Archive for June, 2011

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Price gouging op-ed appears in the Washington Times

June 6, 2011

Michael Giberson

This morning’s Washington Times carries my op-ed on price gouging. You should run out and buy a copy at your local newsstand, call the editor with loads of praise, encourage him to solicit my views more frequently, etc.

Alternatively, read the op-ed at the Times website and offer comments here, there, or both places.

The op-ed provides three examples to illustrate the effects of price gouging policy. Since the op-ed format doesn’t allow footnotes, here are some references to accompany the op-ed:

  1. “A Boston-area water main break in May 2010 had officials warning retailers not to price-gouge on bottled water. It was political grandstanding – the state’s price-gouging law only applies to gasoline – but prices stayed low.” See www.thebostonchannel.com, “Price Gouging Put In Check During Water Crisis,” for quotes from Governor Deval Patrick. The extent of the legal authority assigned to the Division of Standards is to ensure that prices charged at the checkout stand match the prices listed on store shelves, but of course perhaps not every merchant knows all of the details of the relevant state laws. The state’s Attorney General and other local officials issued similar anti-price gouging statements. Other details from contemporaneous Boston-area news accounts.
  2. “In January 1998, an ice storm left millions of people in the United States and Canada without power for days. Chazy Hardware, a small hardware store in upstate New York, sent one of its trucks on a hazardous trip into neighboring Vermont to secure electrical generators for several customers.” The details are taken from a court decision in the case People v. Chazy Hardware, 176 Misc. 2d 960 – NY: Supreme Court, Clinton 1998.
  3. “Some gasoline retailers went to extraordinary efforts to resupply. Other retailers, including Frank Shumpert of Pelion, S.C., refused new supplies when those supplies came at higher cost, preferring to be out of stock rather than be charged with price gouging.” Shumpert is quoted in the Columbia, SC, The State newspaper, “S.C. attorney general launches gasoline price-gouging probe against suppliers,” September 15, 2008 (No link). See more in Price Gouging Report issued by the Office of the Attorney General of South Carolina, July 25, 2009. Report was at http://www.scattorneygeneral.com/newsroom/pdf/2009/gaspricegouging.pdf but is not online anymore.
The Cato Institute helped me find a home for the op-ed, and it is also posted on their website at http://www.cato.org/pub_display.php?pub_id=13164.

Posted in Economics, Politics, Regulation | Tagged | 1 Comment »

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The rhetoric of regulation: free markets are regulated

June 3, 2011

Lynne Kiesling

Here at KP we study and analyze and talk a lot about government regulation of economic activity. But one thing to which we have not been particularly attentive is the rhetoric of regulation — what meaning, explicit and implicit, do we attach to the word “regulation”?

Into this breach comes an excellent Freeman column from Steve Horwitz that explores the rhetoric of regulation. Steve draws our attention to an important insight that is highly relevant to the cases and industries Mike and I study — the way we use the word “regulation” carries with it an implicit, and incorrect, presumption that in the absence of government administrative rules there would be disorder, manipulation, and chaos. That presumption is incorrect because in the standard sense of our understanding of the word, so-called “unregulated” markets are actually already subject to a set of formal and informal rules that discipline the behavior of all market participants, including both producers and consumers.

In this sense, free markets are indeed highly regulated.  Economic theory demonstrates that free markets operate according to rules that we can recognize and understand.  These rules enable us to make what F. A. Hayek called “pattern predictions” about the behavior of markets.  We know, for example, that when price rises, all else constant, quantity demanded will fall, or that above-normal profits in an industry will bring new sellers into that market — even if we cannot predict either outcome precisely.  Market participants will not act haphazardly, nor will outcomes be chaotic.  People’s behavior is regulated by the laws of economics, which in turn produce orderly patterns.

