Demand for gasoline is more price-inelastic than commonly thought

Michael Giberson

A working paper from the UC-Berkeley Department of Agricultural and Resource Economics says that the demand for gasoline is more price-inelastic than typically thought. Here is the abstract, which points to publication selection bias as the culprit:

One of the most frequently examined statistical relationships in energy economics has been the price elasticity of gasoline demand. We conduct a quantitative survey of the estimates of elasticity reported for various countries around the world. Our meta-analysis indicates that the literature suffers from publication selection bias: insignificant or positive estimates of the price elasticity are rarely reported, although implausibly large negative estimates are reported regularly. In consequence, the aver- age published estimates of both short- and long-run elasticities are exaggerated twofold. Using mixed effects multilevel meta-regression, we show that after correction for publication bias the average long-run elasticity reaches -0:31 and the average short-run elasticity only -0.09.

The authors are Tomas Havranek, Zuzana Irsova, and Karel Janda.

Price gouging news roundup (March 2011)

Michael Giberson

ABC News last week tackled the question, “Are Gas Stations Price Gouging?” (2:23 min. video)

Surprisingly, I liked this story, though (and probably because) they mostly sidestep their question about price gouging and instead go in pursuit of “the highest priced gasoline in America.” They find it at a convenience store just outside of the airport in Orlando, Florida. (You’ve got to watch consumer reactions when the reporter asks them to actually look at the price before they pump the gas.) We’ve discussed the station before on Knowledge Problem, see “Orlando wants to discourage high gas prices near the airport“.

The ABC News story noted that California is the state with the highest average gasoline prices ($3.959 according to AAA as of today) and Wyoming is the state with the lowest average gasoline prices (currently $3.268). I wish they would have pointed out that California has the highest state gasoline tax – at over 66 cents/gallon – while Wyoming has the second lowest state gasoline tax – under 33 cents/gallon. (Source, p. 2)

Elsewhere in price gouging news:

  • President Obama directs U.S. government agencies to aid state attorneys general in monitoring for gasoline price gouging. I take this as good news, more or less, since the Federal Trade Commission staff generally does a better job than state attorneys general of understanding the economics of gasoline pricing. There is the usual vaguely ominous political threat implied by the statement, but at least so long as the FTC can act based on science rather than politics (and isn’t that what the administration wants for its regulatory policy?) then I’m not worried.
  • Last week Mississippi’s highest court ruled that the state’s anti-price gouging law is not too vague to be constitutional. One gasoline station owner cited for price gouging after Hurricane Katrina had protested that phrases in the law like “same market area” were not defined and references to prices “at or immediately before” the declaration of emergences wasn’t sufficiently clear. A local judge agreed, but the state’s Supreme Court said the meaning was plain enough to be legal. The case will return to the local court for a ruling on the substance of the allegation. A story in the Clarion-Ledger includes remarks from the state Attorney General.
  • In Texas the state attorney general announced that five motels accused of price gouging after Hurricane Dolly had entered into agreements with the state to pay more than $80,000 in civil penalties and legal expenses.
  • Connecticut state legislature seeks to expand state law to cover price gouging on services in addition to the already covered price gouging on goods. Senate Majority Leader Martin Looney (yes that’s his name) said the heavy winter weather exposed “glaring weaknesses in our price gouging statutes.” (See the law here.)
  • Rep. Tim Bishop (D-NY) and co-sponsors have filed a Federal Price Gouging Prevention Act (H.R. 964) that would authorize criminal fines of up to $500 million and civil penalties up to $100 million for retail or wholesale price gouging during periods for which the President has proclaimed “an international crisis affecting oil markets” exists. The congressman’s press release says the bill “could also apply to speculation in the oil futures market,” but the congressman’s press release is lying. The bill applies to retail and wholesale transactions, it carefully defines retail and wholesale, and oil futures trades do not qualify as wholesale or retail transactions under the proposed law. Perhaps the congressman should read the bill. (PDF from gpo.gov.)

