The People’s Republic of Hawaii Decided to Stop…

being stupid. A little over 8 months ago, Hawaii effectively put a price cap on the wholesale price of gasoline.

Like almost all price caps this cap did not due what it was intended to do. With a hard soft cap that uses pricing lags on gasoline in the wholesale market this will lead to a shortage if the wholesale price goes above the wholesale market clearing price. This in turn would lead to a price increase in the retail markets which would ration whatever gasoline is left.

This last month gasoline prices in Hawaii rose by about $0.45. Yes, in just one month the price went up by $0.45/gallon.

Gov. Linda Lingle on Friday signed a bill to suspend the state’s wholesale gasoline cap, welcoming its suspension, but criticizing aspects of the bill inserted by supporters of the cap. In a statement, she called the cap a “failed experiment to artificially control gas prices” that bound refiners and distributors by an artificial formula.

Guess, the Nixon price cap failures and the fiasco in the California electricity markets were not enough to convince Hawaiian politicians that such a policy was a bad idea.

On a side note, the comparison of gasoline prices in Hawaii and Los Angeles maybe somewhat of a red herring, IMO. The two states may have different requirements as to the blend of gasoline that can be used in each state. Thus, the gasoline in Hawaii is not a substitute for gasoline in Los Anegles or anywhere else in California and vice-versa. Somebody who says, “Yeah gasoline is expensive here in Honolulu, but it isn’t as high as Los Angeles” is very much like somebody saying, “Wow, the price of beef here is expensive, but at least it isn’t as expensive as ice skates in Florida.”

Update: I initially thought the price cap in the wholesale market was a hard cap, i.e. a price that is fixed at a given dollar amount. In actuality, Hawaii had a soft cap that used a formula that was based on historical prices. While this isn’t as potentially bad as a hard cap it can still lead to shortages. If the formula leads to a price of say $2.00 in the whole sale market and the whole market clearing price is $2.15 then there will be a shortage.

Soft caps can help in certain circumstances. In CA during the electricity crisis a soft cap was used. The price was capped at the marginal cost of the producer who cleared the market. Here is an example, suppose the market demand is 1,000 MW for a given hour. There are 6 producers with marginal costs of $30/MW with 300 MW, $40/MW with 400 MW, and 2 with $50/MW and 250 MW each and the remaining producers all have a marginal cost over $50. In this case the price would be set at $50 and bids would be accepted from the producers who have a marginal cost below that cap. This would mean that there would be 1,200 MW available for the system to use. In this situation witholding load limits the impact on the price.

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. Alan says:

    Somebody who says, �Yeah gasoline is expensive here in Honolulu, but it isn�t as high as Los Angeles� is very much like somebody saying, �Wow, the price of beef here is expensive, but at least it isn�t as expensive as ice skates in Florida.�

    Steve,

    I understand you are pushing a certain ideology, and one of the common methods of pushing an ideology is to distort reality, but statements like that are ridiculous.

    The minor difference between gasoline formulations for Hawaii and Los Angeles (if there are any) contribute only a few cents to the price difference. This is not in any way similar to the differences between beef and ice skates.

    If you want to make a comment about price differences between Hawaii and Los Angeles, please say something intelligent. A place to start looking, and one that fits your ideological interests, is the political triumvirate that controls all imports through Hawaii’s ports.

  2. spencer says:

    Hawaii has all of two(2) refiners. Have you ever looked at the difference in the formula the legislature created and the formula these two refiners had been using for years to set prices.

    I am enough of a cynic to bet that the two refiners, and their lobbyists, got to the legislature and there was not
    a nickels worth of difference in them. So, for all practical purposes the politicians got to claim they were doing something that all the insiders knew would not matter.

  3. Herb says:

    At least someone tried to do something about the ripoff that is being laid on the people of this country. Don’t be critical of anyone who is at least trying unless you have a better idea to reduce the gasoline price NOW. The Big Oil Companies sure as hell don’t care a damn about the guy paying the price, They are getting filthy rich and neither the Dems or the Reps are doing anything.

    And Steve:

    The $ 400,000.00 price you pay for a house in California cost about $ 100,000.00 or less here in Indiana.

  4. Steve Verdon says:

    Alan,

    You cannot sell Hawaii gasoline in CA. By law, it is not a subsitute just as beef is not a substitute for ice skates. And yeah, that price differential is actually significant in that it can be measured and that it makes gasoline more volatile.

    Herb,

    Yeah, not having any gasoline at any price is better than having to pay a high price. Gee, your so right.

    Oh, and yeah I’m a price gouger when it comes to housing as well. I can’t wait to sell my house and really stick it to the person who buys it.

  5. Herb says:

    Steve:

    You know, “Not having any gasoline at any price” is a hell of a lot better than having gasoline at these gouging prices. In fact, we just might see a day of not having anyone killed in a car accident and that would be priceless.

    As for selling your house, the old PT Barnum saying that “There is one born every minute” is so true. You bought you house and proved him right.

    But, you appeared to miss what I was telling you. In your statement about the price of a house in Calif. and here was about as stupid as the comparison you made in your post. I guess you just missed the point.

  6. Herb,

    If you think the going rate for gasoline is unfair, simply don’t buy any.