Friday, May 12, 2006

Hawaii's Broken Gas Cap. A Failed Experiment in Government Regulation.

You may not have heard, but Hawaii's recent experiment with regulating the gas industry, also known as the "gas cap," has failed. After about 8 months, the program just didn't work out...or did it? Public opinion seemed to overwhelmingly favor getting rid of it, which is what brought about its demise, but in actuality, it favored the consumer. A lot. Why then was it repealed you ask? Because it "looked" like it didn't work. Before I go on, let me say that I am against government regulation of any business, for the most part, because free enterprise is what drives the US economy. But back to topic, the reason public sentiment was so against the gas cap was purely timing. As gas prices increased, so did the gas cap. This led to the false belief that the gas cap would reduce prices, but didn't. There were a few instances where gas prices dropped, and this was good. But sadly, not enough for the public to accept it. Hawaii is unique in that there are only two refiners. These two refiners control wholesale gas prices in Hawaii. This is one of those instances where maybe government regulation can help, but even then it's still questionable and, in my opinion, a "last resort" action. Regulation makes sense if the companies are not going to be honest. This is the part that pushes me towards regulation, because I believe the two wholesalers in Hawaii are taking advantage of the situation. Pre-gas cap Hawaii often saw price increases, but rarely saw decreases. And if they decreased, it would be a small fraction of what it increased, while the rest of the US saw dramatic decreases. Odd isn't it? As a consumer, I'm sad. But as a US citizen, I'm is better off that this experiment failed even if it might have meant a few more dollars in my pocket.


eric said...

Interesting post! But I feel you can be glad as a consumer and a citizen.

Even if the gas cap had actually resulted in lower retail prices we would have paid in other, less visible, ways; tax revenue to fund the regulators, possible corruption of government officials and subsequent investigation as companies attempt to exploit loopholes, higher prices in the future.

To explain this last point, higher prices would be the result down the road because by capping prices you cut into the profits of the wholesalers. Reduced profit means reduced investment into building up bigger capacity and a slowing of the growth of supply.

Also, by implementing regulations like this you scare away potential competitors. New companies will be hesitant of entering the market if they believe it to be uncertain of changes in regulation. The damage on that score is done because even with the repeal the environment is uncertain. The best outcome would be for this issue to just go away but I have a feeling we'll be fighting this battle for a long time.

frugal said...

Free market is almost always the best. Unfortunately, there are politicians that are using windfall taxes on oil company profits to increase their popularity. That just won't work I believe.

frugal from

freedumb said...

Eric, I hear ya...And yeah, it does seem like we'll be fighting this battle for awhile...I wonder even if no gov't regulations were put in place, is Hawaii big enough for 1 or 2 more refiners? If it isn't, then would you feel some kind of regulation might be appropriate if they find that these companies are overpricing the gas already?

frugal, I would agree, but with some conditions that could probably be summed up as everyone should have a fair opportunity to enter the market and companies should not monopolize a market. How to determine the conditions is the hard, touchy part. I prefer to stay away from that discussion. hah.