Rainy days, but not Sundays, will get them down

Michael Giberson

From the “Things that make you go Hmmmm” file, note things take an interesting turn in paragraph 4:

W2 Energy, Inc. is pleased to announce that it has become a research affiliate of the Arizona Research Institute for Solar Energy (AzRISE).

AzRISE (www.azrise.org) is a global institute at the University of Arizona in Tucson whose mission is to transform science into large and small-scale solar energy solutions that are demonstrable and can transform individual lives.

W2 Energy will be shipping one of the Solar Bug solar-electric vehicles to AzRISE. AzRISE will test the Solar Bug and provide 3rd party certification of its operation and efficiency.

In addition to testing the Solar Bug, AzRISE, in collaboration with musicians and composers at the University of Arizona, will be performing musical pieces that promote solar energy. Several of the musicians will drive the Solar Bug to schools and community centers and will perform their music using power from the Solar Bug’s on-board batteries. The musicians will plug in their instruments, amplifiers and microphones into the Solar Bug’s 110 volt outlet.

“What a great real world example of the beauty and efficacy of solar power,” says Joe Simmons, the Director of AzRISE. “We will play our songs about solar energy using solar energy.”

According to a previous W2 Energy press release, a Solar Bug “can carry two passengers and a small amount of cargo” and will “travel up to 10 miles a day on solar power alone.”

Sure, I can imagine that musicians can plug their instruments and equipment into the Solar Bug’s outlet and play for the kiddos, but will the musicians actually be able to load all of their gear into a Solar Bug AND drive to a school or community center AND play a plugged-in concert AND pack up and get home again, all on solar power? Or will these shows be staged with the help of a lot of petroleum-fueled vehicles behind the scenes?

I’m guessing that when the solar concerts wrap up and the last musicians reach home again, a complete accounting would reveal the performers and sponsors were unable to resist the beauty and efficiency of gasoline as a transportation fuel.

Georgia bill would add useful flexibility to price gouging law

Michael Giberson

A bill passed by the Georgia state senate would add some helpful flexibility to the state’s anti-price gouging law.  The primary purpose of the bill would be to allow the state to limit the range of items for which the price gouging rules will be enforced based upon the nature of the emergency.  For example, if a storm mostly damaged windows and roofs, the price gouging rule might be enforced on plywood and hotel rooms, but not on ice and gasoline.  Another part of the bill would allow gasoline retailers to raise the price of retail gasoline to reflect the cost of replenishing the store’s supplies rather than linking allowed retail prices to the historical cost of the gasoline sold. Currently the state allows “replacement cost pricing” for plywood during declared emergencies, but gasoline price increases were evaluated with reference to pre-emergency historical cost.

I’d rather see the state repeal its price gouging laws altogether.  The laws probably create more costs than benefits, and can lead businesses to shut down during emergencies rather than risk violating anti-price gouging laws.

From the Atlanta Constitution-Journal, “Bill allows gas price increase in emergency“:

Less than two years after hurricanes brought a run on gas, the state Senate has passed legislation letting station owners charge much higher prices as soon as an emergency is declared.

Officials with the Governor’s Office of Consumer Affairs worry the measure, if it becomes law in its current form, would make it tough to prosecute a gas station for price gouging.

“I think it would be very difficult to determine that price gouging had occurred,” said Bill Cloud, spokesman for the office. “I don’t know that we would have confidence in saying that, as the bill exists right now, we would be able to define, or describe or enforce price gouging as it relates to petroleum products.”

The bill was originally meant to give the governor more flexibility in deciding which products would fall under gouging laws during an emergency. For instance, if an emergency involved damage to homes but not a disruption in the flow of gas, gouging laws could apply to plywood or building materials and not fuel.

However the bill, which was backed by Gov. Sonny Perdue, was rewritten by the Senate Agriculture and Consumer Affairs Committee to allow stations, in an emergency, to charge for gas what they decide it will cost to replenish the fuel they have on site.

Meanwhile, one committee of the Connecticut state assembly unanimously approved a bill which offers a “mathematical definition that the state would use to identify gas station price gouging subsequent to natural disasters.”

