Price Gouging Bill

Extracted from yesterday’s OPIS report:

Congressional Democrats have said that they want to get an anti-price-gouging bill to the White House by Memorial Day and there is no indication of any presidential veto in the works.

There are two bills pending. One, sponsored by Sen. Maria Cantwell, D-Wash., has already passed the Senate Commerce Committee and could come to a floor vote this coming week. Rep. Bart Stupak, D-Mich., is pushing a near-identical measure in the House.

Both bills contain draconian penalties for violations. For example, Stupak’s seeks up to $3 million/day in civil fines. The criminal penalty is $150 million for a company, $2 million and up to 10 years in jail for an individual. Cantwell’s bill is less harsh — a $500,000 fine for a small, independent marketer and $5 million for other suppliers.

Both measures call for enforcement by the Federal Trade Commission and allow state attorneys-general to conduct sweeping investigations of any marketers suspected of “taking unfair advantage of unusual market conditions (whether real or perceived).”

Cantwell’s measure requires a presidential declaration of an energy emergency before it takes effect, but Stupak’s just makes it an offense to price-gouge at any time. Neither does it define gouging.

“There needs to be a threshold for an investigation, say, if a retailer raised prices 30% above competitors,” says Gilligan [Dan Gilligan, exec VP with the Petroleum Marketers Assn. of America]. As currently written, marketers would have three choices during a shortage if Stupak’s bill passes – cut prices, keep prices the same, or turn off their pumps. “Most will opt to turn off their dispensers,” Gilligan predicts.

You will never catch me accusing Congress of reallying thinking through the potential consequences of the policies they enact. What they are doing here is to ensure, in the case of an emergency, that no gas is available to anyone at any price. If I am retailer, and gas suddenly becomes very scarce, I no longer have the ability to quickly raise prices to stem demand. So, I either run out of product, or turn off the pumps. Imagine a situation like that during a hurricane evacuation.

9 thoughts on “Price Gouging Bill”

  1. Hi Robert,

    I agree that the bills are stupid, but your comment about the retailers purpose/goal seems a bit off to me: “If I am retailer, and gas suddenly becomes very scarce, I no longer have the ability to quickly raise prices to stem demand. “

    I think, in the neo-liberal market model, the goal of the seller is to maximize profit, not sustain supply in the face of increased demand. The bill’s bad for seller’s because increased demand allows them to increase price, which allows them to maximize profit.

    Increased prices will, in the long run, have the effect of decreasing demand (if the demand is price-sensitive) which will have the effect of rationing supply via price. If the sellers can’t increase prices the market can’t ration supply.

    I think it’s a bit idealizing to suggest the gas station on the corner is motivated to sustain supply, rather than maximize profit. I like the gal who runs the gas station on the corner and think she’s an honest dealer, but if she’s trying to sustain supply, it’s only because she’s decided that doing so will maximize her profits.

  2. “The characteristic feature of the market price is that it tends to equalize supply and demand.”

    –Ludwig von Mises, “Human Action,” 1949

    I would agree with pudentilla in that the corner gas station does not care about rationing supply, however his actions in raising or lowering prices have that consequence.

    In the case of rising profits, the station owner values his inventory at the marginal replacement cost. As prices rise, he marks up the price to replace the gallons he is selling, making money on each gallon sold. As prices fall, he is forced to reduce prices, losing money on each gallon sold.

    I don’t believe in ANY gouging laws, even during natural disasters. Price indicates scarcity of supply and redistributes supply where it is needed most. The local lumber yard sells plywood for $15 a sheet. Lets suppose I need 10 sheets of plywood to cover my windows to avoid damage. My insurance policy has a $2,000 deductable on wind damage. If in a hurricane I think there is a 50-50 chance I might suffer a loss in a hurricane, then I could pay up to $1,000 for the plywood and still come out ahead. So if the lumber yard marks the plywood up to $50 a sheet is that gouging? I paid $750 to avoid a $2,000 loss. I’m better off, the lumber yard is better off, the insurance company is better off, everyone wins.

