If it Passes, I'm Turning Off the Pumps

Per the WSJ($):

Last week the House of Representatives expressed its
collective outrage over high gas prices by voting as a herd, 389-34, to
make gasoline "price gouging" a federal felony.

Really. This command and control legislation reads
like the kind of law passed by the old Soviet Politburo. If an oil
company is found guilty of charging a "grossly excessive" price for
gasoline, it could face a $250 million fine and its executives face
imprisonment. Even neighborhood service station owners could be
sentenced to two years in jail and a $2 million fine for the high crime
of charging too much at the pump.

So what is price gouging?  What is the objective standard that we can all apply to our behavior to know clearly, before the fact, if our actions are legal or illegal?

One small problem is that no one in Washington can seem to define what
constitutes price gouging. Under the House legislation, the bureaucrats
at the Federal Trade Commission would define a "grossly excessive"
price and then, once prosecutors charge some politically vulnerable
target, juries across the country would decide who's guilty and who's
not. A Senate version, sponsored by Maria Cantwell of Washington,
contains terms like "excessively unconscionable price increases" and "a
gross disparity" between the normal price and the price during a
shortage or an emergency.

If this passes, there are two, and only two, ways this can be enforced:

  1. The standards remain incredibly vague, such that there is no objective way to know if you are guilty of a felony until you are in front of a jury listening to the verdict.  Some juries will may decide 6 cents over cost is gouging, others may decide its 50 cents.  But you won't know until you hear the jury's verdict.
  2. In an effort to deal with the problem of having no objective standard in advance, a federal bureaucracy is created to set detailed lists of allowable prices, essentially subjecting retail gasoline sales to price controls.  The prices set by regulators will either be above the price the market would have set, meaning that the price-setting is a meaningless waste of money, or it will be less than that set by the market, such that gas shortages and lines will ensue. 

These are the only two choices.  You only have to look at past history with oil price controls, airline regulation, railroad regulation, wage and price controls, etc. to know just how bad this will end.

As Jeff Flake of Arizona, one of the brave 33 no votes, tells us: "None
of my colleagues actually believes this will reduce prices, and many
realize it will ultimately make shortages worse." Yet this is what
happens when petrified politicians allow mob rule to trump economic
common sense.

My company operates several retail gasoline outlets.  We at best break even and probably lose money on the gas, but we continue to sell it to bring people into our stores and because there are so few other local retailers (we are in very rural areas).  If this law passes, I am just not going to risk going to jail because some economically ignorant jury in the future can't figure out that gas is more expensive in rural areas or because some tragic and sympathetic figure decides to sue me.  I'm out.  And if someone observes that in the rural areas in which we operate, consumers will probably be worse off if we exit, then Congress should have thought of that before they passed this Marxist-populist legislation.

Up to now, it was for this and only this reason that I tended to vote Republican more than Democrat.  I held my nose and looked past family-values-based censorship and stupid drug law enforcement and regulation of sexual choices and xenophobic immigration policies and all the rest of the conservative baggage solely because Republicans tended to pass less stupid dumbshit socialist destructive economic regulation than the Democrats. 

I've always told people that as a libertarian for whom neither party is internally consistent, you just have to pick the issues you vote on.  If I was gay or needed frequent abortions or was Howard Stern, I would vote Democrat.  Trying to run a small business against a growing tidal wave of government taxes and regulations, I often vote Republican.   If every Republican was (were?  I always get that subjunctive thing mixed up) like Jeff Flake, I would continue to vote for them.  Right now, though, I may go back to sitting on my hands or vote for whatever goofy person the Libertarian Party has put forward.

