Pain at the pump—but no easy answers

For most Americans, the pain of the war in Ukraine remains dim and distant, with one highly visible exception: gas prices. Within two weeks of Vladimir Putin’s invasion, as Western sanctions curtailed access to immense Russian oil and gas exports, the price of oil surged from $91 a barrel to $123, and the average price Americans paid at the pump for gas spiked from $3.60 to $4.35. Although both prices have somewhat moderated, such a sudden hit to Americans’ pocketbooks has provoked a predictable political outcry. Some have asked why consumers should bear the burden while Big Oil unfairly profits from a global crisis, while House Democrats have proposed a tax on windfall energy profits. Others have insisted that free markets can solve this temporary problem.

Both have a point. Market incentives can and should respond to price signals so that high prices now will spur more oil production later. But those crying “foul” are not imagining things either. Markets do not always produce fair outcomes all on their own but must be part of a larger moral order that recognizes virtues such as the good of our neighbor.

In a well-designed free-market economy, rewards follow past productive work and incentivize future productive work. Windfall profits are a curious case where the market fails to do the former but still succeeds well at the latter. The term “windfall,” as you might guess, originally referred to fruits or nuts blown down by a windstorm: a providential gift to whoever might own the land they blew onto, who could then potentially reap profit with minimal work. In modern market economies, windfalls occur especially in natural resource industries, when war, natural disaster, or some other outside event reduces the supply of some urgently needed resource. It drives prices up dramatically and gives the remaining suppliers in the market the chance to maximize profits.

Want to prevent that? The problem is that even if windfall profits offer unearned income in the moment, they help stimulate precisely the kind of productive work that is most likely to benefit consumers over the long haul. When oil is above $100 a barrel, drillers will open a lot more wells than they do at $50 a barrel, especially in marginal drilling sites that are expensive to operate. Any attempt to suppress prices and profits in the near term can exacerbate the problem in the long term by reducing incentives to increase production.

In light of this reality, we might be reminded of the famous quip, “Capitalism is the worst economic system, except for all the others that have been tried.” Global resource supply crunches provide opportunities for a few to get rich at the expense of the many, but they also generate the incentives that should, in theory, make such shortages less likely in the future. Perhaps this is the best we can hope for in a fallen world, though we should beware of giving up too hastily on attention to the moral foundations that made modern free-market capitalism possible.

Our Protestant forebears knew the danger of human greed and selfishness, and that, given free rein, these impulses would lead not to free markets but to oppression and exploitation. Accordingly, they argued that it is not enough not to steal. Rather, the Eighth Commandment imposes on all market participants the obligation not merely to avoid stealing but to positively seek the good of our neighbor: “That I do whatever I can for my neighbor’s good, that I treat others as I would like them to treat me, and that I work faithfully so that I may share with those in need” (Heidelberg Catechism Q&A 111). From this standpoint, the just thing to do would be to pass on as few costs to consumers as possible during times of shortage.

In an older era, many virtuous businessmen (such as the small-town banker idealized in It’s a Wonderful Life) tried to put this principle into practice. Today, however, the growing scale of our economy has weakened the interpersonal bonds that nourish such sacrificial behavior. When your “neighbor” in the storefront has been transformed into a faceless and nameless “consumer” far removed from corporate boardrooms, it’s hard to see why you should sacrifice potential profits for his benefit. Furthermore, the complexity of the economy sometimes makes it difficult to know what would truly help our neighbors.

But, if corporations are seen to be driven only by greed, pressure will build for government intervention. The next few weeks could be interesting indeed.