INVESTING: Price controls are not the answer to fuel woes

The cries for rationing are getting louder. About 4 percent of America’s daily oil consumption was taken out by Hurricane Katrina. It will take months to get this supply back, and gas prices at the pump showed immediate reactions. Now with gas over $3 a gallon almost everywhere in the country, some politicians are telling the government to establish price controls and actually take control of the supply chain.

The horrors we put ourselves through during the Nixon administration when price controls were rampant in our economy must have happened so far in the past that rational people have forgotten. Free markets work. It is the best-known method for running an economy that anyone has come up with yet. And until something better comes around, we need to stick to what works.

As the price of gas climbs quickly all over America, rationing is already happening, but it is occurring naturally. Fuel is extremely important in all our lives, but there are periods when it isn’t so critical. People can change their minds about taking weekend vacations. Commuters can quickly decide to car-pool, and others can start taking the bus. High prices will decrease demand, and that will begin to free up supply for critical things in the economy. If we go back to the dark ages of price controls, you can bet you will see shortages throughout the entire system, and you will see them quickly.

The stock market took quick control of the situation by rapidly bidding up almost every company in the oil and gas industry. This is also a positive example of the free market at work. Oil prices are shooting higher because there isn’t enough of the stuff around to satisfy demand. Increasing the firepower of the oil and gas industry through higher valuations is going to allow these companies to obtain the financing to find, extract and deliver more oil to us. That’s a good thing.

I also love the natural equilibrium of the free markets. A few weeks ago, I started to notice increasing evidence that the interest-rate market might finally be taking a turn for the worse. My overall feeling, though, was to wait until more powerful evidence presented itself. Higher oil prices are slowing the economy. That is not necessarily great news, but the slower growth is bringing down interest rates again. Lower interest rates mean decreased inflation, and that’s good.

At least on a short-term basis, it’s probably too late to buy oil and gas stocks due to the extreme run-up they’ve seen. If you buy them now, you run the risk of being a toptick Harry. But there is a structural difference going on, and if oil dips to under $50 a barrel in the next few months, it could offer a solid low-risk play. In the meantime, ignore the calls for price controls. They only have the potential to cause all of us more pain just down the road.