Don’t be fooled by the fake proposal to suspend gasoline price cap

During the next week, the Hawaii state Legislature will be grappling with legislation to do away with the gasoline price cap. In its place, we want to impose greater transparency for gasoline pricing by refiners and wholesale distributors, and with this information go after anti-competitive practices.

The Senate has proposed to amend the House's gas cap suspension bill and, as needed, impose an "on again, off again" gas cap. Under the suspension, the gas cap formula would continue to be calculated hypothetically. If prices exceed the hypothetical cap for four consecutive weeks, the gas cap would kick in again for two weeks.

Not only is this not a true suspension, it is entirely unworkable. If this proposal becomes law, it will create confusion for the gasoline wholesalers and distributors as well as consumers of gasoline in our state.

Why it won't work

There are two reasons why this "on-again off-again" gas cap proposal will not work:

First, there are currently eight gas cap zones in our state: the Big Island has two; Maui County has four; and Oahu and Kauai each have one. Under the proposed "on-again off-again" gas cap, if the average weekly gas price exceeds the cap formula for four weeks in any one zone, the gas cap will be reimposed in the zone or zones where the price of gas exceeded the cap. Can you imagine: different gas cap prices, in different zones, at different times? The reality is that consumers would be faced with multiple caps in multiple zones being implemented and suspended at different times in different zones. Total chaos!

Second, the proponents' method of forcing down the wholesale price of gasoline is arbitrary and could adversely impact consumers. They would do this by: eliminating the location factor for gasoline (reducing 4 cents per gallon); lowering the marketing margin for gasoline (reducing another 4 cents per gallon); and by using the lowest three out of four spot gasoline markets located in New York, the Gulf Coast, Los Angeles, and Singapore (reducing 5 to 9 cents per gallon). True, we would end up with wholesale gasoline price lowered by 13 to 17 cents per gallon.

We all want lower gasoline prices, however, this new pricing mechanism results in wholesale gasoline prices far below those recommended by consultants who advise the Public Utilities Commission on gas cap issues. The wholesale profit margins for gasoline will become too small, making an unsustainable market for gasoline refiners and distributors. That means we could jeopardize our supply of gasoline.

Consumers will pay up

Here are additional problem scenarios whereby consumers will pay more as wholesalers try to make up for losses incurred by the proposed cap formula:

» Once a wholesaler has figured out that it will exceed the hypothetical price cap during the suspension period, the wholesaler then has every incentive under this new cap formula to price gas as high as possible to cover its losses during the period that the gas cap is automatically reimposed. Consumers pay the price.

» A wholesaler could, potentially, try to sell as much gasoline above the cap during the suspension periods and hold back supply when prices are lower during the two-week cap periods. Again, consumers pay the price.

» One wholesaler could potentially be pricing above the cap and the others below the cap, so, on average, the cap is not exceeded. Those wholesalers who price below the cap are penalized for trying to comply with the new pricing formula. Consumers in certain areas pay the price.

» In addition, wholesalers could raise prices for gasoline during part of the suspension period and then bring the price back down within the remainder of the suspension period. Again, in this scenario, the consumer pays the price.

Better solutions

In a market system such as ours, it is impossible for government to insert itself in the pricing of a commodity, such as gasoline, without creating great inefficiencies and unknown and unintended consequences. It is better for government to step back from inserting its fingers in the finely meshed gears of the world petroleum market. Instead, we should repeal the law and adopt the transparency legislation being proposed by both the House and the Senate. With the pricing information on gasoline gathered under this legislation, government can take action against any anti-competitive practices by gasoline refiners or wholesalers in Hawaii.

Finally, Hawaii must reduce its overwhelming dependence on oil. We are blessed more than any other state with multiple sources of alternative energy (wind, solar, wave, geothermal, OTEC, and biomass, to name a few). Developing these sources to their full potential, while providing people with greater incentives to conserve energy, will make the greatest difference for Hawaii.

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