Hawaii Institutes Wholesale Gas Price Cap

Lynne Kiesling

It’s been brewing for several years, but finally the $66/barrel oil prices have induced Hawaii to impose a cap on the wholesale price of gasoline.

On Wednesday, the state’s Public Utilities Commission released its first weekly list of price caps for different parts of the state. Including taxes, the maximum wholesalers in Honolulu may charge is $2.74 per gallon.

Hawaii passed the law in 2004 and the first caps go into effect Sept. 1.

Now, we all know the economics of this, right? If the cap is binding (that is, if it is lower than the market-clearing price would be without the cap), then quantity demanded will exceed quantity supplied and Hawaiians will use another means of allocating scarce gasoline: queuing. If the price cap is not binding, then it’s irrelevant.

But this price cap has a twist:

On Wednesday, the average retail price of regular unleaded in Honolulu was at a record $2.761, some 15 cents above the nationwide average. Statewide, prices average $2.84, the highest in the nation, according to AAA’s Web site.

Prices on Maui have already topped $3 a gallon this week.

Frank Young, a member of Citizens Against Gasoline Price Gouging, said he was confident that over the long run, the caps will ensure Hawaii residents pay fair prices, because they link the state’s wholesale prices to spot prices elsewhere.

“The purpose of the cap is so that we move with the rest of the country,” said Young.

The caps are pegged to an index made up of average wholesale prices in California, the U.S. East Coast and the Gulf Coast, which are all at record highs. According to the commission, the five-day average of the three markets was $1.8728. This was used as a baseline price in calculating the caps for eight geographic zones across the state.

Other factors used in calculating the price caps were marketing costs and regional market conditions.

Gov. Linda Lingle, who unsuccessfully sought repeal of the 2004 law passed by the state Legislature, has said she feels the cap will actually increase prices and create fuel shortages.

I think she’s right. Populist politicians in Hawaii want to force the prices in Hawaii to mimic those in the rest of the country. But Hawaii is a world apart, in many ways (in addition to its natural beauty). It’s very far away, it’s an archipelago, and it’s sparsely populated. All of these factors contribute to a naturally high price of gasoline there — transportation costs (to Hawaii and within the archipelago), lack of space and political will, and relative lack of demand, to warrant building new refinery capacity there, etc.

They say they used “regional market conditions” to determine the cap. But if that’s the case, then won’t the cap reflect transportation cost differentials and relative lack of demand, thus rendering a price cap irrelevant?

Hawaii politicans are congratulating themselves for constructing a “market-based” price cap. I think those congratulations are hollow. Let’s see if they will be congratulating themselves when poor people in rural parts of Hawaii who rely on their trucks for jobs find no gas at the station.

Also draw this interesting connection: remember the gas lines in China we were talking about last week? The economic dynamics are the same. So is the queuing.

UPDATE: Mike put the link to today’s Wall Street Journal piece on the Hawaii cap in the comments, but I’m duplicating it here for the benefit of those who don’t click through to comments.


11 thoughts on “Hawaii Institutes Wholesale Gas Price Cap

  1. Amazing. Next they should legislate that all waves on the surf beaches be “catchable.” More evidence, perhaps, that good weather somehow muddles the logical parts of the brain.

  2. Richard Nixon Would Be Proud

    Hawaii implements price controls on gasoline:

    The caps apply as of next week, when a new law goes into effect. It lets Hawaii set a maximum wholesale price at which gasol…

  3. Richard Nixon Would Be Proud

    Hawaii implements price controls on gasoline:

    The caps apply as of next week, when a new law goes into effect. It lets Hawaii set a maximum wholesale price at which gasol…

  4. The WSJ’s Opinion Journal has an article at http://www.opinionjournal.com/cc/?id=110007155.

    While the wholesale gasoline price cap is clearly a bad policy, I think that the Hawaiian Governor is wise in not exercising her emergency authority to block the price cap from going into effect.

    After all, if she acts now to block the cap it will look like an anti-consumer gift to the oil companies. If she waits just a few weeks, then:

    *Hawaiians will experience an emergency,
    *Hawaiians will better understand what the state legislature has done,
    *Hawaiians (and anyone else paying attention) will get some valuable lessons in economics, and
    *Hawaiians will experience the repeal as a gift to Hawaii consumers.

    Trial-and-error is a great teacher. Unfortunately, the lessons aren’t free.

  5. Since the retail price is not capped, I would not expect queues. Whoelsalers will put station owners on allocation, so stattion owners will run the risk of running out before the allocation period ends. The way for them to handle the situation is to keep their prices high until their allocation period ends. If they have any left over at that point they can run a sale. The governor should not intervene to save the legislature from the fruits of their folly.

  6. It depends on the nature of the contract between the wholesaler and the retailer, but yes, if the retailer does not face any contractual constraints on its markups, the retail price may still adjust.

    This is gonna be interesting …

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    Since penguin-mania seems to be gripping everyone this summer, you might to take at look at the pictures that 75° South took when he visited the penguins. Hmmm. I didn’t know the Rol…

  8. Catching my eye: morning A through Z

    Here’s what’s caught my eye this morning:

    Since penguin-mania seems to be gripping everyone this summer, you might to take at look at the pictures that 75° South took when he visited the penguins. Hmmm. I didn’t know the Rol…

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