The Oil Drum | Hawaii puts caps on gas prices

Hawaii puts caps on gas prices

Posted by Yankee on August 25, 2005 - 7:53am

It was announced today that Hawaii has put a cap on gas prices, to take effect starting Sept 1. The pre-tax wholesale cap in Honolulu is $2.1578. Today, the average gas price in Hawaii is $2.824, 21 cents higher than Monday's national average. According to CNN,

The law states that no manufacturer or wholesaler may sell regular unleaded to a retail gas station or another wholesaler for more than the maximum pre-tax wholesale price set each week by the state for each Hawaiian island.

Why are they doing it? Well, not necessarily just to ease the burden on the consumer:

According to local media, proponents of the law say it was created to keep Hawaii's refiners from taking advantage of the isolated market by charging high prices as crude costs rise and not lowering prices to reflect dips in crude costs.

Looks like governor Linda Lingle isn't a fan of the plan. She's a member of the group who believes that prices are so high because the oil companies are out to make record profits (which, I concede, could possibly be true, but it can't be the only reason that the gas prices are so high).

Hawaii's Star Bulletin reported that Governor Linda Lingle (R) is an opponent of the caps. The newspaper said Lingle believes it would be better to force oil companies to open their books and show consumers how much money they make at each stage of business.
"It's a feeling people have that they're being gouged. I think that's what bothers people most, is that they feel they're being charged unfairly simply because we have no other choice," she told the newspaper.

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Hawaii puts caps on gas prices

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10 comments

pbrewer on August 25, 2005 - 8:36am Permalink | Comments top

Whenever I talk to people about peak oil issues, I emphasize that the results will simply be high prices, not actual shortages--unless the government puts on price controls.

A price ceiling is a perfect way to create spot shortages.

sampo on August 25, 2005 - 10:49am Permalink | Parent | Comments top

and allowing the price to rise uncontrolled just creates a different kind of spot shortage, one the affects the population quite regressively. In addition, it allows suppliers with consolidated control over market segments to take advantage of the situation by throttling supplies to just the right levels where they maximise profits.

are you saying that only the richest people should be entitled to gasoline? are you in favor of rationing in conjunction with caps?

As a Hawaii Resident: I just want to note that this gas cap story is the only thing i've heard about for going on 2 weeks (with our 12.5% excise tax hike being second). The news, local talk radio, the break room, the gym....its all anyone wants to talk about anymore.

pbrewer on August 25, 2005 - 2:36pm Permalink | Parent | Comments top

There is, of course, no good solution. Oil is just not going to be cheap any more, except for periods where demand destruction has pushed demand below the supply.

As far as making fuel available to poor people, there are any number of rationing schemes. They all work pretty poorly, but there probably needs to be some mechanism, at least for a transition period. I kind of like the one that was recently proposed in Britian as a mechanism for controlling carbon emissions. In that scheme, everyone gets a certain number of fuel purchase credits. You need to use one with each unit of fuel that you buy, but you can sell any that you don't need. Result is that fuel still sells at the market price, and the impact on the poor is ameliorated by the profit they can make selling unused credits. (I like it mostly because I use a lot less fuel than the average person, so I'd be able to sell my credits and make some money.)

But just putting a ceiling on fuel prices will have one of two results: either it will have no effect (if the ceiling is above the market-clearing price) or it will produce shortages because the quantity supplied will below the quantity demanded at that price (if the ceiling is below the market-clearing price).

It's pretty hard to produce shortages in a market economy, but if shortages are what you want, that's how to do it.

Anonymous (not verified) on August 25, 2005 - 8:43am Permalink | Comments top

Okay, so people are uninformed about supply issues and the threat of Peak Oil. But advancing legislation and adopting a targeted policy apparently without doing research and educating the public about the underlying issues is just plain irresponsible an will reinforce erroneous public perceptions. Sounding a little like a self-destructive spiral to me.

Anonymous (not verified) on August 25, 2005 - 12:38pm Permalink | Parent | Comments top

You're absolutely right.

Anyone remember what's going on in China ? The government caps the price. This results in a) a market that doesn't contain demand, resulting in shortages, and b) suppliers reluctant to produce because they can't make a profit.

Ben on August 25, 2005 - 8:54am Permalink | Comments top

From the Houston Chronicle version of the AP story:

The caps are based on a baseline price calculated from the five-day average of spot rates from three mainland markets: Los Angeles, New York harbor and the U.S. Gulf Coast.
The commission then adds on allowances for the cost of shipping to the state and for transporting gasoline from Oahu to more remote and less populated islands.
For example, under next week's cap wholesalers may not charge more than $2.3058 — about $2.86 including tax — for a gallon of regular unleaded gas in Hilo on the Big Island. Allowing for a retailer's markup, prices at the pump in Hilo could be close to $3 a gallon or more.
Federal, state, and county authorities each impose a fuel tax on wholesale gasoline. The state's excise tax is also imposed on gasoline at the wholesale and retail levels.
Frank Young, a member of Citizens Against Gasoline Price Gouging, said the price caps were pretty much in line with current market rates in the state.
"The purpose of the cap is so that we move with the rest of the country," he said.

I don't like the idea of a cap, but at least it seems they aren't being totally arbitrary about it. Setting it every week they also have a lot of flexibility. In other words, if the government is gonna muck with the market in this way (they do it in other ways all the time), at least they seem to have put a little thought into it.

Hopefully they've left themselves an out, if it backfires (like the lovely rolling blackout power plan in California) they should undo it in a big hurry.

JLA on August 25, 2005 - 10:42am Permalink | Parent | Comments top

Perhaps this is not quite as dumb as it sounded at first. An inflexible price cap is a recipe for shortages. If suppliers have to take a loss (even if the loss is just the opportunity cost to sell the fuel elsewhere) in order to deliver fuel, they won't deliver the fuel.

The devil may be in the details. For example, have they accounted for the increased shipping costs of fuel as oil prices rise?

We shall see...some politicians may look really dumb if they go from high gas prices to gas shortages.

fatbear on August 25, 2005 - 9:03am Permalink | Comments top

Unfortunately we better get used to this sort of ineffective and counter-productive political reaction - there's going to be lots of it over the next few years. It is far easier for the pols to do something dumb like this than it is for them to educate the populace and foster constructive change.

As we know too well, explaining Peak Oil is difficult, and understanding Simmons is even more difficult for the average person who thinks you just need to open a valve and the oil flows.

Saudi Arabia failing to produce as promised is IMHO the most likely cause of the first real "permanent" shock (as opposed to other [weather, pipeline blow-up, etc.] causes of a temporary event). Just yesterday I had lunch with a very smart friend who asked me if I had ever heard of Simmons, and if I understood him and/or the whole PO idea. It took the rest of the lunch (over 20 minutes) to go through PO and Simmons, and she accepted it more because she trusts my having vetted it than by understanding. We have quite a task in front of us....

Anonymous (not verified) on August 25, 2005 - 9:21am Permalink | Comments top

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.

pbrewer on August 25, 2005 - 2:45pm Permalink | Parent | Comments top

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.