Economic Viewpoint UNCLE SAM SHOULD KEEP HIS MITTS OFF OIL PRICES
GARY S. BECKER

10/29/1990
Business Week
Pg. 20
Copyright 1990 McGraw-Hill, Inc.

With oil selling at close to $40 a barrel, the U. S. and other industrialized countries are under enormous pressure to do something, anything, to stabilize prices. But what goverments are being asked to do will hurt rather than help their economies. Here are a few dos and don'ts for a sound oil policy.

The most important step is to avoid interfering with the market for oil and other sources of energy so that supply and demand can determine prices. If oil continues to be expensive because of anticipated cutbacks in supply, businesses and households worried about their budgets will discover many ways to reduce energy use, including smaller cars, greater reliance on nuclear energy, and more insulation in homes. After all, the threefold jump in the world price of oil from the early 1970s to 1980 caused the amount of oil used per real dollar of gross national product to fall in all industrialized countries.

Japan's oil consumption changed hardly at all since 1970, while its industrial output grew enormously. Even though Japan imports all of its oil, it adjusted much faster than the U. S. to the first crunch partly because Tokyo permitted domestic oil prices to rise to world levels, whereas Washington cushioned the impact with controls and rationing. PAINFUL MEMORIES. Governments should resist the strong temptation to ration and allocate oil and natural gas. Rationing was the most blatant of many misguided U. S. reactions to the price rise of the '70s. Voters' painful memories of long gasoline lines should help Washington avoid repeating that mistake.

It is also unwise to control specific uses of oil, such as setting tougher fuel-economy standards for cars. Indeed, I still believe that Congress should abolish the corporate average fuel economy (CAFE) standards altogether. These require that the new fleet of each manufacturer average at least 27.5 miles per gallon. When gasoline prices are high, car owners choose between the economy of more fuel-efficient cars and the safer, smoother, roomier rides of larger, heavier cars that guzzle more fuel.

A federal tax on gasoline is another attempt to control a specific use of oil. Thus, though it may be a good way to help reduce the budget deficit, it is a bad way to cut down the demand for oil because it artificially reduces one type of oil use rather than all uses. This distorts the allocation of oil among gasoline and other petroleum products.

A general tax on oil imports encourages a shift to domestic oil. This is undesirable because it would encourage U. S. oil reserves to be used up faster, and in the long run, would increase rather than reduce U. S. dependence on imported oil. What makes more sense is a selective tax on oil imported from the Middle East. Such a tax would shift some import demand toward Venezuela, Mexico, Indonesia, and other, safer sources. This tax would also have the advantage of raising funds from Middle Eastern states to help defray the cost of their defense in the current gulf crisis and at other times. BUSH'S MISTAKE. Governments should avoid using ''moral suasion'' to jawbone oil companies into holding the prices of gasoline and other petroleum-using products below market-clearing levels. Artificially low prices create shortages: They stimulate excessive demand for these products while taking away any incentive refiners would have to increase supplies and search for new oil fields.

The U. S. surely does not need another ''excess'' profits tax on oil companies. Such a tax discourages investments toward discovering new reserves and getting more output from producing wells. High profits when supplies are scarce and prices are high help offset oil companies' low profits when oil supplies are plentiful and prices are low.

President Bush made a mistake in yielding to pressure to sell oil from the Strategic Petroleum Reserve, even though he is only selling a small amount. The U. S. and other governments have no more business trying to stabilize the price of oil than they have trying to stabilize copper, platinum, plastics, or other commodity prices that fluctuate widely. Profit-seeking private companies are much better positioned than federal bureaucrats to determine how much oil inventory to hold in light of expectations about price fluctuations. But rational private-inventory policies require clear signals about what a government will do with its oil reserves. Government strategic-oil reserves should be used only for military purposes during a war, boycott, or other periods of severe oil shortage.

The newly emerging market economies of Eastern Europe may be in for a difficult period since world oil prices have risen just as the Soviet Union stopped selling them oil at subsidized prices. But even at $40 a barrel, oil will not have a devastating economic effect on most other countries unless it generates silly policies such as those introduced during the '70s' crunch. If governments can resist the formidable political pressures to intervene in the markets for oil and other energy sources, it is possible to ride out the present crisis with only modest damage to the world economy.

-- GARY S. BECKER IS UNIVERSITY PROFESSOR OF ECONOMICS AND SOCIOLOGY AT THE UNIVERSITY OF CHICAGO