“In the past, gas dealers have had trouble knowing what constitutes an emergency and what the definition of gouging is,” [State Rep. Jim] Shapiro said. “So the current provisions against gouging have been tough to enforce. This new anti-gouging provision clarifies the rules to provide consumers and businesses information to act accordingly when there is problems.”

Clarity in the law is usually a good thing – in order to comply with the law, businesses need to be able to tell what level of price increase will constitute a violation of the law.  But, as an industry spokesman stated, “the devil is in the details.”

In this case the bill declares it will not be a violation of the price gouging law if a retailer’s average margin during the “abnormal market disruption” is no higher than the maximum margin during the 90-day period prior to the beginning of the market disruption.  Because the definition is in terms of changing margin rather than changing prices, it may allow retail prices to track changing wholesale costs.  However, the bill fails to clarify whether the relevant rack price is the historical rack price paid at the time of the initial wholesale gasoline purchase, or a contemporaneous rack price at which replacement fuel could be acquired. The historical cost method would restrain price increases and hamper market adjustment more, the contemporaneous rack price method would restrain price increases and hamper market adjustment less.

Once again, probably an improvement over the existing state of affairs, but I’d rather see Connecticut repeal its price gouging laws altogether, too. As with Georgia, the Connecticut law probably creates more costs than benefits.

Oligopoly in Alaska’s wholesale gasoline market

Michael Giberson

Last year, as crude oil and gasoline prices went on their wild ride, gasoline prices in Alaska took a somewhat different path than prices in the lower 48 states.  For years, average prices in Alaska were about the same as the U.S. average price.  Higher costs of delivery in Alaska were mostly offset by the nation’s lowest gasoline tax, just 8 cents a gallon, and the result was a price that more or less tracked the U.S. average price.

That pattern changed beginning in June 2008.  Prices had been marching up everywhere, but the price march stalled in the lower 48, while in Alaska (and Hawaii) prices continued to rise for another month.  Prices fell sharply throughout the country from July through December – excepting a short pause during the late hurricane season in the lower 48 – but Alaska’s prices now seemed to track the higher prices of Hawaii rather than returning to the U.S. average. (See this chart at www.alaskagasprices.com.)

Last fall the State of Alaska initiated an investigation, and in January 2009 they concluded that oligopoly was to blame.  No illegal acts were discovered, but the report suggested that with relatively few players involved competitive pressures can be weak and prices above the competitive level can be sustained for some time.

Explanation from the report, 2008 ALASKA GASOLINE PRICING INVESTIGATION:

The fewer the number of sellers in a market, the easier it is for each to observe the other and develop expectations as to the way in which each will likely react to the other’s decisions regarding output and prices. In these markets, each seller will naturally take into account the potential impact of its own actions on market prices, including the potential responses that its actions might elicit from other sellers. This type of “competitive” behavior is often referred to as oligopolistic pricing or “oligopolistic interdependence” because the decisions that each make are “dependent” in part on the expected actions (or reactions) of other sellers. In this environment, it is easier for sellers to develop a “live and let live” attitude toward their rivals that would not be possible to maintain in competitively structured markets with more sellers. As a result, oligopolistic or interdependent behavior can result in prices that are above competitive levels over extended periods of time.

Interdependent behavior on the part of sellers is not generally regarded as a violation of antitrust law as long as firms develop and implement their pricing and output decisions independently.

… Alaska’s gasoline markets can fairly be characterized as oligopolies at the wholesale level. Oligopoly markets can produce a wide range of prices, high or low, without there ever being any illegal behavior or collusion by sellers. …. [The ability to keep prices high] is dependent on the existence of some sort of entry barrier that prevents non-incumbent suppliers from entering the market and taking advantage of the higher profit opportunities. As discussed above, these entry barriers exist in parts of Alaska, limiting competition from outside suppliers, particularly during short-term periods or periods such as the second half of 2008 characterized by extreme market volatility and uncertainty.

Retailing gasoline: At least twice a day Dan checks up on his competition

Michael Giberson

An article from the San Bernardino, CA, The Sun offers a glimpse at the retail gasoline world from the retailers point of view: checking up on the competition twice a day, worried about being a penny or two too high in price, the pluses and minuses of accepting credit cards, negotiating with his wholesale distributor over the cost of gasoline.  Better than your average newspaper story.

