Dennis Kucinich and five other Congressmen are again pushing for a windfall profits tax with teeth. Or maybe it's just a convenient way to extort campaign contributions from the oil-and-gas industry. Either way, they have recently sponsored a bill to Congress called the "Gas Price Spike Act of 2012." It is the old theme that politicians know the correct prices, how much profit a company should earn, what kind of cars that people should drive, and how we should get to work and the grocery store. The right price, however, cannot be known by any politician. Even a trainload of brilliant, highly trained economists with the most powerful computers could not know what the right price is. Prices arise from the day-to-day interactions of all participants in a free market, which is itself a dynamic, constantly evolving discovery process.
It is worthwhile thinking about why prices may spike. It typically happens after a major catastrophe, like when a hurricane knocks out 30 percent of the refining capacity for petroleum products or a weather event destroys a major portion of a crop. In a market free of coercion by any participant or the government, the prices convey important messages and help to direct the scarce commodity to the activity for which it is valued the most. One of the most fundamental economic principles is the relationship between the supply and demand for a product and its price. A higher quantity demanded leads to a higher price. Shortages also lead to higher prices. This is neither bad nor good, it just is. It is the nature of voluntary exchange systems which we call markets.
High prices tend to encourage more efficient usage and discourage waste. In the case of energy, trips to town may be consolidated and vacation plans may be altered. In the longer term, more efficient vehicles, factories and equipment are developed and put into use, which reduce energy consumption in the long run. High prices cause the quantity which consumers demand, that is, the amount which they are actually willing and able to pay at any point in time, to decrease, which tends to moderate prices.
What do we want in the wake of a shortage and price spike caused by destruction of productive assets? What do we want in the event of a blockade of major oil supplies in the Middle East? The inevitable result of a sudden shortage is a spike in price, and we ultimately want prices to return to normal as quickly as possible. More important to economic reality is that high prices tend to increase the profits of suppliers who are fortunate enough to be in a position to supply the product. This is not good or bad, it is a part of the reality of voluntary trade.
Profits are the mechanism by which the market determines how much will be supplied. Since suppliers are just members of the human race, they will try to take advantage of opportunities which arise. In times of high prices, they will try to increase their profits by finding more to sell, and those profits will draw others into the market. Ultimately, in a free market setting, the supply will increase and prices will decline. The low energy prices of the 1990s were the result of high prices of the 70s and 80s. The high prices of the 2000s have resulted in tremendous energy finds all over the world, but especially here in North America. They will result in lower prices in the coming decade, if politicians quit trying to help us to death.
Those politicians say that they want to lower prices to help the poor working stiffs, the helpless babies, the cuddly little puppies, and all of the warm, fuzzy, wonderful things that politicians promote. What, however, have they actually done, and what are the inevitable results? They say they want business to build in the U.S., then they demonize the people who earn profits. They try to steal those profits outright with taxes of up to 100 percent. They prevent, delay, and increase the costs for any development of energy in America while promoting and financing foreign development. Most recently, President Obama rejected the Keystone XL pipeline proposal, thus rejecting the supply of millions of barrels of petroleum from Canada. Our politicians don't know how to fix markets. All they know is how to break them. We need to get rid of arrogant politicians (and their economic advisors) who think they know how to run our lives.
Dan McLaughlin is a columnist for The Post-Journal. Contact him at danmcl999@roadrunner.com.