Hawaii’s Gasoline Price Controls

The wholesale price controls that Hawaii has put in place on gasoline are going to be a disaster. The price for wholesale gasoline will be stuck and hence there will be less gasoline available from wholesalers. This will induce retailers, who operate under no price cap, to raise their prices. The end result will be a transfer of economic rents from the wholesalers and consumers to the retailers.

Many are pointing to the Nixon era price controls on gasoline as evidence that this policy will fail. However, we don’t have to look that far back to see that price controls, when done badly, can lead to disasterous outcomes. The California energy crisis was in large part due to the retail price controls. This transfered economic rents from the retailers (the state’s investor owned utilities) to the wholesalers. Initially the consumers were protected due to the retail rate freeze, but now consumers face higher energy charges to pay for the enormous rents extracted by the wholesalers and also to pay for the exhorbitant energy contracts entered into by then Gov. Gray “Idiot” Davis.

Of course, there are conditions where a price cap can work. Again we can look to the California electricity crisis. In that case, the energy crisis was in large part resolved by the implementation of price caps that were flexible. The price was capped at the marginal cost of the least efficient producer necessary to clear the market. This is a flexible price cap, which in theory will allow the market to “clear” (i.e. supply is equal to demand). With the hard caps being utilized in Hawaii there is no such flexibility which means that the market will not clear (i.e. demand will exceed supply creating a shortage and pushing up the price in the retail market).

On top of this, the claims that the politicians have to do something in response to the public outcries that something be done are misleading. Hawaii has very high gasoline taxes. Cutting those taxes would provide immediate price relief without causing a shortage that will only exacerbate the recent increase in prices.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Rob M says:

    But it will be great for an example for my students. Both the American Government and the economics classes

  2. M1EK says:

    The problem here is that Hawaii needs even higher gas taxes. If you’ve ever been there (I have, about ten times), you realize the folly of continuing to subsidize automobiles (no more room to build freeways without knocking down the urban buildings which create all the demand for the freeways), yet they’re STILL DOING IT.

    A big gas tax with the proceeds dedicated to building rail transit seems freakin’ obvious, since they have the highest residential density of any city in this country (yes, higher even than New York), yet the drivers want LESS taxes. What are you gonna do?

  3. Steve Verdon says:

    Well this current policy will solve that problem as there will less gasoline. Less gasoline = less driving. Problem solved.

    Of course, the Hawaii economy will probably take a hit, but hey that’s just the way the cookie crumbles in paradise.

  4. Rick DeMent says:

    Even better, eliminate all Government subsidies to oil companies and let the market do it’s work. Of course this means that we will have to suffer the indignity of finding out how much gas really costs without the government help.

  5. Bachbone says:

    MI politicians are considering this tactic, too. But we already have taxes upon taxes here. If they would simply quit that, we’d save a bundle per gallon.

  6. Steve Verdon says:

    Rick,

    Really, how much is that subsidy per gallon in the state you live?

  7. McGehee says:

    Even better, eliminate all Government subsidies to oil companies and let the market do it’s work. Of course this means that we will have to suffer the indignity of finding out how much gas really costs without the government help.

    And that would be…?

    I mean, you’re the one arguing that somehow the price of gasoline is kept low by government subsidy, so you must have some idea how much of an effect there is.

    Clue for Mr. DeMent: just because our pump prices are lower than in other HIGH TAX welfare-state countries, doesn’t mean they’re ARTIFICIALLY lower.

    Now, you want to talk about artificially low prices, my wife read somewhere that Venezuela’s pump price works out to 12¢ a gallon.

  8. Herb says:

    There is more than one problem associated with gasoline pricing. The first is that gasoline is priced on the futures price of oil. This allows the oil companies to make a fortune during high futures prices. Now the oil companies pay about half of the futures price for a barrel of oil. If and when the futures price drops to realistic prices, you can bet that the oil companies will NOT reduce the price for a gallon of gasoline.

