Thursday, August 25, 2005

Wholesale Gasoline Price Ceiling

From the online pages of the Wall Street Journal [subscription required]:
Hawaii's legislature first authorized the cap on wholesale gasoline prices in 2002, and amended it last year, in an effort to control what have long been higher prices than those on the mainland U.S. The state plans to set a weekly cap that is pegged to an index made up of average wholesale prices in California, the East Coast and the Gulf Coast. Yesterday, its Public Utilities Commission imposed its first such price ceilings, which take effect Sept. 1.

Because of the state's relative isolation, Hawaiians have long paid more for basic commodities such as milk and bread. The average for regular unleaded gasoline in Hawaii currently is $2.84, according to the automobile association AAA; nationwide, the average price is $2.61, according to the Department of Energy.

The move lacked the backing of Gov. Linda Lingle, who has tried to repeal the cap. She does not support artificial price controls, according to spokesman Russell Pang. "It's not the right solution to what the legislature is trying to accomplish, which is lower gas prices," he said.

Indeed, some critics said the cap may cause pump prices to rise, since it affects wholesale prices but not retail prices, and refiners and marketers have long warned that caps could spur shortages and long gas lines. "Any steps to interfere with market forces have undesirable consequences," said Chevron Corp. CEO David O'Reilly in 2002.

Fereidun Fesharaki, an energy expert at the East-West Center in Hawaii, said the index used by the state's PUC is likely to push up gasoline prices that in some cases are cheaper than on the mainland. "I think it's a really stupid idea," he said, adding that the move will create "a negative business environment" that could discourage the state's two refiners, Chevron and Tesoro Corp., from making additional large investments. "One of them may close down," he said.

In a statement, Chevron said, "We continue to believe that this law is flawed and not in the best interest of the state." Tesoro said its Hawaii operation believes any cap "will only serve to distort market forces and will result in long-term negative impacts to the citizens and the economy of Hawaii."

But State Sen. Ron Menor, a leading advocate of the measure, said the cap is designed for a market in which oil companies and gasoline marketers are free to charge what they want. "Consumers have been price gouged for a very long time," said Sen. Menor, chairman of the commerce, consumer protection and housing committee.

Sen. Menor argued that regulating gas prices is no different than regulating the price of electricity, saying that with only two refiners, Hawaii "is not really a free market." He also dismissed concerns about gas lines or pressure on refiners and marketers as "scare tactics." Both of Hawaii's refiners have considerable investment in the state, he said, and "I doubt they would abandon it."
Let me suggest some questions to ponder:

1. The Hawaii legislature wants to relate wholesale gasoline prices in Hawaii to such prices in California, and in the East Coast and Gulf Coast regions. Is there any economic reason we would expect that Hawaii's prices should be similar to prices in these regions of the country?

2. So, the price ceiling is being imposed on what the owners of gasoline stations pay to the person/company who supplies them with the gasoline they sell to consumers. If you use a demand and supply model for 2 markets, one for the wholesale market and one for the retail market, what economic effects of imposing a price ceiling in the wholesale market would you predict?

3. State Senator Menor says that the price ceiling in question is no different than regulating the price of electricity. He notes that he doesn't think there is a free market in Hawaii because there are only 2 gasoline refiners in Hawaii. Assuming Senator Menor is correct regarding the number of refiners, would you agree that the price ceiling in question is no different from regulating the price of electricity? Are the effects of a price ceiling different for a competitive market and a monopoly market?

4. Does anyone know if gasoline can be shippped to Hawaii, or if the only way to have gasoline in Hawaii is to refine the gasoline in Hawaii?

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