Punishing gasoline customers for non-existent ‘price gouging’ by New Jersy station

Michael Giberson

First, the news:

Washington Township, N.J., gas station ordered temporarily closed for price gouging

A judge on Monday [July 13] ordered the temporary closing of a Washington Township, N.J., gas station after the owners pleaded guilty to price gouging.

Express Fuel on Route 31 North, south of Washington, will reopen on Monday. The judge also ordered the station’s owners to pay a $1,500 fine and court costs.

An investigation by the Warren County Department of Weights & Measures revealed the station owners violated a rule permitting only one price change within a 24-hour period.

On June 19, the price for regular gas changed three times within a few hours. At 11:03 a.m. that day, the price was $2.43.9 a gallon. The price went down to $2.39.9 at 11:24 a.m. and up to $2.41.9 at 2:10 p.m.

Weights and Measures Superintendent Michael Santos said typically the price changes are all upward or all downward. He said the changes reflect competition among gas stations.

Santos speculated the Express Fuel price went down and back up that day because the owners realized they mistakenly lowered the price more than they needed to.

The gas station is closed all week.

This stupidity momentarily rendered me speechless.

During that moment, I looked up some associated data. All of the prices mentioned in the article were about 10 to 15 cents below the average price in the state at the time (about $2.56/gallon mid-June according to AAA’s Fuel Gauge Report). So this is not “price gouging” in the normal English-language meaning of the term, not even close.

Nonetheless, more than one price change in a day is apparently a violation of somebody’s rule. Pending revision of the rule to something more sensible, there was a technical violation of the rule. Fine. Stupid rule, as this case illustrates, but a violation is a violation.

But why impose a penalty on the station that also penalizes gasoline customers in the area by giving them one fewer station to shop at for a week?

Clearly the court-ordered shutdown of the station for a week will harm consumers many times more than the harm, if any, from the station changing its price twice in a day.

Gasoline retailer opposes a zone pricing ban in Connecticut

Michael Giberson

An effective zone pricing ban in Connecticut would have the effect of equalizing the wholesale price to gasoline retailers in the state. As such, it would benefit some retailers and harm others.

TheDay.com presents commentary from an owner of a retail gasoline station who expects to be harmed by the zone pricing ban currently under debate in the state:

Like the cost of living, the cost of doing business in Connecticut varies widely depending on your location…Retailers are given the flexibility to price their goods as a reflection of their overhead, as well as recognizing what their competitor down the street may be charging. The same system is used for the sale of gasoline…

If distributors are required to sell gas to dealers like us at the same price regardless of what external marketing conditions might be, we will not be able to compete and will very quickly go out of business.

A bill against zone pricing would benefit a very small, wealthy population and would have a devastating impact on eastern Connecticut’s residents. We have managed to keep our doors open in the midst of a financial crisis… Now, as the summer travel season approaches and the light at the end of the tunnel nears, our livelihood is once again in jeopardy as a result of a short-sighted attempt to cut gas prices for a select group of Fairfield County residents.

As I said of the New York zone pricing ban which went into effect last November, in essence a zone pricing ban is consumer protection for the affluent. This “protection,” if it has any effect at all, will come primarily at a cost of higher prices and poorer service in less affluent neighborhoods.

NOTE: Search for all zone pricing posts at Knowledge Problem.

Congressman to Western New York gasoline retailers: We will be watching you

Michael Giberson

From the Buffalo, New York, BusinessFirst:

In a letter sent May 13 by FTC Chairman Jon Leibowitz to Higgins, the agency said after a careful and extensive investigation, regulators could not find any evidence of illegal activity in gasoline markets in any of the affected cities. The agency monitored prices in Buffalo, Jamestown, Rochester and Burlington, Vt.

“To the contrary, staff found evidence suggesting that it is unlikely that illegal conduct caused those price levels, although staff was unable to identify precise reasons why retail gas prices in Western New York did not fall as quickly as prices in other Northeast cities,” Leibowitz wrote.

