Friday, October 07, 2005

Shooting the Messenger

Congress is rushing to respond to some of the energy shortcomings exposed by the hurricanes. Here's a good article at Econbrowser on HR 3893, which attempts to address the refining capacity shortfall by promoting new refinery construction. It also proposes to harmonize gasoline standards to a much smaller set of options for states. That alone would go a long way to streamlining our inventory problems and restoring some of the industry's flexibility of response. Unfortunately, this bill also acquired a scorpion's tail: a provision that narrowly defines "gouging" in the retail fuel context, and does so in a way that defies both common sense and basic economics. The bill may be voted on in the House today.

I wrote about gouging recently, but I want to get down to specifics as they pertain to this legislation. House Bill 3893 defines "gouging" under the slightly Orwellian rubric of "Gasoline Price Reform", based on the following:

...any finding that the price of gasoline available for sale to the public in September, 2005, or thereafter in a market area located in an area designated as a State or National disaster area because of Hurricane Katrina, or in any other area where price-gouging complaints have been filed because of Hurricane Katrina...exceeded the average price of such gasoline in that area of the month of August, 2005, unless the Commission finds substantial evidence that the increase is substantially attributable to additional costs in connection with the production, transportation, delivery, and sale of gasoline in that area or to national or international market trends.
It goes on to set penalties of "not more than $11,000 per person per day in which a violation occurs."

This economic mischief will be visited largely upon a group of independent businesspeople, many of whom did the right and responsible thing by raising prices to avoid running through their entire supply of fuel in a day, when no replacement was in sight for an unknown number of days. In effect, if you are a retailer in Louisiana, Mississippi, Alabama or Florida, and you hiked your prices before the distributor or major oil company that supplies you raised its rack price, then you could easily be found guilty of gouging and fined $11,000/day, under the provisions of this legislation.

Let's put that in perspective. The average gas station in this country pumps a bit under 100,000 gallons per month. (Less than that if you exclude the big company-operated stations from the average.) That works out to about 3300 gallons per day, on which the typical station operator would normally make a couple hundred bucks, after paying rent, wages, and other costs. $11,000 is a lot of money to someone running a gas station. A week's worth of this kind of penalty could put many of them out of business, or at least into debt.

Before you say, "It serves them right," consider what this means going forward. This provision is obviously intended to frighten gas station owners into holding prices flat in future disasters. That's a problem, because raising gas prices after this kind of disaster is the economy's way of saying, "Something big has just happened, and you need to think twice about how badly you need this fuel." How will ambulance services, fire companies, and other responders such as doctors keep their vehicles fueled, if all the inventory in the area has disappeared in a brief spasm of hoarding? That's precisely why prices need to be allowed to go up, to ration fuel to those who need it most.

The dearth of gas lines and serious supply disruptions in the wake of Katrina and Rita--despite the temporary loss of a large part of our refining and distribution infrastructure--is clear evidence that this system works better than state controls, including the pernicious retroactive price controls included in this bill.

Addendum: HR 3893 passed the House of Representatives today on a vote of 212-210, with no Democrats voting in favor. It goes on to the Senate.

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