    The next problem is taxes. The politic ans are as greedy as ever and would never think of reducing a penny in taxes without putting it to the public in some other way. We, the public are to blame for this because we demand that more and more services be rendered to them and, the politic an will gladly accommodate providing they can take in a dollar and spend only fifty cents in return. Who knows where the other fifty cents goes

    The next is the EPA. The mandate regulations for everything from cleaner air to fewer fire roads in our timbers. The EPA is nothing more that a bunch of self preserving bureaucrats with totally unrealistic demands on everyone. Tell me, where is all this clean air.

    If we all want lower gasoline prices, then we all must first start with the oil companies, then take on all the politic ans.

    Living an a very fixed income, I can tell you it’s only people like me that suffer from this greedy fiasco of high oil prices.

  9. DC Loser says:

    If we all want lower gasoline prices, then we all must first start with the oil companies, then take on all the politic ans.

    But that would mean taking on Bush and company since they are in bed with the oil lobby. Bush the Texas oil man and Cheney the Halliburton Oil man. Fat chance in this administration.

  10. M1EK says:

    Uh, for one, the military adventures in the Middle East aren’t being paid for out of gasoline taxes. For another, only a subset of road construction and maintenance is paid for out of the gas tax; large sums are transferred from various local, county, and state governments in the forms of property and sales taxes (mostly).

    People who study this come up with subsidies (per gallon) of at least a buck or two. Seriously.

  11. Steve Verdon says:

    There is more than one problem associated with gasoline pricing. The first is that gasoline is priced on the futures price of oil. This allows the oil companies to make a fortune during high futures prices. Now the oil companies pay about half of the futures price for a barrel of oil. If and when the futures price drops to realistic prices, you can bet that the oil companies will NOT reduce the price for a gallon of gasoline.

    You a Democrat Herb? Just curious because lets say you are right about high future prices, it also implies big losses for low futures prices. Thus, the implicit position in the above is that a company that to some degree gets lucky in the futures market is somehow making illicit gains.

    As for gasoline prices moving down when oil moves down, sorry Herb you are just flat out wrong. I remember a few years ago with oil was really cheap and at the same time gasoline was about a buck a gallon in some places…and this is CA where gasoline tends to be pretty high compared to the rest of the country.

    The next problem is taxes. The politic ans are as greedy as ever and would never think of reducing a penny in taxes without putting it to the public in some other way. We, the public are to blame for this because we demand that more and more services be rendered to them and, the politic an will gladly accommodate providing they can take in a dollar and spend only fifty cents in return. Who knows where the other fifty cents goes

    Well aside from the whacky views of accounting at the end, I don’t disagree with you here too much.

    If we all want lower gasoline prices, then we all must first start with the oil companies, then take on all the politic ans.

    Living an a very fixed income, I can tell you it’s only people like me that suffer from this greedy fiasco of high oil prices.

    Sure Herb, the increased price/gallon of gasoline causes no discomfort for others, only you and your fellow retirees are suffering. Please.

    Uh, for one, the military adventures in the Middle East aren’t being paid for out of gasoline taxes. For another, only a subset of road construction and maintenance is paid for out of the gas tax; large sums are transferred from various local, county, and state governments in the forms of property and sales taxes (mostly).

    People who study this come up with subsidies (per gallon) of at least a buck or two. Seriously.

    LOL. Nice, we get to put the entire military budget down as a subsidy. Cute. Got any links to these kinds of “studies”?

  12. M1EK says:

    Steve,

    I didn’t say the entire military budget, but I know we wouldn’t give a crap about Iraq if we didn’t care about the price of oil. Afghanistan, sure. Wipe those jerks off the face of the earth. Hit the Saudis next, since they were the ones who paid the bills and flew the planes. Oops, we can’t attack THEM because we’re afraid of their power over crude oil prices….

    And from your rhetoric, I’m sure you won’t appreciate the source, but here it is anyways – a selection of estimates of road subsidies from your favorite club.

    http://www.sierraclub.org/sprawl/articles/subsidies.asp

  13. TJIT says:

    M1EK,

    The list below is from your link and gives what they consider to be subsidies. Honestly I don’t think a lot of those items could be considered a subsidy unless the definition of subsidy is twisted beyond recognition.

