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.