We are all bothered by the even higher price of gasoline this week. Can't someone do something about it?
Two actions can improve it: 1- increase the supply of refined gasoline, or 2- decrease the demand for it. Enough of either will bring the price down.
Can a US Senator increase the supply or decrease the demand? I haven't seen one do it.
But Senator Maria Cantwell has another course of action: price controls. Both the theory and the experience of economics show what happens when the price is limited in the absence of actions 1 and 2 - you get a shortage. It has happened every time. Wikipedia In 1973 price controls resulted in rationing and line ups at every gas station and gimicks to reduce them, such as alternating days by even-odd license plates to match the numeric day of the month.
(Mac Safari users click on the date/time to continue.)
Jeff Jacoby says it well:
There is only one rational and efficient way to allocate a scarce commodity: through price. That is because the more a person values something, the more he is generally willing to pay for it. By charging what the market will bear -- for gasoline or anything else -- vendors channel their product to the customers who value it the most. A mandatory cap on the price of gas may seem like kindness to the poor, but all it will do is raise demands that can't be met. The result will be "Sold Out" signs on Joe's pumps, or gasoline lines stretching around the block.And
Painful as they are, price spikes are invaluable -- especially after a disaster, when critical goods and services are at a premium. At $3 or $4 a gallon, post-Katrina gasoline prices are transmitting two urgent messages. To consumers they say: "Conserve! Buy only as much as you really need, and look for ways to use even less." To the energy industry they say: "Produce! Get those refineries back online and supply more gasoline ASAP." Aren't those exactly the behaviors we want to encourage?Back to Cantwell. Rich Karlgaard of Forbes Magazine honored her as
But the power of market pricing to affect behavior is unwelcome to those who think useful things don't happen unless the government tells them to happen. In The New York Times last week, Senator Levin dismissed the idea that higher prices will induce consumers to use less gasoline. "By that logic," he snorted, "you could raise prices to $10 a gallon and you make sure that people walk."
In the real world, though, consumers do make choices based on price, as the large photo accompanying the Times story illustrated nicely. It showed a woman turning away from gasoline pumps charging $5.88 a gallon. The caption read: "The price of gas at a station in Stockbridge, Ga., last week was too high for one customer, who returned to her car without buying."
Actually she isn't the only Dunce of the Week! Two other US senators and a governor share the honor.
Cross posted at my nameless blog
Posted by Ron Hebron at September 13, 2005 09:00 PM | Email ThisSo, what's her excuse?
Posted by: jimg on September 13, 2005 09:06 PMDunce of the Week...how does that look on an re-election billboard?
Posted by: Shaun on September 13, 2005 09:07 PM1) Oil is a commodity. It is freely traded. Iraq is a sovereign nation and we did not go to war "for oil." Iraq and all other nations that produce oil, including the US, freely trade oil. Oil is a commodity. Period.
2) Supply and demand. The best possible thing that can happen when prices for oil are high, in other words, there is high demand and short supply, is for the prices to remain high for a good while. This causes two things to happen. Those who don't like high prices will conserve, stop making extra trips, buy cars that are more fuel efficient, etc. And, it causes the Oil companies to do whatever they can to get more oil out of the ground to meet the high demand and sell more oil. High prices force market changes that will eventually reduce prices. The best way for those changes to take effect is to have a sustained high price. Basic Econ 101.
3) The high demand for Oil is not caused alone by China, nor by the US demand, nor by the OPEC nations, nor any other paranoid liberal conspiracy. The number one cause of high Oil demand is environmentalism, i.e. the liberals themselves. For 20 years we've had environemental policies that have made it far cheaper for oil companies to expand capacity to the limit of existing refinereries, rather than build new ones. And at the same time, liberal/ environmental politicians created several unique gasoline markets all over the US by requiring special blends in each market thus destroying the highly beneficial and price stabilizing standardization of gasoline grades that were the genius of Rockefeller. But we all know that the great industrialists are hated and maligned by liberals at every turn. In the liberal history books, Rockefeller waas a bad guy because he was successful at selling oil.
