Bustamante's Bad Policies: Gasoline Price Controls Would Be a Disaster

Like many Americans, I never heard of California Lt. Gov. Cruz Bustamante until recently. But because the California recall election has dominated national political coverage for the last month, I have been getting a crash course on Mr. Bustamante--the leading Democrat to replace Gov. Gray Davis should the recall be successful on Oct. 7. Unfortunately, Mr. Bustamante's latest pronouncement does not indicate any knowledge of economics whatsoever. This suggests that California's economic woes are unlikely to improve under his leadership.

Last week, Mr. Bustamante proposed amending the California state constitution to allow the Public Utilities Commission to regulate gasoline prices. "Californians are being gouged," he charged. His proposal would require oil companies to justify price increases and regulate their profits in the state.

The price control plan has universally been condemned on economic and legal grounds. "It's a terrible idea," says energy expert Philip Verleger. He warned that it will lead to gas lines as oil companies export gasoline production from California refineries to other states and reduce imports of gasoline from Canada, the Caribbean and others places that now serve the California market.

The state would have no power, even if the constitutional amendment were adopted, to compel oil companies to keep supplies in the state or bring gasoline in from elsewhere. Any effort to do so would be a violation of the commerce clause of the U.S. Constitution and surely be thwarted.

Says law professor Anthony Sabino, "Gasoline and the business of selling gasoline is part of interstate commerce that belongs to Congress to regulate, if at all." He added that Mr. Bustamante "is either very ignorant of the law or he's getting incredibly bad advice from his advisers or it's a publicity stunt."

The last is a definite possibility. Susan Estrich, a Democratic consultant, believes that Mr. Bustamante is trying to shore-up the party's left-wing base going into the recall election. "Bustamante is running as some would say a ‘60s or ‘70s Democrat," she says. This would be a foolish strategy in a normal election, where the winner needs 51 percent of the vote. But in the recall election, where a third of the vote might win, the strategy makes some sense.

Mr. Bustamante's problem is that he is only getting about a third of the vote in public opinion polls, despite the fact that he is the only major Democrat running to replace Mr. Davis. With 45 percent of registered voters belonging to the Democratic Party, Mr. Bustamante should be doing much better than he is. Hence the appeal to the party's extremists.

The danger is that Mr. Bustamante's strategy is going to make middle-of-the-road voters doubt his basic competence for office, thus improving the chances for a Republican candidate to attract enough independent votes to put him over the top. If editorial opinion is any indication, Mr. Bustamante's proposal is already backfiring.

Says the Sacramento Bee, a liberal paper, "The price controls Bustamante proposes would be a disaster…. Either Bustamante doesn't understand simple economics or he's pandering to people who don't. Fool or panderer: It's not a pretty choice."

Unfortunately, the movement to control gasoline prices is not limited to California. Last year, Hawaii enacted a law giving it the power to regulate gasoline prices. It is scheduled to go into effect next year. In Washington, Congressman Edward Markey, Democrat of Massachusetts, and Senator Joseph Lieberman, Democrat of Connecticut, have been pressuring the Energy Department to take action against high gasoline prices.

Apparently, neither has bothered to learn the facts of the situation before lashing out at the oil companies--always convenient whipping boys for liberal politicians. If they checked, they would see that real (inflation-adjusted) gasoline prices are about where they have been for most of the last 20 years. The recent runup is from a historically low level. Even so, they are still substantially lower than they were in 1981: $1.79 per gallon now versus $2.74 then. And contrary to popular belief, oil company profits are not rising. According to Business Week, the profit margin in the oil industry is only 5.4 percent, compared with 6.4 for all industries.

The main reason why gasoline prices rise and fall is because of fluctuations in the world price of oil, which oil companies have little control over since they import most of it from places like Saudi Arabia. California, however, has deliberately imposed higher costs on itself by requiring that gasoline sold there be specially formulated to reduce pollution. With a limited number of refineries able to produce the kind of gasoline California demands, prices there have long been higher than in the rest of the country.

If Mr. Bustamante is really concerned about gasoline prices, he should look at California's 50.8-cent per gallon gasoline tax--4th highest in the U.S.

Bruce Bartlett is a Senior Fellow with the National Center for Policy Analysis (NCPA).