Like This and Like That and Like This ...

The New York Times on Tuesday reported that the Governors of several states are demanding a government inquiry into gasoline prices and a remedy to consumers in their states if the oil companies are guilty of "price gouging":

"When the wholesale price of gas went up by 60 cents almost overnight, oil companies were obviously using the most devastating natural disaster in our nation's history to reap a windfall at the expense of American consumers," said the letter, which was initiated by Gov. James E. Doyle of Wisconsin and was signed by governors from Illinois, Iowa, Michigan, Montana, New Mexico, Oregon and Washington.

"To price-gouge consumers under normal circumstances is dishonest enough," the letter stated, "but to make money off the severe misfortune of others is downright immoral."

It was reported that the governors relied on the 'economic analysis' of Professor Donald A. Nichols of the University of Wisconsin at Madison.  Professor Nichols study focused on the disproportionate rise in gasoline prices compared to the price of crude oil.  I haven't read Professor Nichols's study and it would be irresponsible to criticize it based on newspaper summaries, so I will not.

I realize that politics may make it popular to attack the oil companies, but perhaps some economic analysis of the particulars of oil refining and delivery of gasoline to the pumps might give pause to such judgments at those suggested in the governors' letter.

Speaking sense on energy economics is Lynn Kiesling at her wonderful blog Knowledge Problem.  Her entries on "price gouging" and "windfall profits" are particularly recommended.  Robert Bradley of the Institute for Energy Research is the author of perhaps the most thorough examination of the oil industry and its struggles and relationship with the government Oil, Gas and Government, 2 volumes.

The bottom line --- markets if allowed to operate are amazingly quick at adapting to the changes in the underlying conditions and satisfying the demands of consumers.  In this instance, the price hikes smooth out consumption over time.  As people respond rationally to incentives their consumption adjusts, and firms will shift production plans in the lure of pure profit to conform to the new realities caused by changing preferences, and changing technological possibilities.  This is how both Smithian (gains from trade) and Schumpeterian (gains from innovation) development in an economy take place.  Government intervention stifles this process and leads instead to distorted patterns of exchange and production.  Markets left to their own devices will outperform government plans in terms of economic efficiency and also rightly understood notions of justice and fairness.  As Adam Smith wrote many years ago in The Wealth of Nations,

"The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unneccessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would no-where be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it." (1776, BK IV, chapter 2, p. 478)