More(iss) on Gasoline Prices

by Don Boudreaux on May 31, 2007

in Prices, Regulation

My friend and co-blogger (at Market Correction) Andy Morriss has a new paper here that compellingly explains why the gasoline prices Americans now pay at the pump are unnecessarily high.  Here’s the abstract:

Rising gasoline prices have brought energy issues back to the forefront of public policy debates. Gasoline markets today are the result of almost a hundred years of conflicting regulatory policies, which have left them dangerously fragmented. In this article, I analyze that regulatory history, highlighting the unintended consequences of regulation that have pushed the United States into a series of loosely connected regional markets rather than a broad, deep national market. This fragmentation leaves the American economy is vulnerable to natural disasters, terrorist attacks, and foreign dictators in ways that it need not be. It also produces higher prices for consumers and reduced innovation by refiners.

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{ 1 comment }

Chris O'Leary June 1, 2007 at 2:14 pm

This is a fascinating article that answers a lot of question.

In particular, I found interesting the idea that, because of varying local regulations, there no longer exists a broad national market for gasoline.

Instead, what you have are a bunch of smaller, more fragmented markets. As a result, it's harder to address local supply shortfalls, because there is less supply available in a specific formulation. A retailer can't just buy from anyone any more. Instead, he has to buy from a smaller, more specific set of wholesalers.

This also suggests that you've got more gasoline just sitting around in the system in the form of wholesaler inventories, because it can only be bought by specific retailers, and not by just anyone. Maintaining those inventories come at a cost.

Combine this with the consolidation at the refinery level, and you have less competition.

All of this drives up prices and profits.

It's also the product of regulation.

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