We Can't Freeze Gas Prices



Friday’s editorial explores the cons and possible pros of trying to cap gas prices:

We all share the frustration with rising gas prices that led to North Myrtle Beach Sen. Dick Elliott’s proposal for a year of statewide price controls on wholesale gas sales. The prices we’re paying at the pump this month are nearly a dollar higher than they were a year ago.

But would Elliott’s suggestion really work? We have major doubts, not least because it would represent a rejection of our state’s free market underpinnings. On Wednesday night, Myrtle Beach resident John Bonsignor thanked Elliott for his work and asked, “What’s going to be the big deal for one year? Let’s see what’s going to happen in one year.”

Luckily, we have at least two examples of this strategy in action, which we can review to get a feel for what might happen in that year. Most recently, the state of Hawaii put caps on the price of both wholesale and retail gasoline sales in the state. The experiment lasted about eight months from 2005 to 2006 before wheezing to an end. In a study of the first five months under the cap, the state’s Department of Business, Economic Development and Tourism estimated that the policy actually cost the state’s drivers $54.9 million more than they would have paid without the cap.

Why? One reason could have been the cap itself. Like a speed limit sign on the highway, oil companies were given a maximum amount they could charge. As long as all the companies simply charged the maximum all the time, they could all make more money, even when their cost of producing the gasoline dropped.

Before Hawaii, a similar strategy was tried on the national level under President Nixon. In 2003, as Hawaii was debating its strategy, Jerry Ellig, the deputy director of the Office of Policy Planning at the Federal Trade Commission, reminded the state of what had happened in the ’70s:

“Customers queued up at gasoline stations are perhaps the most visible example of the inefficiencies resulting from the shortages created by gasoline price controls, but myriad other examples actually occurred during this period: limited station hours, Sunday station closures, ‘odd-even’ purchasing restrictions based on license plate numbers, and restrictions on the number of gallons the customer could purchase in a single trip to the gasoline station. Also noteworthy are the secondary effects of such inconveniences, which included efforts to hoard gasoline and, in some instances, an increased hazard of car fires because people began storing additional gasoline in containers in their trunks.”

But even if the price controls suggested by Elliott are a terrible idea, the problem remains: What can we do to ease some of the pain at the gas pumps? This could be the real benefit of Elliott’s resolution. Wednesday night’s hearing brought in sharp-dressed oil industry representatives from Atlanta and Washington, D.C. If Elliott’s provocative suggestion can serve as bait to bring these bigger players to the table for a frank discussion of real solutions it could yet benefit the state.

The oil industry spokesmen offered perhaps a predictable suggestion to lower prices: Increase the supply by doing more offshore drilling. Another, more palatable solution? Decrease the demand. Many alternative energies are still being developed, but South Carolina and the Grand Strand have a good start on taking advantage of these, particularly wind and solar power. Increased fuel efficiency standards will also come into effect in coming years. Changing consumer behavior, whether it be driving less or buying smaller and more efficient cars, could also lower demand and with it the price.

If Elliott is merely hoping to raise his profile ahead of his upcoming election via a populist sop, he’s succeeded for now. On the other hand, if he’s attempting to make a real dent in gas prices, we need a larger conversation that involves viable strategies and many voices. The actions of the next few months will be telling.

 

Luckily, we have at least two examples of this strategy in action, which we can review to get a feel for what might happen in that year. Most recently, the state of Hawaii put caps on the price of both wholesale and retail gasoline sales in the state. The experiment lasted about eight months from 2005 to 2006 before wheezing to an end. In a study of the first five months under the cap, the state’s Department of Business, Economic Development and Tourism estimated that the policy actually cost the state’s drivers $54.9 million more than they would have paid without the cap.

Why? One reason could have been the cap itself. Like a speed limit sign on the highway, oil companies were given a maximum amount they could charge. As long as all the companies simply charged the maximum all the time, they could all make more money, even when their cost of producing the gasoline dropped.

Before Hawaii, a similar strategy was tried on the national level under President Nixon. In 2003, as Hawaii was debating its strategy, Jerry Ellig, the deputy director of the Office of Policy Planning at the Federal Trade Commission, reminded the state of what had happened in the ’70s:

“Customers queued up at gasoline stations are perhaps the most visible example of the inefficiencies resulting from the shortages created by gasoline price controls, but myriad other examples actually occurred during this period: limited station hours, Sunday station closures, ‘odd-even’ purchasing restrictions based on license plate numbers, and restrictions on the number of gallons the customer could purchase in a single trip to the gasoline station. Also noteworthy are the secondary effects of such inconveniences, which included efforts to hoard gasoline and, in some instances, an increased hazard of car fires because people began storing additional gasoline in containers in their trunks.”

But even if the price controls suggested by Elliott are a terrible idea, the problem remains: What can we do to ease some of the pain at the gas pumps? This could be the real benefit of Elliott’s resolution. Wednesday night’s hearing brought in sharp-dressed oil industry representatives from Atlanta and Washington, D.C. If Elliott’s provocative suggestion can serve as bait to bring these bigger players to the table for a frank discussion of real solutions it could yet benefit the state.

The oil industry spokesmen offered perhaps a predictable suggestion to lower prices: Increase the supply by doing more offshore drilling. Another, more palatable solution? Decrease the demand. Many alternative energies are still being developed, but South Carolina and the Grand Strand have a good start on taking advantage of these, particularly wind and solar power. Increased fuel efficiency standards will also come into effect in coming years. Changing consumer behavior, whether it be driving less or buying smaller and more efficient cars, could also lower demand and with it the price.

If Elliott is merely hoping to raise his profile ahead of his upcoming election via a populist sop, he’s succeeded for now. On the other hand, if he’s attempting to make a real dent in gas prices, we need a larger conversation that involves viable strategies and many voices. The actions of the next few months will be telling.