In other words, rules exist that lead to decentralized coordination in markets, and that decentralized coordination among heterogeneous agents leads to order, even in the absence of administrative “regulation”. Government regulation imposes a set of rules that differs from these organic rules, and may often conflict with those organic rules, with unintended consequences:

However, we could also argue that such intervention reduces the level of regulation in the market because intervention invariably puts a great deal of discretion in the hands of both the “regulators” and those being regulated.  Are “regulated” markets more predictable than “unregulated” ones?  Is it easier for entrepreneurs to anticipate the actions of bureaucrats with discretionary powers or of competitors seeking profits according to the rules of the marketplace?  Is behavior more “regular” when firms are genuinely profit-seeking or when they attempt to manipulate the “regulators” through rent-seeking?

Free markets are regulated, and government regulation that subverts or conflicts with those organic rules often create more distortions than they purportedly resolve. Kudos to Steve for making the rhetoric of regulation more explicit.

Posted in Economics | Tagged , | 6 Comments »

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DOE shale gas hearings, day 1: Companies want state, not fed regulation; Environmentalists suspicious of panel bias

June 2, 2011

Michael Giberson

FuelFix has the run down on the first day of the U.S. Department of Energy’s hearings on shale gas fracking regulation. The title above offers captures much of the tone: Company execs urged regulation of fracking at the state level, rather than federal level; Environmental groups saw significant pro-energy industry bias among the advisory panel members and said they had low expectations for the panel’s ultimate assessment.

In day 2 of the hearing, the panel will hear from state regulators.

BACKGROUND: From the DOE website, “On May 5, 2011, U.S. Energy Secretary Steven Chu charged the Secretary of Energy Advisory Board (SEAB) Natural Gas Subcommittee to make recommendations to improve the safety and environmental performance of natural gas hydraulic fracturing from shale formations. Secretary Chu extended the Subcommittee membership beyond SEAB members to include the natural gas industry, states, and environmental experts. The Subcommittee is supported by the Departments of Energy and Interior, and the U.S. Environmental Protection Agency.” DOE indicates that video of the two day hearings will be made available after the event.

Posted in Environmental policy, Regulation | Tagged , | Comments Off

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Do anti-price gouging laws help the victims of natural disaster?

June 2, 2011

Michael Giberson

At the LegalMatch Law Blog, Sonya Ziaja editorializes in favor of laws against price gouging:

Natural forces are blind to what they destroy. People aren’t. In the past month, tornadoes and flooding in the South and Midwest left behind crippled lives, destroyed homes, and eviscerated infrastructure.

Now as the victims of the tornadoes try to rebuild, they are left vulnerable to another foe—people who use the disaster for economic gain by price-gouging.

…

Thankfully, there are legal protections against price-gouging in many states…. [The] price-gouging statutes allows the attorney’s general to investigate and prosecute instances of price-gouging once a state of emergency is declared.

After some discussion of the difficulty of defining price gouging precisely and the resulting differences in state laws, Ziaja asks a very good question: “How does any of this help the victims of natural disaster?”

Her answer sticks to the simple intended effect of the laws: “In theory, the threat of these consequences will deter potential price-gougers from profiting excessively from the misfortune of others.”

That line is a fine beginning to an answer, but unfortunately, is this case, it is also the end of the answer. The editorial moves on to other issues. What should come next is any evidence on whether the deterrence theory actually keeps people from profiting excessively, however that is defined. After all, first we should assess whether the law actual does the main thing it attempts to do. Following that one should look at whether the law has any unintended consequences, positive or negative, for victims of natural disasters.

On the issue of unintended consequences it seems clear that price gouging laws has negative effects for victims. The laws discourage efforts by merchants to bring useful goods into disaster-affected areas. Stores have been fined by the state after going to extraordinary efforts to bring electric generators into areas where an ice storm left millions of people without power. Gasoline retailers sometimes refuse to resupply at higher wholesale prices during declared emergencies, afraid they’ll be accused of price gouging. Victims of disasters are worse off if the laws reduce the resources available to them for recovery.

