Small Business News
July 2004 | Online Edition
Gasoline Price Cap Will Lead to
Long Lines and Shortages at the Pump
By Rep. David A. Pendleton
This article is adapted from a floor speech made by Rep. David A. Pendleton on March 25 2004, in support of Floor Amendment No. 7, which sought to amend SB 3193 SD2 HD2 and sought to repeal the gasoline price cap
In Act 77, Session Laws of Hawaii 2002, the legislature found that there was a need to ensure lower gasoline prices for Hawaii’s consumers. One way the legislature addressed this problem was the imposition of gasoline price caps, which are to become effective on July 1, 2004. Prior to the implementation of the price caps, the Department of Business, Economic Development, and Tourism (DBEDT) was directed to conduct a comprehensive and empirical examination of Hawaii’s petroleum market. They were to report to the legislature their findings and recommendations concerning appropriate solutions available to reduce wholesale and retail gasoline prices in Hawaii, including the provisions in Act 77 imposing maximum prices on wholesale and retail gasoline and potential effects of imposing price caps.
DBEDT completed its comprehensive study and compiled its findings and policy opinions. First and foremost on their list was to call for the repeal of the gasoline price caps. On March 25, 2004, I voted in strong support of Floor Amendment No. 7 which amends Senate Bill 3193, Senate Draft 2, House Draft 2, because it seeks to implement the findings made by DBEDT, and most of all, it repeals the gas cap.
Price controls reduce supply. The most basic models of supply and demand teach this to college freshmen in economics class. Let us not forget that price controls are inherently dangerous. Anyone wit a basic understanding of economics, or a good memory, can easily predict the consequences of gasoline price limits. According to Dr. Lee Coppock, a Professor of Economics at Hillsdale College, there are two predictable effects when prices are held below the level that would prevail in a free market: “First, consumers will buy more gasoline than they would otherwise have, since prices are artificially low. Second, the low prices mean that oil companies will not supply as much gasoline.” These two effects work together to produce an unnecessary shortage. It happened exactly like this during the early 1970s when gasoline price controls created artificial gas shortages, and it worked the same way in California in 2001, when electricity rice caps prohibited retailers from raising their prices.
Price caps are a very bad idea. Cutting the price of energy should be our goal, but the question is, how do we make that happen? In 1979, Ronald Reagan addressed this very issue on his radio show. He said, “California has 65,000 oil wells. About 23,000 of them are closed down. California crude is a heavy oil and requires more expensive equipment to refine it. Once upon a time this was reflected in the price for California oil. Since 1973, however, the Department of Energy has set the price on oil. So when a well in California sands up or a pump breaks down there is no profit incentive in putting it back in operation. At least 15,000 of those closed down wells could be reopened if the Department of Energy would get out of the way and trust the free market to determine the price.” A little under two years later, Reagan became our nation’s 40th President. Among his first actions in office was deregulation of natural gas and oil prices. Statists claimed that prices would rise but the market adjusted, and the price of energy fell. The result was that lines at the gas stations disappeared, oil production increased, and prices at the pump fell.
The idea that prices must remain free of government controls in order for markets to work efficiently is not partisan ideology; it is economic fact. Robert Litan of the Brookings Institution noted that, “95 percent of economists would say that price controls are always dumb or that there should be very strong presumption against price controls. They lead to artificial scarcity and then perpetuate it.” Artificial scarcity is otherwise known a shortage. This happens because prices are left artificially low. Thus, incentives to produce are diminished. Imagine if Hawaii lawmakers said plate lunches are to be sold for only a dollar, that would effectively end the sale of plate lunches.
Price caps won’t produce a single drop of oil or one watt of electricity. It will, however, create a disincentive to production, and only through more production can we increase supply and reduce prices. The reasoning behind price controls on oil in the 1970s was to ensure that petroleum products, particularly gasoline, remained affordable. Instead the price controls in practice created artificially low prices which gave customers no incentive to cut their use of oil and gasoline, so demand kept growing. The low prices also removed all incentives for producers to increase supply and to meet the growing demand. After all, if prices were capped, so are profits, and there is no reason for producers to invest in ways to produce more oil and to do it more efficiently.
The very study that Act 77 commissioned DBEDT to do, found and reported in their conclusions and recommendations that first and foremost the gasoline price caps should be repealed. Stillwater Associates LLC reported that “an analysis of gasoline price caps in general, and those enacted in certain parts of Canada in particular, shows that these measures generally are ineffective, risky, costly, open to manipulation, and complicated to administer. It is likely that likewise the caps in Act 77 would fail to achieve their objective of protecting the interests of gasoline consumers.”
This is echoed in the testimony by Jerry Ellig, Deputy Director of the Federal Trade Commissions Office of Policy Planning. He testified before a Joint House and Senate hearing on January 28, 2003 that “historical experience demonstrates that price controls tend to create shortages, reduce quality, and generate other inefficiencies. The U.S. experience with gasoline price controls in the 1970s confirms the predictions of economic reasoning.” He goes on to say that “some research even shows that the inconvenience and other inefficiencies associated with gasoline station lines cost consumers more than they saved as a result of regulated gas prices. The price controls in Act 77 likely would create shortages.” He concluded with, “we urge you to consider however, that a decision to impose price controls is also, in most cases, a decision to supplant competitive forces with direct administrative intervention. A significant body of research and experience suggests that price controls have a poor record of improving consumer welfare in markets where competition is possible, and may in fact cause more harm than good in the long run.”
It is preposterous for us in government to continue to complain about Hawaii’s high gas prices when policies by the state have made our gas taxes among the highest in the nation and when our regulatory and statutory framework has discourage and diminished competition in this vital industry. The present law would peg our gas prices to the West Coast. If you explore California gas prices you will readily see that their prices are presently higher than ours. This means our gas cap would result in an immediate increase in our price — exactly the opposite of what was intended. These unintended consequences coupled with the various reports we have received indicate that we need to repeal the gas cap. Instead of imposing price controls, we need to see reductions in state fuel taxes and increases in competition. We want more market participants and actors in our Hawaii fuel market. We want lower fuel taxes, not higher taxes. How can government seek to solve a problem with a price cap when we have in place taxes and laws which are at odds with bringing down gas prices?
The gasoline price cap must be repealed otherwise Hawaii will see a return to long lines at the gas stations, and gas shortages, not unlike the last time a price cap was enacted. Hawaii does not need to revisit the conditions created by the gas cap in the 1970s.
EDITOR'S NOTE: Rep. David A. Pendleton is an attorney and a member of the House Judiciary Committee.
SB 3193 passed into law without the Governor's signature.
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