The Oil Drum

10 comments on Hawaii puts caps on gas prices

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Anonymous on August 25, 2005 - 8:21am

Scarcity creates lots of opportunities to manipulate small submarkets where demand is inflexible. When suppliers can turn supply on and off faster than the demand side can adjust their consumption then you get a strong incentive for the suppliers to create shortages so they can reap skim profits off the run up in prices. That's what happened in the California energy debacle. The regulators took their hands off the market, the suppliers consolidate the supply, and then shut down plants to assure that supply was less than demand. At that point prices exploded and they pocketed the profits.

So regulation has a role to play. It can work by assuring that the suppliers can't coordinate their actions to create price spikes, say by assuring multiple suppliers into the niche markets. It can work by setting price caps.

Fear that the regulators will screw it up is perfectly reasonably. They can screw it up by serving the goals of the demand side - setting the price to low. I think you can see that in the recent stories in China. They can screw it up by serving the supply sides goals and enabling things like the story in California.

Failing to regulate entirely is both unlikely and typically serves one side or the other.

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pbrewer on August 25, 2005 - 1:45pm

Regulators are almost guaranteed to screw it up, for the same reasons that a market economy works better than a planned economy.

Even a "flexible" scheme like this will surely make thing worse in the long run. Some of the suppliers in the market will just throw up their hands at the added cost of complying with the scheme and the many added risks (the risk that the price they're allowed to charge will not allow them to cover they costs, but also the legal risk that they'll commit some technical violation of the new rules and get sent to jail). The result will be even more concentration of suppliers and even more opportunity for suppliers to take advantage of the situation to make monopoly profits.