I’ll provide a few more details and analysis in a subsequent post on the consequences of price gouging laws. (The interested reader should also check out my price gouging article in Regulation magazine.)

Posted in Economics, Law | Tagged , , | 5 Comments »

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Another data point on oil and gas shale fracking profitability

June 2, 2011

Michael Giberson

Marathon Oil has agreed to pay $3.5 billion to acquire the Eagle Ford holdings of privately-owned Hilcorp Resources, about $25,000 per acre. The Eagle Ford is primarily a oil shale resource. Among other things, the purchase provides another public data point about the production promise of fracked shale resources. Much of the public controversy over the long-term productivity of fracked shale oil and gas was on the gas side of the business, perhaps because fracking was big news in shale gas before it became news in oil. The deal suggests increasing confidence that fracking quality oil shale resources can be done profitably.

Tom Fowler, FuelFix blog, interviewed Marathon’s Chairman/CEO Clarence Cazelot, CFO Janet Clark and Executive VP of Upstream Dave Robert. Some observers think the price paid was high. Unsurprisingly, the Marathon execs’ say it was worth the price:

FuelFix: The price tag seems to be a bit steep to some observers. KKR nearly tripled it $400 million investment in the partnership in just one year. How do you justify that to investors?

Cazelot: You’re exactly right about how KKR’s investment has grown since they came in, but we’ve seen several things happen since then.

A great deal of drilling has occurred since they entered and the play is much more significantly de-risked. There’s additional production history now in how these reservoirs perform.

We’ve seen oil prices at a higher level then when they entered as well . So I think there is much more comfort with the tremendous potential that the Eagle Ford has.

I would say that people who are opining on whether it’s pricy or not just because of a certain dollar price per acre, are taking a very naïve perspective. Not all acres out here are created equal. There’s a black oil trend, a volatile oil trend, a gas condensate trend, a dry gas trend. And every one of those has a very different set of economic results for the wells that are drilled. It is our belief that our acreage lies in the core of this trend where the economics are much better than other areas in part because of the higher liquids and higher pressures that lead to better recovery.

…

Dave Roberts: Beyond that, I would say there’s this  7,000 barrels per day of production from the assets that we just acquired. So we have a history of 45 to 50 wells that have been drilled on the asset in these core areas. So we have a very strong confidence have brought into the most significant value portion of this play.

Admittedly, the history of shale oil development in the Eagle Ford is still relatively short, but how many years of production from shale are required before the skeptics yield?

(The best known skeptic is still Art Berman. Here is a recent Berman presentation on shale gas. I’m not competent to judge the geological and engineering information presented, but many people in the business are. Among the many such competent people are folks working at Marathon and elsewhere agreeing to pay thousands of dollars per acre for shale resources. Why are there not more people persuaded to become shale skeptics after Berman’s years of arguing the merits of skepticism?)

Posted in Energy markets | Tagged , | Comments Off

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Recently caught my eye …

June 1, 2011

Lynne Kiesling

The long-anticipated collapse of the U.S. Postal Service is nigh, according to this very detailed Business Week article, and none of you will be surprised to learn that political stalemates are part of the story.

The convergence of two parts of my world: whisky to energy in Scotland! Contracts have been signed in Speyside for a new power plant that will use distilling draff (spent grains and liquid residue from the copper stills) for its fuel. Participating distilleries include Glenlivet and Macallan. Slàinte!

Gavin Kennedy provides a gentle correction to Dani Rodrik’s interpretation of the meaning and implication of Adam Smith’s analysis of the human “propensity to truck, barter, and exchange”, which Rodrik inaccurately claims to be innate in Smith’s view. Kennedy’s pointing to Smith’s connection of that propensity to our “faculties of reason and speech” is accurate and important to bear in mind because, as Kennedy points out in this excellent post, Smith saw this exchange propensity as a “foundation of human social life”, not just commercial activity. I could not agree more.

Posted in Economics, Uncategorized | Tagged | 1 Comment »

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