Limit production over 20 years, reduce standardization over 20 years, and allow for the gradual increase in demand over time as the world becomes more industrialized, and you have a perfect storm for high Oil Prices.
Thanks environmentalists and liberals.
Price controls will only make the matter worse because limiting the price does nothing to decrease demand, in fact it does the opposite, while discouraging greater supply.
If the Repbulican party leadership outlines these basic economic truths for the WA voters, and Cantwell continues her ways of trying to impose controls, she will be a very easy target in 2006.
Posted by: Jeff B. on September 13, 2005 09:45 PMGasoline is a commodity that is considered to have inelastic demand, because so much of the demand is related to activities that must continue (at least in the short run) regardless of the price (running errands, commuting, etc.). Exacerbating this problem is the fact that gasoline at the retail level is provided by more of an oligopoly than a true free market. Which leads to the observed condition that the price of gas goes "up like a rocket and down like a feather".
As long as prices are expected to fall back to their old equilibrium point (regardless of how long that takes) the incentive for consumers to make long-term changes in their consumption behavior will never fully develop. Similarly, the incentive for others to develop alternative sources of energy with higher baseline costs can also be stifled. Somehow the gasoline market at both wholesale and retail colludes to maintain these anti-competitive pricing policies, which means that the rules of the free market do not apply.
In the meantime, these fluctuations offer retailers an opportunity for windfall profits that risks little in terms of long term market size or relative market position.
I am sure that everyone noticed how, the day that the damage from Katrina began to be assessed, the retail price of gasoline here increased by $.20 per gallon or more, even though the gas that was being sold was still the stuff in the dealerships' storage tanks that had been previously purchased at a lower price. Now that the wholesale price of gas has declined by more than $.30 per gallon, the retail price remains at the same high levels as before. To finagle their higher prices, it is as if retailers use LIFO accounting on the front end of a crisis and FIFO on the back end. And as anyone knows, you can't change systems mid-stream.
That is the problem that needs to be addressed, and although Senator Cantwell has the wrong solution in mind she at least recognizes that something funny and indeed collusive is going on in the world of retail gasoline sales.
Posted by: HT on September 13, 2005 10:14 PMPart one had Cantwell doing everything in her power to derail the opening of a tiny part of ANWR to exploration for oil.
Now she has the unmitigated effrontery to complain about the price of gasoline as if the back to the Stone Age environmental policies that she and the Democratic party have championed so long and so loudly are not having their intended effect.
Of course Cantwell and the Democrats know that "price caps", as they evasively term price controls, would result in shortages and long lines. They also know, or should know, that the market will resolve the difference between price and demand if left to do so by itself. But in the Democratic Party egalitarianism trumps market economics every time. If someone has to suffer then everyone, rich or poor or in between, must suffer too.
Cutting red tape to allow more refineries to be built or opening new areas to oil exploration is completely out of the question for Cantwell and her ilk. This is a man made disaster not a natural one.
Oh! That's right the USSR, worked out really well for them didn't it.
I think we should counter with price controls on the products of the companies in Cantwell's stock portfolio, see what see thinks of it then.
One name for any ijit who would propose price controls.
COMMUNIST!
We spent 50 beating that threat now they are in the Senate.
They talk about record profits for "Big Oil" well record profits mean nothing if there is record production. You need a consistent base line reference for that kind analysis. Like profit per barrel. My industry in semiconductors we look at profit per chip as the indicator, then look at number of chips produced.
Posted by: JCM on September 13, 2005 10:52 PMFunny how we get these leftist conspiracy theories of corporate collusion every time the price of gas goes up, but never when it goes down. When the price goes down, are thousands of people in the petroleum industry getting together in a super-secret huddle and conspiring to make less money to throw off suspicion?
I will believe that oil companies are raking in the dough when prices go up when someone can show me a statistically meaningful correlation between gas prices and oil stock prices. Until then, I'm going to accuse the market of working pretty well.
It is true that prices fluctuate at any given gas station while it is still selling the same shipment of gas. But why on Earth would you assume a constant price markup? What you paid for your current supply is a sunk cost, and not terribly relevant after it's paid for. What you charge motorists for it is whatever will now maximize your profit. It has more to do with 1) how much you will need to pay for your next shipment once this one is gone, and 2) how much the station across the street is charging.