    “Sources of Subsidies

    1. Police, fire, ambulance; road construction & maintenance; other local government – paid for with taxes.
    2. Property taxes lost from land cleared for freeways
    3. Parking – free or cheaper parking is paid for with other taxes, or more expensive goods or services.
    4. Air, water, land pollution – adds to medical expenses, loss of species and cleanup costs.
    5. Noise, vibration damage to structures – adds to medical expenses and repair costs.
    6. Global warming – adds to medical expenses, loss of species and other costs.
    7. Petroleum supply line policing, security, petroleum production subsidies – increases taxes for defense.
    8. Trade deficit, infrastructure deficit – increases costs of goods.
    9. Sprawl, loss of transportation options – increases personal and corporate transportation costs.
    10. Uncompensated auto accidents – increases personal costs.
    11. Congestion- increases personal costs and losses. “

  14. Steve Verdon says:

    1. Police, fire, ambulance; road construction & maintenance; other local government – paid for with taxes.

    No kidding on the notion of twisting subsidies. Police, fire, and ambulances are goods with strong positive externalities and should be subsidized on their own, IMO. Road construction and maintenance are actually public goods subject to congestion. Again a free market solution for these goods could very likely result in a massive under-allocation. In short, what we have are goods that should likely be funded at least in part if not entirely by taxes.

    2. Property taxes lost from land cleared for freeways

    How about increased property taxes since freeways might also increase the value of the land next to them? If you are going to include this one, then you should include the countervailing benefit at least…well at least if you are honest.

    3. Parking – free or cheaper parking is paid for with other taxes, or more expensive goods or services.

    The taxes might be an example of a subsidy, the more expensive goods and services are actually examples of the costs being incorporated into the market price of the goods sold by stores and businesses selling such goods. No subsidy here at all. If a transportation economist came up with this one, he should have his degree revoked and sent to Tuvalu.

    4. Air, water, land pollution – adds to medical expenses, loss of species and cleanup costs.

    This is not a subsidy, but examples of negative externalities. The solution here is to tax gasoline to reduce these externalities so that the total marginal benefit is equal to total marginal cost.

    5. Noise, vibration damage to structures – adds to medical expenses and repair costs.

    Rinse and repeat the answer to number 4.

    6. Global warming – adds to medical expenses, loss of species and other costs

    Rinse and repeat number 5, and toss in that the magnitude and attribution issue of AGW are still not yet known.

    7. Petroleum supply line policing, security, petroleum production subsidies – increases taxes for defense.

    I’d be more than happy to swap a revenue neutral tax on gasoline for a reduction in my income taxes on this one.

    8. Trade deficit, infrastructure deficit – increases costs of goods.

    This is also not a subsidy as the trade deficit is not merely a function of oil purchases. This one is really grasping at straws.

    9. Sprawl, loss of transportation options – increases personal and corporate transportation costs.

    This one is not just a result of gasoline. “Sprawl” has been a problem for centuries (try looking at London 150 years ago).

    10. Uncompensated auto accidents – increases personal costs.

    Why isn’t this considered a subsidy for automobiles?

    Overall I’ve seen one possible subsidy that is in fact offset by an income tax. Frankly, if we were to swap part of the income tax for a gasoline tax it wouldn’t bother me in the least. Funny, I don’t think any of the liberals/Democrats in this thread would actually go for that.

  15. Herb says:

    Steve:

    First of all, I am NOT a Democrat and just because you may disagree with me, it is very rude for you to make that assumption.

    secondly. Most manufacturers and businesses that I know of price their goods at Direct costs + indirect costs, + profit = selling price. But then again, you may know of a better way where you could gouge the purchaser of your products.

    Lastly, The price of crude that is artificially inflated by a bunch of river boat gamblers is nothing short of obscene. Everyone in business is entitled to a fair and reasonable profit, but excess profits is nothing more than GREED.

