Define Gouging

May 11th, 2007

The hard left think tank Canadian Centre for Policy Alternatives released a much trumpeted report Wednesday that said Canadians are being gouged at the gas pumps. Entitled Gas Price Gouge: The Sequel (pdf file here), the report concludes that consumers are being gouged because gas prices are 15c above what they should be. Using historical price analysis, author Hugh Mackenzie determines that gas company profits should never be allowed to increase above the historical.

Early on Mackenzie makes the point that there are “signals to the industry that the price that the market will bear has gone up.” Still on the first page, he concludes, “the precedent was set (after Hurricane Katrina) as the psychological barrier of $1.00 per litre… was broken.” These are both valid and possibly accurate points, but irrelevant to the thesis at hand.

The problem with the report, as others have already noted, is it treats gas company profits as a bad thing. They are, however, neither bad nor good, they are simply part of a market transaction. Gas company’s, as noted in the report, charge what “the market will bear.” The consumer has choices, one of which is to not buy gas. But Mackenzie and the Canadian Centre for Policy Alternatives never acknowledge this report.

The problem in the gas industry isn’t profits, it’s possible collusion. Profits are both legal and moral, as they should be. Gouging, the word used throughout this report, is defined as “pricing above the market,” yet Mackenzie himself acknowledges the market will bear present prices.

The basic thesis, that the profit rates of two years ago are somehow the appropriate profits, rests on the idea that the Canadian Centre for Policy Alternatives or some other such organization should determine gas prices, not the market as defined by supply and demand.

This report, however, is not a complete throw away. As noted above it’s possible there’s a problem with gas and oil industry: not profit making or price taking, but possible collusion. If this reports numbers are accurate (and Back Off Government questions that), then this report helps provide evidence of that collusion. Collusion, an agreement amongst sellers to act jointly in their common interest, is illegal in Canada, and anti-market behaviour. This is where Mackenzie should have spent his time. Otherwise, all he really proved was that the people running the gas companies are good at their business.

More junk science from the Centre for Policy Alternatives
Road Hammer

Economic Fundamentalism, property rights

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