    Now suppose I live outside the area affected by the hurricane. My local lumber yard sells plywood for $15 a sheet, but I have a truck that can transport several hundred sheets of plywood. So I load up the truck and head to the hurricane area to sell my plywood at $50 a sheet. Would that make me a price gouger? I am not forcing anyone to buy my $50 plywood. Again, in my example above, I would be better off buying 15 sheets of plywood at $50 then to have no sheets of plywood at $15.

    Yet politicians would put such price “gougers” in jail.

  3. When there is a temporary shortage, what I want most is available supply, even if at a very high price. I would prefer my retailer raise the price dramatically, in order to maintain supply. I trust my retailer to make that judgement. By doing this my retailer makes more profit, and makes his customer happy. Most of the people I talk to feel the same way.

  4. I think, in the neo-liberal market model, the goal of the seller is to maximize profit, not sustain supply in the face of increased demand.

    The previous posters have captures my sentiments. In times of shortage, price needs to rise to choke off demand. I may like to go visit my Aunt Bettie in the midst of this emergency, but I can put that trip off. However, if you have a dying relative, the price is not going to stop you. But you will be glad that it stopped me, and others whose need was not critical, from draining supplies.

    Cheers, Robert

  5. I was also going to make the emergency fuel argument.

    I think what people complain about are the temporary dislocations that rapid change in price make on their lives.

    However, people in a market economy will adjust – even in the short run. Lower wage workers may request longer shifts to avoid frequent commutes. Trips to the theater or video store might be replaced with videos by mail or movie downloads. Shopping will be combined with commuting. I have been riding my bike to the store for small purchases. It actually saves me time as I can use the bike path and avoid local traffic.

    We might complain about prices, but we adjust voluntarily. Price gouging legislation will lead to an involuntary adjustments. Service stations will just run out of gas – leaving consumers with much fewer alternatives.

  6. You guys know where this is coming from, right? How long do you think the lawyers were going to watch those record Big Oil profits without figuring a way to get a piece of the action?

    This bill is perfect for that: Long oral arguments (paid by the hour, of course) about what constitutes gouging, how it is affecting the lives of old ladies, etc. etc.

  7. It’s all just posturing for the voters. Everyone in congress knows W won’t sign either of these bills.

  8. I don’t know, Doug. As it says:…and there is no indication of any presidential veto in the works.

    W has so far been pretty selective in his use of the veto pen. His preferred strategy is apparently to issue lengthy signing statements, which I find a bit underhanded, but unfortunately also typical.

  9. More than half of the 300+ US refineries that were in operation in the early 1980’s have closed their doors…”. The thing that Congress and the news media isn’t talking about is why all those refineries closed permanently.

    Although there are probably several different reasons, I believe the main reason is from the Tier II Regulations that were passed by the EPA. Most people (including those in Congress) don’t realize the cost that each refinery had to invest to meet the Tier II Regulations. In general terms, these regulations state that gasoline must have less than 30 parts per million of sulphur and diesel fuel must have less than 15 parts per million of sulphur. Previous requirements were 300 ppm for gas and 500 ppm for diesel.

    To meet the new regulations, each refinery was required to spend huge amounts of money, from tens of millions for smaller refineries to hundreds of millions for larger refineries. Refineries had to make a choice, spend the huge amounts of money to upgrade and stay in business or not spend the money and shutdown.

    For smaller refineries, the profits at the time didn’t justify the huge investment to upgrade so they stopped producing gas and diesel fuel. Most of these refineries became storage terminals because, without the upgrades, they could no longer sell their products and the cost of closure, which includes demolition and clean-up, prohibited them from actually closing. In other words, the EPA sees them as an operating facility but they no longer produce gasoline and diesel fuel. In the early years of some of the refinery closures, other larger refineries de-bottlenecked (increased capacity) which offset the loss of capacity from the closed refineries. Once these large refineries increased capacity as much as practical, other smaller refineries were still continuing to close.