    But then again, I think you are from the left coast and greed seems to be a part of everyday life there. It’s no wonder that that State is BLUE and will most likely remain so as long as the motto out there is “Play ball with me and I will shove the bat up your rear end”

    As for those of us that have financial difficulty with the high price of gasoline. You obviously don’t have a problem with paying the price and it is definitely unfair of you to make assumptions based on your financial abilities. I would like for you to try making ends meet while having to pay out sixty dollars for a tankful of gasoline on a very limited income.

    I have worked with many accountants in my day and they all seem to operate the same. I have always said of them, “Figures don’t, but Liars figure”

    Now be nice and I will also.

  16. M1EK says:

    Steve,

    I didn’t expect you to agree with these, but note that everybody studying the issue accepts some to all of these as legitimate subsidies. I’ll discuss a couple in particular:

    #1: police/fire/EMS: The point is that a lot of the ‘demand’ for these services comes from automobile accidents. IE, in a world in which nobody drove, we’d need a lot less of that service per-capita. NOT that the ENTIRE amount paid for those services is a subsidy. SOME of it clearly is, though.

    #2: Property taxes: I know this one very well – in Austin, trust me, the city loses a hell of a lot more than it gains on this. The amount of land taken up by the freeway far exceeds the amount of land which becomes somewhat more valuable for strip malls and the like, and then what you get is the residential property bordering the strip malls loses value. (Don’t forget – residential properties within the noise cone of the highway, even without those strip malls, lose value too). And before you start, most of the ‘property access’ increase in land values comes from the construction of arterials, not highways, and a 2-lane road is pretty much as good as a 6-lane road for that purpose.

    #3: Parking – this is another one I know quite well. Every business in your town is forced to construct X parking spaces per square-foot based on a zoning formula. In most cases this results in more parking being supplied overall than if the market did it itself (i.e. a given area certainly would have parking lots and parking garages, but they wouldn’t be free, and there’d be a lot less spaces). Everybody pays for this through higher goods prices – and the store doesn’t get to choose to build less spaces (mandated by law) even if they figure they don’t need them. There’s also, in many towns, a requirement that said off-street parking be free, so even if they wanted to charge, they can’t.

    #4 through #7: you’re quibbling over semantics. Clearly the people who wrote this document consider subsidies and negative externalities part of the same boat. I’m ready to call them whatever you want as long as you’re willing to bump the gas tax for them.

    #8 and #10: I agree with you. I think they’re bogus.

    #9: There’s a big difference between “streetcar sprawl” which is what London had and “suburban sprawl” which is what we’ve got. And I think you know this. In London, you don’t have to have a car (the majority of commuters don’t use a car, despite all that ‘sprawl’).

  17. Steve Verdon says:

    First of all, I am NOT a Democrat and just because you may disagree with me, it is very rude for you to make that assumption.

    Actually Herb it was a question, if I was making an assumption I wouldn’t put a question mark at the end of the sentence. You sound like a non-liberal/non-Democrat, but then you throw those curve balls that makes it hard to get a good reading on your political/economic views.

    secondly. Most manufacturers and businesses that I know of price their goods at Direct costs + indirect costs, + profit = selling price. But then again, you may know of a better way where you could gouge the purchaser of your products.

    All firms try to charge as high a price as possible, IMO. Some are just have more market power than others.

    Lastly, The price of crude that is artificially inflated by a bunch of river boat gamblers is nothing short of obscene. Everyone in business is entitled to a fair and reasonable profit, but excess profits is nothing more than GREED.

    This implies a level of collusion that the Saudi’s and OPEC would envy, so I’m sorry I don’t buy it. Every cartel, absent some sort of enforcement mechanism, will suffer from cheating on the collusive agreement and as the price goes higher the incentive to cheat becomes stronger and stronger. So you either need to posit an enforcement mechanism or give up one this one.

    But then again, I think you are from the left coast and greed seems to be a part of everyday life there. It’s no wonder that that State is BLUE and will most likely remain so as long as the motto out there is “Play ball with me and I will shove the bat up your rear end”

    You, know I actually like that motto.

