June 19, 2005

COMMODITY SHORTAGES ARE ALWAYS ARTIFICIAL:

Refiners Maintain a Firm but Legal Grip on Supplies: Clean-gas mandates thinned the competition a decade ago. Companies that stayed 'take advantage of the crazy rules' and enjoy huge profits. (Elizabeth Douglass and Gary Cohn, June 18, 2005, LA Times)

Some consumer advocates and politicians believe that the state's higher prices stem from unlawful manipulation by California's small band of gasoline producers. Government investigations have questioned some industry practices but have found no proof of illegal activities.

A more likely explanation: California refiners are simply cashing in on a system that allows a handful of players to keep prices high by carefully controlling supplies. The result is a kind of miracle market in which profits abound, outsiders can't compete and a dwindling cadre of gas station operators has little choice but go along.

Indeed, the recent history of California's fuel industry is a textbook case of how a once-competitive business can become skewed to the advantage of a few, all with the federal government's blessing.

"They don't have to collude, they don't have to form a cartel, they don't have to be monopolists," said Stanford University economist Roger Noll. "All they have to do is take advantage of the crazy rules."

Little more than a decade ago, California was awash in relatively cheap fuel.

But in 1996, the California Air Resources Board began requiring a special gas that was the least polluting in the world. Although the change did wonders for California's dirty air, it also was a first crucial step toward permanently eliminating the state's gasoline cushion.

One-third of the state's refineries closed, largely because they couldn't afford to comply with the new fuel rules. In addition, most outside suppliers were shut out of California because they couldn't make the unique blend.

Today, the state's gasoline comes almost exclusively from refiners in California, a group that has grown smaller and more powerful through mergers.

What's more, the gap between gasoline prices in California and the rest of the nation, once about 5 to 10 cents a gallon, has swelled in recent years. At times, the price difference has been as wide as 40 or 50 cents a gallon. That price chasm extracted an extra $3 billion from Californians in 2004 and an additional $1.5 billion so far this year, compared with the U.S. average.


Gas should cost more, not less, but the government should be taking the extra dollars, not rigging the system to benefit the private sector.

Posted by Orrin Judd at June 19, 2005 12:49 PM
Comments

California always rigs the system to benefit private-sector producers, just like they rigged their electric utility laws to make Enron rich.

It just so happens that to swindle gullible voters through demagoguery and demonization, you have to wipe out the competitive market process, which leaves some lucky survivors to rake in the cash.

Posted by: pj at June 19, 2005 1:17 PM

This is getting boring. Why you think the government should get the extra dollars, and what possible precedent there might be for them not squandering them on statist foolishness (like "mass" transit) is never explained. What a joke. Or would be, except that missing humor aspect.

Posted by: Kirk Parker at June 19, 2005 1:27 PM

Heavens no, don't let the government have the extra profit. Let the refiners and oil companies keep it, invest it, pay it in dividends, hire people for new ventures, etc.

I mean, you want the California Teachers Union to get their hands on that money?

Posted by: Steve White at June 19, 2005 1:53 PM

No, the Feds.

Posted by: oj at June 19, 2005 2:22 PM

Tried to buy any koa wood lately?

Posted by: Harry Eagar at June 19, 2005 3:31 PM

We've got more wood here than you can shake a stick at.

Posted by: oj at June 19, 2005 3:35 PM

Not koa.

Posted by: Harry Eagar at June 19, 2005 5:14 PM

Koa's not unique.

Posted by: oj at June 19, 2005 5:45 PM

Say rather that it has substitutes -- rosewood or mahogany or sitka if you're a guitar maker, for example. Most commodities do.

Posted by: joe shropshire at June 19, 2005 5:59 PM

yes, is not unique.

Posted by: oj at June 19, 2005 6:05 PM

burf

Posted by: joe shropshire at June 19, 2005 7:11 PM

"Why you think the government should get the extra dollars, and what possible precedent there might be for them not squandering them on statist foolishness (like "mass" transit) is never explained."

Some times they spend it on weapons:-)

Posted by: Robert Schwartz at June 19, 2005 9:43 PM

Those are all in short supply, too, and none of them is a substitute for koa.

I wonder what it costs to lease a sugar bush this year. More or less than 10 years ago?

Posted by: Harry Eagar at June 19, 2005 10:49 PM

We're drowning in maple syrup.

Posted by: oj at June 19, 2005 11:12 PM

Harry, the West Coast is covered in sitka spruce from northern California to the Yukon. And yes, it is: you can't tell the difference in sound, and neither can I.

Posted by: joe shropshire at June 20, 2005 12:14 AM
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