What the agency did note was that after Higgins released an Oil Price Information Service (OPIS) report on Dec. 4, 2008 citing Jamestown and the Buffalo-Niagara regions among the top 5 most “profitable” for gasoline retailers, the prices for unleaded gas decreased from an average of $2.25 to $1.85 by the end of 2009.

Does this last paragraph suggest that a servile and pandering attitude on the behalf of the FTC toward the congressman? I don’t find the FTC letter online at either the FTC’s website or that of the Congressman, so I’m just raising the question based on the news article.

The congressman’s press release suggests, surprise!, that he is quite willing to encourage the view that his actions had something to do with prices falling back in line with state averages:

“Western New York consumers were getting ripped off and we sounded the alarm, which caused WNY gas prices to fall in line with state averages, again proving that when we stand up for ourselves we can get things done,” Higgins added.  After Congressman Higgins publicly released an Oil Price Information Service (OPIS) report naming Jamestown & the Buffalo-Niagara regions among the top 5 most “Profitable” for gasoline retailers on December 4th, 2008, the prices of unleaded gas decreased from an average to $2.25 in Buffalo to $1.85 by the year’s end.

To the congressman, absence of evidence is no barrier to action:

“While we might not have proof of illegal activity or a clear definition of why our prices were so high, what is clear is retailers were acting in bad faith trough some type of implicit collusion and retailers and consumers should know that we were watching then and are watching now and will continue to work to make sure this doesn’t happen again,” said Higgins.

A quick trip to the price charts at http://www.buffalogasprices.com tells some of the story (start here at the default Buffalo price chart for one month, then add two more upstate New York cities to the chart – Rochester, Albany, or Syracuse are options – and expand to at least 18 months).  Up until the 2008 mid-July gasoline price peak, retail prices in Buffalo tracked prices elsewhere in upstate New York pretty closely. When prices started falling, they fell more slowly in Buffalo than in the rest of the state.  By the time retail prices hit bottom at the end of the year, prices in Buffalo were back in line with prices elsewhere in New York, and since the beginning of the year prices in Buffalo have moved in line with other gasoline prices in the state.

So, yes, prices did fall more slowly in Buffalo. Presumably, a good economic study could uncover likely causes. Those causes may not turn out to be politically useful to local politicians. In any case, of the congressman’s agenda intended to “prevent price disparity in [the Western New York] region” — raise public awareness, push for passage of a federal price gouging bill, push for passage of a bill to prevent excess speculation in the oil market, and invest in renewable energy — only the first is likely to have any real impact on local “price disparity.”

Hartford Courant editorializes against zone pricing ban in Connecticut

Michael Giberson

From the Hartford Courant (May 11, 2009):

A bill in the General Assembly that would force gasoline wholesalers to charge the same price to retail dealers across Connecticut would likely raise the price of fuel for most motorists and make the market less responsive to competition.

Legislation to ban so-called zone pricing has been tried a number of times. The ban’s drawbacks are far outweighed by the advantages of allowing the market to continue working as it already does.

“Zone pricing” is the practice of gasoline wholesalers setting prices for sale to gasoline retailers by area, based upon a projected ability of the area to support higher or lower prices. While specific practices vary by wholesaler, typically incomes in the area and the level of competition between retailers would be taken into account as wholesales select the price it wishes to charge.  It is asserted that zone pricing harms retail station competitiveness and leads to higher retail prices.

Over the past several years zone pricing bans have been often debated in Connecticut and elsewhere. Numerous points have been made by both proponents and opponents of zone pricing bans. Until recently the evidence for and against zone pricing has been primarily theoretical, or experimental, or based on inferences from similar practices in other industry.

But last November neighboring New York implemented a law (partially) banning zone pricing.  So my advice to the people of Connecticut is that they continue without a zone pricing ban a little longer, and commission a few economic studies of the effects of New York’s zone pricing ban instead. Why not find out how this idea actually plays out in the real world?

Better to spend thousands of dollars on economic studies than make a million dollar mistake.

Previous zone pricing posts on Knowledge Problem: