Cause of gas price increase

AMERICANS aren't overly suspicious, except perhaps when gasoline prices start rising quickly, as has been the case for the past few months.

The same people who would be willing to bear arms if anyone tried to dictate a price limit, say, for selling their homes or cars, seem avid for government to step in and prevent gas station owners from charging what the market will bear for gas.

Mike Cox, Michigan's attorney general, announced his office will be investigating retail gasoline prices around the state. He's seeking to arrest dealers who charge a price "grossly in excess of the price at which similar property or services are sold."

Although Cox didn't--and couldn't--define precisely what constitutes a grossly excessive price, his press release states that "opportunists" who play on consumer fears and charge illegal prices are price gougers.

"Gross excess could mean two times the price or 30 cents over or whatever. There is no bright line," said Matt Davis, a spokesman for Cox. "We know it when we see it." Sort of like pornography, I guess.

Seven Democratic attorneys general also have asked President Bush to instruct Attorney General John Ashcroft to investigate whether oil and gas companies "are colluding to drive up the cost of gasoline."

Government investigations in the last half-century haven't uncovered much price-fixing of gasoline. But the investigations arise with every price spike. The overwhelming evidence suggests that higher crude oil prices, limited refining capacity and rising demand for fuel are the reasons we now have a shortage of fuel.

Shortages, explain most economists, are the most important cause of higher prices--rather than sellers who are trying to exploit panic and maximize profit. One exception is when sellers conspire to set prices, which is illegal under federal antitrust law.

"If one retailer is selling at a higher price, then other consumers are free to shun him and go elsewhere," said Van Bussmann, former chief economist for the Chrysler Corp. who also taught economics at Cornell University.

L. Bruce Lanni, a senior analyst at A.G. Edwards & Sons, wrote to clients that "there is little reason for concern over the near term concerning the recent increase in gasoline prices." Prices of $2 a gallon would have to rise least 50 percent more to dampen demand, he wrote.

Lanni zeroes in on a key point: Prices, high and low, are how the market allocates scarce goods and services. Flashlight batteries always cost more just before a hurricane hits, reflecting rising demand and falling supply.

While government may decide, based on very honorable intentions, that commodities as essential as gasoline or batteries must be distributed according to prices that aren't allowed to rise too high or too fast, this approach has a down side: longer, more serious shortages. If prices aren't allowed to rise, those who are allowed to bid for gasoline will get it, whether they are Italian motorists or landscapers in Beijing.

Want to avoid the high price of batteries in the next blackout? Buy now. Laws against high prices can only ensure you'll be sitting in the dark.

Doron Levin is a columnist for Bloomberg News.