Responding to retail gas prices that have skyrocketed to record levels, President Joe Biden has decided to pose as Americans’ protector from abuses in the energy marketplace. Ignoring his energy policy resume, which includes his cancellation of the Keystone XL pipeline, limiting of drilling leases and opposition to fracking, each of which predictably raises oil and gas prices, he wants to move blame by pointing his finger at alleged price-gouging, manipulation and/or collusion. As the president’s letter to the FTC put it, “The Federal Trade Commission has authority to consider whether illegal conduct is costing families at the pump. I believe you should do so immediately.”
However, that portrayal is simply a very well-worn, calculated pretense.
Real collusion has long been illegal, which raises the question of why our supposedly vigilant regulators didn’t prevent what they suddenly want to use now as a scapegoat until after the fact. Oil and gas are heavily regulated on the premise Americans need to be protected from the risk of such industry depradations. So where was the “protection”?
There has also been a long list of past industry investigations, also timed to bail out politicians and regulators from well-deserved blame, which have produced no evidence of collusion.
Further, insinuations of gouging, manipulation or implied collusion rely on ambiguous terms. What evidence could prove, rather than just assert, gouging? Political assertions run in terms of charging “excessive” prices or failing to charge “fair” or “reasonable” prices, but none of those modifiers have clear meanings.
What qualifies as prosecutable manipulation? Given that the only time these charges are brought is when gas prices jump, does that mean any such increase implies collusion? But successful collusion is hard to square with the fact Brent crude fell to just $9.12 a barrel last April 21. Those vague but ominous-sounding words are just rhetorical efforts to divert blame, not to understand what is going on.
In addition, investigations into undefined violations undercut the essential purpose of the rule of law. Effective social cooperation can only be built upon clear rules which constrain government arbitrariness as well as abuses by others. But potential government prosecution for arbitrarily defined “crimes” subjects every decision’s legality to whims of judges or regulatory functionaries, exercised after the fact. This open invitation to government abuse means no one can know what actions would insulate them from wrongful persecution or prosecution. It would effectively create law after the fact and apply it to prior behavior.
The unfairness as well as arbitrariness is obvious. What would happen if referees could change the rules of a game after the fact? Retroactivity also violates the Constitution’s ban on ex post facto laws, which James Madison called “contrary to the first principles of the social compact, and … prohibited by the spirit and scope of these fundamental charters.”
Demanding investigations into whether higher gas prices reflect manipulation is also political posturing, because proving manipulation from higher current prices is impossible. Multiple political and market forces, with effects that are impossible to quantify accurately, are pushing prices up, so that there is no way to know what the competitive price “should” be.
Perhaps most importantly, the relevant costs are forward looking, rather than historical. Critical to manipulation charges is uncertainty about future oil supplies and prices. A refiner intending to remain in business must replace oil used in current gas production, so that the relevant cost of that oil is therefore not what it cost to buy in the past, or even today, but what replacing it is expected to cost in the future. But no one can know what that cost will be in the face of our present and future uncertainty. The effects of multiple interacting influences on “competitive” prices would need to be accurately quantified before anyone could possibly show some manipulation had made prices “too high,” but that cannot be done reliably.
However, that does not stop the political scapegoating. Accusations try to move the burden of proof from the accusers, as would be necessary under a real rule of law, to oil companies and traders, distracting people from the fact that the accusations cannot be proven, either.
What should we make of government gouging, manipulation and collusion witch hunts that cannot possibly establish what they are supposedly looking for? What if they are combined with a host of government policies that substantially raise oil and gas prices, both now and in the future (e.g., inflationary policies, development and production restrictions, taxes extracted by multiple levels of government that dwarf the profits earned by “big oil,” etc.)?
We should recognize that government does not protect us against the evils of the market and its rhetorical posing as consumer-advocate is both dishonest and dangerous. It undermines what really protects consumers – the market competition regulators are so eager to hamstring. What Americans need is not more arbitrary, logically flawed government “protection,” but more protection against it.
Gary M. Galles is a professor of economics at Pepperdine University.