirty - which is bad - won't higher prices make the air cleaner? If high prices hurt the poor and line the pockets of oil company fat cats, don't lower prices help the poor and deny those fat cats more money?

I am suggesting that you liberals pick your favorite gas price argument and stick with it. You cannot complain about the environment and the budgets of the poor and the profits of greedy corporations all at the same time without sounding like a bunch of idiots.

It is time to choose whether you want lower prices or higher prices.

Thank you for your time.