    Eventually, we end up where we are today, total refinery capacity in the USA is less than current demand. I can remember in the early 1990’s when gas was cheap and refineries were losing money during certain times of the year because there was an oversupply of product. Where were the Congressmen and news media back then. I never heard one Congressional request for an investigation back then into why gas prices were so low. Another thing about the Tier II issue is that the cost to meet the regulations was so huge, the refineries that did make the investment were limited on the money they could spend on other capital improvements. These are the improvements to become more efficient and more reliable.

    Most refineries took about 3 to 4 years from start to finish to meet the Tier II Requirements. During this time, the refineries continued to operate but were not making the normal improvements that they would have without the Tier II cost. Most people don’t realize that process units in refineries must take turnarounds every 4 to 5 years. This must be done to operate safely and maintain equipment properly. Depending on the refinery, some schudule turnarounds for different process units during different years to minimize production downtime and limit their exposure to market conditions. Most refineries try to schedule turnarounds during the time of year when they believe demand and margins will be at their lowest. This is usually during the spring and fall. However, during the last few years, demand has been continually increasing even during the spring and fall. Imports is another issue. I believe that the imports from Europe still have a 50 part per million sulphur specification.

    This means that every gallon of imported gasoline must be blended with gasoline that is less than 30 ppm so the level at the gas pump meets the EPA required 30 ppm. Because most refineries don’t make a gasoline blend that is significantly lower than 30 ppm to blend with the 50 ppm imported gasoline, imports will continue to be limited until Europe requires the same 30 ppm specification. Regarding ethanol, must people don’t understand that it takes more energy to make a gallon of ethanol than it does to make a gallon of gasoline and ethanol doesn’t have the BTU value of gasoline.

    In other words, you would have to use approximately 20% to 30% more E85 gasoline to go the same distance you would with 100% gasoline. E85 gas is a mixture of 85% ethanol and 15% gasoline. Another thing most people don’t realize is that the gasoline blend that is used to make the E85 gas and the 10% ethanol blended gasoline must start out at a higher octane rating than the 87 octane that you buy at the pump. When MTBE was used, it had an octane rating around 100. MTBE could be blended with a low 80 octane blend and the final product still ends up with the 87 octane. The higher the octane blend stock the more expensive it is to make. That’s why 93 octane premium grade is higher than 87 octane regular gas.

    Back to the EPA, I believe there is talk that they want to reduce the sulphur requirement to below 10 ppm in the future. In this regulation gets passed, the remaining operating refineries will have another huge investment and the cycle will start all over again. By the way, lowering the sulphur in gas and diesel doesn’t make your vehicle go any farther on a gallon. Eventually, you get to a point of diminishing returns. In other words, the huge investments required to meet the regulations never justify the end results. I believe that the Supreme Court has ruled that the EPA does not have to consider cost in its decisions when passing regulations. Maybe I don’t understand how the EPA works but it seems that they actually violate the Constitution of the United States since they make their own laws, they pass their own laws, and they enforce their own laws. I thought this country was set up with three branches of Government so one body wouldn’t be able to have all of the power. Regarding one of Gas Guys comments about the cost of building a new refinery, he was a little low. The cost in today’s dollars to build a 200,000 barrel per day refinery would be about $5 billion to $7 billion and it would take about 5 to 7 years assuming you could get the necessary EPA permits in a timely manner. With Congress talking about passing Windfall Profits Taxes and President Bush talking about reducing demand by 20% in the foreseeable future, I don’t know of any company that would be considering building a new refinery. If you were a “widget” manufacturer and there was a widget shortage, you would want to make as many widgets as you could if they were selling as fast as you made them at a price that was higher than the previous 5 year period. However, if there was talk of a “Widget Tax” for future profits and the government was going to take action to reduce the demand for widgets, would you as a widget manufacturer be willing to spend billions of dollars without knowing if you will ever get a return on your investment?

    By the way, I saw an article the other day that talked about the Kuwati Government cancelling their plans to build a 600,000 barrel per day refinery. The article stated that the estimated cost went from an earlier estimated $6 billion to the latest revised cost of $15 billion and that was without the US EPA being involved.

    The costs with the EPA are estimated at 50 cents per gallon by

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