Is A Price Ceiling For Gasoline Off The Table?

(1:30PM EST – promoted by Nightprowlkitty)

Today, as I drove past a local intersection in upstate, Eastern New York with 2 gas stations, Mobil and Sunoco, and observed that the price of unleaded regular was now $4.169/gallon, I said aloud, making a terroristic hand gesture, “Basta ja!  Enough already!  Somebody needs to freeze the price right where it is before it gets even higher.”  Sometimes the truth is said in anger.

Maybe what’s needed in the short term is a price ceiling on gasoline, diesel fuel, home heating oil.  Admittedly this would not be a long term solution to America’s lack of an energy policy, but it might provide some short-term relief to consumers.  And it would provide far more relief than the bogus McSame proposal for a “gas tax holiday.”

First, a definition of a price ceiling:

A price ceiling is a government-imposed limit on how high a price can be charged on a product. For a price ceiling to be effective, it must differ from the free market price.

In other words, the price of self-serve unleaded regular could be set by law at $4.00/gallon, and this would be the “price ceiling.”  It would then be illegal to sell gas for more than $4.00/gallon. Period.  This would have the effect of pricing all gasoline at a price below the present price, which presumably was set by market forces.  This theoretical price ceiling would have certain expected consequences:

A price ceiling set below the free-market price has several effects. Suppliers find they can no longer charge what they had been charging for their products. As a result, some suppliers drop out of the market. This represents a reduction in the quantity supplied. Meanwhile, demanders find that they can now buy the same product at a lower price. As a result, market demand increases as new buyers enter the market and existing buyers consume more of the good.

As a result of these two actions, demand exceeds supply and a shortage ensues. The good must then be rationed by non-market means, such as waiting in line.

In case of a gasoline price ceiling, however, you cannot expect Exxon Mobil or any of the other 800 pound gorillas to “drop out of the market.”   They’re not going anywhere. And poor people, people who cannot afford $4.25/gallon gas will still be able to buy gas to get to work and keep the economy from what I think is an approaching Tom Joad moment.

It’s true that a price ceiling does allow more demand than market forces would otherwise permit, but it also takes part of the oil companies’ profits and distributes it back to purchasers at the pump.

The recent unsuccessful Senate proposals to impose a 25% excess profits tax on the major oil companies and to deprive them of $17 billion in tax benefits correctly put an emphasis on the oil companies’ siphoning dollars from consumers at the pump and from government as tax breaks and giving them to their shareholders as excess profits and dividends.  But the proposal was primarily an attempt to drive the oil companies into development of new energy sources rather than a direct effort to provide short term relief to consumers.  A price ceiling, on the other hand, would provide immediate relief at the pump and it would reduce oil companies’ excess profits.

It would also provide an incentive for the oil companies to develop alternative fuels by making the sale of petroleum less profitable in the short and long terms.

To my surprise, most consumers agree that a price ceiling on gas would be a step in the right direction.  According to a May 28, 2008 Gallup Poll a majority of Americans support price controls on gasoline:

When Americans are asked what steps should be taken to reduce gas prices, no consensus appears, but somewhat surprisingly, a majority favor imposing price controls, by a 53% to 45% margin. Americans also support releasing supplies from the federal government’s strategic petroleum reserve (58%) and drilling in U.S. coastal and wilderness areas now off limits (57%). On the other hand, a majority oppose rationing gasoline (79%), re-instituting the 55 mph speed limit (56%), and suspending the federal tax on gasoline for the summer (52%).

In state houses across the US and in Washington, DC, I’m sure that the elected representatives by now realize, even though they may not pump and pay for their own gas, that something needs to be done to restrain gas prices before they further impoverish

poor people, drive prices on food and other necessities through the roof, and lead to even great economic devastation.  Or do they?  All I hear is, “Well, we tried and we failed and we’ll try again.”  Maybe a price ceiling should be part of the effort.


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  1. Thanks for reading.  

  2. …which would screw us in two ways: first, of course, it would be hell on the environment.  Second, it would be massively, foolishly expensive.  Price is the major signal we have to understand the scarcity of a thing.  With price removed, consumers will have no real concept of the value of gasoline, and will overuse it, driving up prices worldwide.

    If we’re not going to care about the environmental benefits of more expensive gas, then we may as well just permit drilling in ANWAR and offshore, rather than destroying the market for gasoline and increasing consumption.

  3. by reducing demand is the only way it will work.

    Exxon used to buy oil at $55 a barrel, refine it and sell it at a 20% profit.

    It costs them $1 a gallon to refine it (for instance, OK), and a dollar a gallon in raw material to buy it at $55 per barrel, so they sell it for $2.40 a gallon realizing a 20% profit. (I know, I know, I’m just demonstrating)

    Now, let’s say some asshole invades a Middle Eastern country and upsets the worldwide OPEC price of oil. Now Exxon has to buy that barrel of oil for $110, or twice the price.

    It still costs $1 a gallon to refine it, but now they’re selling it for $3.60 a gallon because their raw material costs are now $2 per gallon and they add a 20% profit.

    Now they’re making sixty cents profit per gallon, an extra twenty cents per gallon with no real extra costs except for laying out more money for raw materials.

    That’s a 50% increase in profits, but they’re not doing anything different, they’re just making more money. On an Exxon scale, an extra 50% in profits is HUGE.

    So, drop the demand to provide an incentive to reduce the price. Twenty cents will be the immediate relief because

    Exxon can still make 2005 profit levels (which was forty cents a gallon), reducing the cost at the pump twenty cents per gallon in this example. (Which is not accurate, I’m fairly certain refining cost is closer to pennies per gallon)

    You want to freeze a price, freeze not the percentage markup they’re taking, freeze the hard value of that markup to prewar profit.

    Consume less fuel. That’s the answer.

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