That prices go "up like a rocket and down like a feather" is also not a shock, as uncertainty due to things like hurricanes arrives quickly and leaves slowly, and factors into how dearly we wish to sell things in an uncertain world.
As for the collusion bit, I'd recommend a little George Stigler, a Nobel laureate in economics who grew up around here. Half a dozen oil companies in the regional market, no unusual barriers to market entry, and a number of substitute goods... look for a little collusion in a two-gas-station town in Okanogan County, maybe, but not in the Washington State market as a whole.
Posted by: TB on September 13, 2005 11:14 PMWhat you also don't take into consideration is the confusing web of taxes and regulations that add so much to the cost of gasoline. If all regulations and controls were removed and there were only minimal flat taxes assessed for transportation projects, etc. then gas prices would be set more by straight competition.
Also, you don't take into consideration retail pricing psychology. If all of the retail prices start to rise, certainly no retailer is going to be left behind in rising their prices, given the cost of supply. Even the few retailers willing to lower their prices by an extra 5 or 10 cents to increase volume are still very close to the average price. And yet, which retailer is going to be the first to drastically lower prices when the wholesale costs go down? Certainly it's a lot harder to be the first to lower prices than it is to be the first to raise prices.
I think what your seeing is somewhat a product of non-market forces at work, but they are not the product of some conspiracy or planned collusion. The non market forces are those of government regulation and the jitters of commodity pricing.
Posted by: Jeff B. on September 13, 2005 11:38 PMCantwell's idea won't reduce gas prices but she's talking about the right thing. Ideas like better CAFE standards, long proposed by Slade Gorton (no enviro-liberal), would make more of a difference - more highly efficient autos Made in America.
Our state needs to repeal the special interest tax break we give to oil companies by taxing gas and petroleum products the same way we tax most other things - with a sales tax. That way we could fix the roads, the cost of road improvements would keep pace with the price - and the oil companies would have an incentive to keep their costs lower. And there would be no debate about raising the flat gas tax - the whole 9.5 cent increase could be eliminated if we'd end the special tax break the state give the oilies.
Posted by: thor on September 14, 2005 07:17 AMCAFE standards force car manufactures to produce cars that the market does not want! If people want fuel efficient cars, the manufactures will make them or go bankrupt.
High gas prices are changing what people are buying at car lots far more than CAFE standards.
CAFE standards are the equivalent of "price controls" but on gasoline mileage. They just mess up the overall availability of products, create shortages and economic inefficiency. (Actually they are worse than price controls because they only work on the marginal car purchases.) Anyone who has taken any Econ should know that price controls or their equivalent are a ticket for disaster in a market economy. If you want you local Commissar to tell you the type of vehicle you are allowed to purchase it may work for a brief period of time.
Posted by: Bob on September 14, 2005 07:34 AMUnless we construct automobiles out of tin foil (something liberals are quite familiar with), we will not be seeing substantial improvements in fuel mileage, given the current technologies available.
While I have no doubt that you could talk liberals into purchasing said tin foil cars, the approach that liberals take is that they would like to force us into these little deathtraps as well.
HT would like to give CantDoWell some sort of credit for not being a complete idiot (or, at least not appearing to be a complete idiot), but
1. She has never said anything that all of us didn't already know, and
2. In addition to being completely unoriginal, her ideas do not work!
Posted by: alphabet soup on September 14, 2005 08:02 AMWith unstable revenue, What do you think will happen to the interest rates on the construction bonds?
With higher gas taxes, how will that bring stability to gas prices?
Posted by: oh,thor on September 14, 2005 08:32 AMMaybe I misunderstand what a price cap is...
Posted by: JustSumGuy on September 14, 2005 08:45 AMInterestingly enough, though, in your last paragraph you actually admitted that I was right, in your comment that allowed for the possibility of collusion in "Okanogan County...but not in "the Washington State market as a whole." Gasoline at the retail level is in fact just a patchwork of local markets, because people cannot and do not drive long distances to shop for gasoline, and information about pricing outside of their local area is not generally available to consumers. Within these local markets, collusion to take advantage of inelastic demand is certainly one logical way to explain the recent and continuing price spikes.
