An old mistake: why are they trying to punish the oil companies?

High prices are unfortunate for consumers, but they accurately reflect market realities. Congress can no more repeal the law of supply and demand than physicists can repeal the law of gravity. If you restrict the profits you can make from something, you'll get less of it. If you restrict prices, you'll get less conservation. High prices do more to encourage both production and conservation than anything Congress could dream up.

The Republican call for more refining investment is even less explicable. First, returns on investment in refining have been less than the median returns in the rest of the economy since 1985. Forcing investment in a historically low-returning sector would seem to be the antithesis of good public policy. Second, it is absurd for politicians to tell private companies what they should or should not do with their private capital. In a free society, businessmen make that choice for themselves.

Consider also how quickly the oil industry responded to disruptions after Hurricane Katrina. The storm took more than 10 percent of U.S. refining capacity offline and knocked out many of the pipelines needed to deliver Gulf Coast gasoline to the rest of the nation. By mid-October, 1 million barrels a day of U.S. crude production remained shut down (5.2 percent of U.S. consumption, 19 percent of U.S. production, and only 1.4 percent of world production). Simultaneously, 1.6 million barrels per day of refinery capacity remained offline (7.8 percent of U.S. consumption, 1 percent of world consumption).

An economic analysis of those numbers predicts that a reduction in supply of that magnitude would result in a gas-price increase of 33 percent, or 84 cents per gallon. We saw exactly that as prices went from their August average of $2.50 to nearly $3.30 per gallon, but prices have since fallen back to below August levels. The market has responded: Imports are up 38 percent, and gasoline demand has dropped--all in less than two months.

Motorists might think it nice if the oil industry had the reserve capacity to insure against major disasters, but business is not in the job of doing the public favors--unless the public pays for them. A company with excess capacity will have to pass that fixed cost along to consumers, and there will almost assuredly be another company, with less excess capacity, that can undercut the price. Refineries typically cost $2-6 billion to build, and managers cannot allow them to sit idle for long without triggering a (justified) stockholder rebellion.

Politicians have no business calling for such excesses. Consumers are much better off paying relatively low prices most of the time and high prices when supplies are tight, than paying higher-than-normal prices most of the time in return for slightly lower peak prices. Investors will put money into the refining sector if and when they discover that profits can be gained by doing so. If profits can't be made, it tells us that there is no shortage of capacity. In other words, if there's a problem, the capitalists in our midst will solve it--without Dennis Hastert's help.