    As for those of us that have financial difficulty with the high price of gasoline. You obviously don’t have a problem with paying the price and it is definitely unfair of you to make assumptions based on your financial abilities.

    I suppose it would be a complete waste of time to point out that the only person here making assumption on another person’s finances is you? I haven’t assumed anything about yoru finances based on mine. Such assumptions would be ridiculous.

    #1: police/fire/EMS: The point is that a lot of the ‘demand’ for these services comes from automobile accidents. IE, in a world in which nobody drove, we’d need a lot less of that service per-capita. NOT that the ENTIRE amount paid for those services is a subsidy. SOME of it clearly is, though.

    We’d also be quite a bit poorer if nobody drove as well and I still don’t see why this should be a tax on gasoline and not a tax on automobiles or heck even spreading this “subsidy”. Personally, I suspect ulterior motives on the part of those doing the research.

    #2: Property taxes: I know this one very well – in Austin, trust me, the city loses a hell of a lot more than it gains on this. The amount of land taken up by the freeway far exceeds the amount of land which becomes somewhat more valuable for strip malls and the like, and then what you get is the residential property bordering the strip malls loses value. (Don’t forget – residential properties within the noise cone of the highway, even without those strip malls, lose value too). And before you start, most of the ‘property access’ increase in land values comes from the construction of arterials, not highways, and a 2-lane road is pretty much as good as a 6-lane road for that purpose.

    You’ll have to forgive me if I don’t take your word on it. For one thing, freeways can make it possible for people to have better homes that are a little bit further than where they currently live. For example, San Francisco. Housing is very, very costly there. A highway going out to an area outside the city would provide an opportunity for new housing to be built. With the high prices in S.F. the price of land in this area would likely rise very, very quickly. Now that doesn’t have to be the case in all areas, but the overall impact should not be determined by Austin, Texas (or San Francisco).

    #3: Parking – this is another one I know quite well. Every business in your town is forced to construct X parking spaces per square-foot based on a zoning formula. In most cases this results in more parking being supplied overall than if the market did it itself (i.e. a given area certainly would have parking lots and parking garages, but they wouldn’t be free, and there’d be a lot less spaces). Everybody pays for this through higher goods prices – and the store doesn’t get to choose to build less spaces (mandated by law) even if they figure they don’t need them. There’s also, in many towns, a requirement that said off-street parking be free, so even if they wanted to charge, they can’t.

    Again I don’t see how this is a “gas subsidy”. You note that praking wouldn’t be free and there would be less spaces. Fine, but the price of parking would indicate that this “zoning issue” (for lack of a better term) is not a gasoline issue so much as it is a bad government policy issue.

    #4 through #7: you’re quibbling over semantics. Clearly the people who wrote this document consider subsidies and negative externalities part of the same boat. I’m ready to call them whatever you want as long as you’re willing to bump the gas tax for them.

    Actually no I’m not and if you were half as familiar with the terminology as you are claiming you’d know that they aren’t the same either.

    A subsidy is something you have paid for so that you get more of it. A negative externality is an effect that has an adverse effect on welfare or profits and is not being captured by the market. By failing to account for a negative externality you are not subsidizing it, not by a long shot. Further, there is the issue that current taxes account for these negative externalities. Now this may not be the case, but then again government is rarely about bringing about economically efficient outcomes.

    Does gasoline come with external costs? Sure. Are their external benefits? I dunno, maybe. Heck if we are going to count EMS response to auto accidents then we should count the reduced time for non-auto EMS calls as a positive. After all, gasoline allows the EMS unit to get to your house or whereve faster and then get you to the hospital faster. Still all of this does not mean that gasoline is subsidized. As for subsidies, I think the typical view is going to look for payments to those supplying the gasoline.

    Oh, and how about all those regulations that make refining gasoline more and more difficult? Those actually drive up the price. Same thing with all the laws for different fuel additives. Should these be counted as some sort of “anti-subsidy”? Have these guys tried to impute a dollar figure to these things? Let me guess: No?