The fact that both you and Jeff B are willing to offer psychological explanations for the behavior of retailers is, again, proof that the phenomenon is there but that you are willing to tolerate it more than I am. It makes no sense to allow retailers to switch from LIFO to FIFO and then back again just to rake in windfall profits on the back of a national disaster. If they were doing it with bottled water it would be gouging, and it's no different just because they're trying it with gasoline. As I noted, the price of gasoline at the wholesale level has declined by about $.30 per gallon. Since retailers normally make abougt $.03 per gallon (most of their money comes from other products), this represents an increase of approximately 1000% in their profit margins. Given the effects that higher gas prices have on the rest of the economy, I think that addressing this phenomenon is called for, although again, probably not in the way that Senator Cantwell will propose.
By the way: taxes on gasoline, which have remained fairly constant throughout the recent crisis, have nothing to do with this situation. I will also note, for the record, that my opinion is that gasoline taxes are just about the most perfect user fee for the road system ever devised. You pay for roads pretty much proportionally to the number of miles you drive and the wear and tear you inflict on the asphalt when you do so. What's not to like about that?
Posted by: HT on September 14, 2005 08:48 AMFurthermore, oil companies are recording record profits. If it were truly a free market, wouldn't the margin remain reougly the same even when the supply decreases?
Posted by: ronin551 on September 14, 2005 09:02 AMRecord profits happen when there are record prices and thus record demand. Why is that a bad thing? If we are talking blue jeans and there is a record demand in blue jeans, does that change you thinking? Oil, while something that we all need in our auto and plastic based lives, is not a right. Oil companies sell oil and that makes them no different or worse than any other business. They just happen to sell oil. And why are you against profits?
The irrational fear and paranoia surrounding oil and big business in general is a mythical construct created by the progressives in the Rockefeller era that persists even today in the form of moonbats screaming about "no war for oil" etc. Rise above the irrationality. Profits are good. Business is good. Freedom is good. Capitalism is good.
There is no "right" to stay in business. The free market is a brutal thing, but that is what makes it great.
Currently oil supply is not really the problem, production is the bottle neck.
We need to increase out production by adding refineries.
The regional formulation needs to drop entirely.
Increase domestic production with ANWR, CA coast, Gulf coast and pushing technologies for the oil sands and shales of the eastern Rockies (oil reserves there are 3x Saudi).
Increase domestic clean coal electrical production.
Increase nuclear electrical production.
Right now alternate fuels like ethanol, bio-diesel, fuel cells, hydrogen are energy negatives in production, requiring more energy to produce than they contain for use.
The ONLY reason we are having a price spike is 30 years of the watermelons and dems blocking sensible energy policies.
Cantwell and ilk are the problem without a clue.
Posted by: JCM on September 14, 2005 09:15 AM
To be scrupulously fair, though, OPEC's decision to embargo the U.S. in 1973, after the Yom Kippur war, probably had more to do with the lines at the pump than the price controls themselves.
Still, price controls are a short-sighted solution to a long term problem. They do nothing to reduce demand while simultaneously eliminating any incentive to increase demand.
Hrmmmm.
Maria Cantwell: Pursuing short-sighted solutions to long term problems.
Heh. I like it.
Posted by: Nathan Azinger on September 14, 2005 10:19 AMAnd this proposal from Cantwell makes me wonder -- again -- exactly what she did to earn her millions at Real Networks. Maybe I am too suspicious, but I keep wondering whether her job there wasn't more a giant campaign contribution than a real job.
Posted by: Jim Miller on September 14, 2005 10:51 AMAgree with Jeff B...don't like gas prices? Thank the environmentalists and liberals. Since at least the 1970's they have been working diligently towards high gas prices (don't let the whining and false sympathy fool you, that's what they have to say to get elected) They believe that high gas prices will move you were they believe you belong, on mass transit...go forth and be little robots. It's all part of the plan folks, and after decades of planning, it appears to be coming together very nicely.
