On Hawaiian Gasoline

by Don Boudreaux on January 24, 2006

in Prices

Spencer recently posted the following comment on this blog-post:

Last August when Hawaii imposed price controls on gasoline you said
you were looking forward to getting picture of people waiting in line
to buy gasoline to use in your introductory class.

Did you ever get the pictures?

Can you post them so we can see them?

The gasoline-price post that Spencer refers to is here.

Spencer’s question and request are fair.

Alas, though, in my original post I misconstrued the nature of Hawaii’s price cap.  It is a cap not on retail gasoline prices; it is, instead, a cap on wholesale gasoline prices.  This report from the San Francisco Chronicle explains.

Because Hawaii’s new regulation (adoped in late August 2005) doesn’t cap retail prices, such prices can rise high enough to keep people from waiting in long lines to buy gasoline.  But this absence of queues at gasoline pumps doesn’t mean that Hawaiian drivers are well-served by the wholesale-price cap.

The wholesale-price cap reduces the supply of gasoline available at retail, causing the retail price to rise to heights higher than it would otherwise reach.  Queues might not emerge, but the quantity of gasoline available to drivers surely is lower than otherwise, and the price consumers pay for each gallon they buy is higher than otherwise.

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{ 14 comments }

Anshu Sharma January 24, 2006 at 6:13 pm

No lines for years after bait-and-switch by Hawaii!

Yes, there will be no lines for years to come. Just as countries like India did quite well for decades after throwing out (regulating) foreing & private banks, oil producers, computer makers etc. Instead it took decades for us (in India) to realize that we were using 20 year old computer technology, using black-and-white TVs in 1980s, driving cars designed in 1950s, etc.

Here is what happens:
- Sunk costs
Companies with infrastructure (like oil and gas) in Hawaii will try to maximize profits by running their current refineries etc. profitably as long as they can. But they will not spend more money in Hawaii on future investment. Hawaii has done a bait-and-switch. And there is a one time benefit to that… lower prices while the infrastructure lasts.
- Read my lips, no new machines
Just as happened to India, what is likely to happen in Hawaii is that profit-seeking corporations will much rather build one in Mexico, New Jersey, Qatar, China than build one in Hawaii. In fact the effects may be subtle to the human eye. For example India seemed to do just fine without color TVs or latest computers but the quality of life was impacted and so was the economic growth. So Hawaii can cap prices if they are prepared to become a slow-growth lethargic economy with low productivity and standards of living in exchange for a few years of stable gas prices. Not a bargain I would want.

Chrees January 24, 2006 at 8:22 pm

This sounds very similar to California's so-called energy deregulation from a few years ago.

Ammonium January 24, 2006 at 11:36 pm

Here's a site with price comparisons: http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=24

It's difficult to make conclusions because the prices are cyclical and volatile, but it seems like Hawaii is getting more expensive relative to other areas (try comparing it to Alaska and California). Hawaii's prices spiked much more severely in September, and after coming down they are again shooting up.

California's energy deregulation freed wholesale prices while capping retail prices. This created a shortage. It's like the gas lines.

Barry P. January 25, 2006 at 4:22 am

Ammonium:

The retail electricity price in Cali wasn't capped – it was fixed.

When introduced, it was intended to act as a price floor, protecting utilities by giving them monies above "market" rates in order to allow them to pay off "stranded" costs. When those costs were paid off, the price was supposed to be freed. So what was designed as a price floor turned into a cap, to the detriment of the rent-seekers it was designed to enrich.

The San Diego utility had already recovered its stranded costs, and thus were able to charge market-based retail rates.

What we saw in California electrcity markets has no right to be called "deregulation": it was merely "reregulation", the replacement of one absurd list of meddlesome encroachments with another.

spencer January 25, 2006 at 10:45 am

Thank you for repling to my comment. I admire your honesty.

prices are more expensive in Hawaii, but that has always been true and there is not enough information to see if the controls have caused an increase in the spread between prices there and the mainland. Nor do we know if it will have a long term negative impact on supply.

I agree with you that price controls are a bad thing. But the best method of stopping such behavior is good analysis, not jumping to conclusions and making a case that can we turned against you.

Scott Scheule January 25, 2006 at 2:40 pm

I agree, Spencer, but the case against price controls has been made pretty substantially. Further analysis is not really needed, just more careful remarks.

spencer January 25, 2006 at 3:49 pm

Yes — about the only thing I see about price controls that really sets me off is some people running aroung claiiming that Carter established price conrols. Nixon actually established price controls and Carter lifted them. He did not lift them 100%, but he actually did more to lift price controls on oil then Reagan.

But that is like trying to demonstrate that historically the economy and stock market do much better under democrats then republicans. It is a historic fact, but even die hard democrats do not want to believe it.

cb January 25, 2006 at 5:02 pm

Spencer, please tell me you're not implying democratic presidents are better for the economy than republicans.

embutler January 25, 2006 at 9:21 pm

I too have read that markets are more profitable under demos than repubs… but I choose not to believe it either… what I think I read was the stock dividends were higher under d's than r's…and another way of putting that is the stock prices were lower under d's than r's… same return ,lower price therfore better percentage return

Strophyx January 26, 2006 at 12:49 am

One might be prompted to ask who benefited from this price control. It's certain that drivers didn't, since they ended up paying even higher prices than they would have paid in the absence of regulations. I can't say for certain whether state government gained high tax revenues but deem it doubtful. Gasoline sellers got much average net revenues, but on lower volume. We all recognize that this sort of thing is a loss in the long run, but I'm still scratching my head trying to figure out who was supposed to benefit in the short run.

spencer January 26, 2006 at 9:25 am

All I'm doing is making a factual statement.

embutler –From Truman to Clinton the average total return of the s&p 500 was 11.9% under democrats and 7.9% under repubublicans

this does not include Bush II where the stock market is still below where it was when he took office.

the Radical January 26, 2006 at 11:06 am

History does indeed show that returns are higher when dem's control the White House than under rep's. I do believe that this is true, the numbers show it to be so; however, correlation and causality are two different things. First, we must ask ourselves how much of an effect presidential and gov't policies have on the market in relation to other factors. E.g. a case can be made that the prosperity of the 1990's is more a result of the actions of Bill Gates than of Bill Clinton. The market is made up of hundreds of millions of individual actors; the Prez, no matter how powerful, in only one man. Second, we must ask what is the lag time between policy enactment and its total effect on the market. When Prez's come into office they "inherit" the economy of their predecessor regardless of what party they are from. The real effects of policy often take years to show up in market data.
Note that I am not trying to defend either party for there is little substantive difference between the two we seem to be stuck with.

Doug January 26, 2006 at 7:43 pm

There are (at least) two other confounding factors at work:

1) The stock market is theoretically forward-looking and is considered a leading economic indicator, not a coincident indicator. Stock market = up <> economy = good.

2) I vaguely recall another study that shows that the economy and/or stock market does best when the president and congress are run by different parties. Clinton as prez w/Gingrich as speaker is the best example I can think of. The popular reasoning is that the government spends too much time arguing that they don't have enough time or energy to screw anything up!

flinsinapse January 18, 2008 at 6:12 pm

Hello!
Nice site ;)
Bye

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