Supplying Prices on Demand

Yesterday’s Kansas City Star ran an article about congressional legislation that "would make it a criminal offense for gas prices to be ‘unconscionably’ high." The article’s headline? "Gas-price legislation would hurt consumers, oil group says" — undoubtedly true, but an unfortunate choice of words all the same.

Using the oil industry as the lone dissenting voice to legislation that seems populist and consumer-friendly on the surface makes it look like any objection to the bill is disingenous. After all, an oil industry spokeswoman would have to be against price controls, right? For those who have an instinctual us-vs.-them attitude about business, and the oil industry in particular, it seems like naked self-interest masquerading as concern for consumer welfare. But this is an objection worth heeding. If it had made a few more phone calls, the Star could well have titled its article, "Gas-price legislation would hurt consumers, says almost every economist on the planet".

The fundamental relationship between supply, demand, and price isn’t a matter of opinion or conjecture. Changing one of those variables by legislative fiat changes the others as well. If you set a cap on prices, more people will buy more gas and fewer oil producers will have an incentive to supply the market — leading to shortages. Simple as that.