Posted by: dl on September 14, 2005 01:25 PMEver heard of when OPEC would try to set a price and member nations would "cheat" once the price increased. So much for collusion.
As a valuable commodity (There is virtually no difference between company A's oil and company B's oil) it is still one of the most "pure" markets on earth.
Also, I'm very impressed with the knowledge of economics many of the comments above contain.
If there is one discipline that people just don't know about in this country it's economics. I think if it were taught well and required in high school, we'd have a lot less loony liberals that think price controls are a great idea.
If Cantwell is for price controls for oil/gas, is she trying to get the citizens of the US to use more oil/gas? Because artificially high demand is what price controlls lead to. She must hate the environment.
Posted by: Mark D on September 14, 2005 07:22 PMWin at the pumps by slowing your gas spend.
Posted by: Save a Tank of Gas on September 14, 2005 08:29 PMRather than agitating for more government controls, your time would be better spent convincing those who are in the market for a new car to consider fuel-efficient ones and reject the gas hogs. Encourage those who use SUVs to consider replacing them with less fuel-consuming types. And start with the highly visible, low-hanging fruit represented by the likes of Robert Kennedy Jr. (an "environmentalist" who would deny others the right to own an SUV, but defends his own possesion of one by saying he "needs" it to take his family out into the country on weekends), and Robert Redford, who rails against the energy-wasting ways of his fellow citizens yet takes his own SUV out over tens or hundreds of miles of territory on his ranch and says he is justified in having an SUV because he uses it for "exploring".
Posted by: Interested Observer on September 15, 2005 01:43 PMThe unintended result of the CAFE standards was the SUV. To meet CAFE the car makers axed the big station wagon. Families looking for vehicles found the solution in the light truck market of what we now call mini-vans and SUVs. Light trucks not being covered in CAFE.
It is just this type of government interference in the free market that creates rather than solves problems.
Consumers will balance the mileage / size questions and push car makers toward the correct economic balance. Gov't interfered in the car market, killing the wagon and in effect creating the more inefficient SUV.
I trust the market over government mandates any day of the week.
Posted by: JCM on September 15, 2005 03:47 PMNobody forces us to buy gas-guzzling SUVs. Nobody stops us from buying fuel-efficient cars. If we all get smart and vote with our wallets, the producers will get the message soon enough.
Posted by: Interested Observer on September 15, 2005 06:10 PMAs much as I might try or desire it, I am not going to start up a backyard oil well. The material probably isn't there, and even if it were, I would be unlikely to either have on hand or be able to amass on my own sufficient capital to develop the resource. Likewise, we're not likely to see Mom and Pop oil refineries popping up on every corner.
It's the kind of business that gravitates naturally to the big business model. Lots of capital is required to participate in the business in a meaningful way, one that might have an impact on "the market". To be sure, big businesses can compete (if they have to) and when they do there is afforded the consumer some measure of protection through the competitive pricing system. But, fewer players on the field means, naturally, the competition is more limited, and the opportunity for manipulation is increased.
Posted by: Interested Observer on September 15, 2005 07:17 PMHigh barriers to entry in a field does not mean that the particular filed isn't subject to the free market. If anything, you may be able to accuse the oil industry of an oligarchy at best. Evidence doesn't exist to support that as far as oil companies are concerned. OPEC will try to influence prices but it usually doesn't work for long.
There is, definately less competition in the auto industry...and their products aren't commodities. The oil business is extremely cut-throat and is actually one of the businesses that proves free market rules.
Posted by: Mark D on September 15, 2005 09:02 PMCapital-intensive industries will always be dominated by the big players. Sure, you can get into those businesses, but you need a lot of backing and a lot of clout. Lacking a sea change in technology (like happened in telecomm and the computer industry), big players tend to dominate. Right now that means the oil business, electric and gas utilities, automotive, aircraft manufacturing, and some aspects of the basic materials businesses. Regulated monopolies was one way of dealing with limited or non-existent competition. Deregulation was tried there with mixed results (it works if you do it right). Otherwise, small players got squeezed out. Competition can certainly occur among the big players. But so can non-competiton.
Posted by: Interested Observer on September 17, 2005 10:13 AM