I just can't figure out who is making all these imagined profits.  I don't know any retailers of gasoline who make any real money on gasoline sales.   For god sakes, typical gasoline margins are 5-12 cents a gallon, and the credit card processing fee alone at $3 a gallon uses up 9 cents of that!  And even the great Satan ExxonMobil, in their greatest most profitable quarter ever, made a profit of 9.7% of sales, barely above the US industrial average and well below that of most well-known consumer products companies.  If anyone is making profits they don't deserve, it is Hugo Chavez and the Saudi princes, but I don't think there is much we are going to do about that.  And, if one is concerned with pricing in emergencies, I have actually pleaded for gouging when the alternative was not being able to find gas at all.

If Congress really wants to do something about gas prices, it could consider:

  • Reducing gas taxes, which take more our of a gallon of gas than any private entity makes in profit
  • Opening up exploration in the ANWR and on the US east coast
  • Making it easier to build new refining capacity in the US
  • Restructuring rules to reduce the number of EPA-mandated unique local gasoline blends are required
  • Remove the 40+ cent tariff on important ethanol, which federal rules effectively require in gasoline and which is in short supply domestically

By the way, in the past several weeks, Congress has rejected legislation on every one of these items in favor of this silly gouging legislation.  The WSJ offers this final thought:

If service stations are guilty of extortion because their prices are
rising more than their costs, then are we to have pricing police
preventing homeowners from selling their houses for two or three times
what they bought them for, or movie theaters from charging $6 for
popcorn that costs 25 cents to produce, or Barbra Streisand from
commanding a $1 million fee for a single performance? Now that
Republicans have surrendered to the political expediency of price
controls on big oil, they won't have much standing to stop Democrats
from imposing price ceilings on pharmaceutical drugs, school supplies,
medical equipment, and the like.

  • faultolerant

    I'm constantly amazed at how those idjits inside the Beltway continue to drive the country into the ground. I had an argument with a nitwit at the barbershop recently: I drive a big V8 getting 13 MPG - on a good day, downhill, with a tailwind. I also drive like an overcaffeinated bat out of hell. I'm gittin ready to trade up to something with more power and poorer mileage.

    This nitwit began to castigate me for gas prices, SUV's, ozone depletion and erectile dysfunction. (Like my V8 gave him a case of shrinky winky). I asked him how my $100 a week in gas was his issue....of course, it was the *evil* gas companies (and my V8) that cause all manner of social ills.

    What business is it of Congress how much gas costs? If I can get it cheaper at Station A, that's where I'll go. If Station B wants to charge $0.20 more per gallon, they'll lose business to Station A. Do I smell Free Market here? If I want to buy a gas hog - and have to pay the pumper (piper?) for it - who's business is it?

    I'm so thoroughly disgusted with the ecophreaks, busybodies, demoncrats, republinitwits and congresscritters I could just scream. Of course that would add additional CO2, so someone from Greenpiece would accuse me of depleting the ozone. ARGH!

  • Gas Price Stupidity

    Coyote Blog reports on some bills making their ways through Congress that may make charging "grossly excessive" (the House version) and "excessively unconscionable" (the Senate version) prices for gas a crime. What do either of those mean? I don't know...

  • Rachel

    I do happen to be gay, and it is hard to know who to vote for because the parties are so internally inconsistent and one wants to legally mug me while the other would gladly have me strung up for being "unnatural." Oh well, good luck on deciding who to vote for.

    "If every Republican was (were? I always get that subjunctive thing mixed up) like Jeff Flake, I would continue to vote for them."
    The reason you are having so much trouble with this is that both are now used and for the most part considered right. It used to be that only "were" was considered right, but now the English language is in one of its transitions, and now we are moving away from "were" being the only grammatical choice to also (and maybe one day only) having "was" as the right tense.

  • Matt

    As Ayn Rand like as it is, I'd actually like to see a massive shutdown of gas stations, refineries, or oil pumps. Something like a reverse boycott that misguided communists have been proposing. I think that it would take something that drastic to fundamentally illustrate what the government is truly doing. Gas belongs to whoever purchases it. When it's in the tanks at the gas station, it belongs to that owner and its up to him whether he wants to sell it (and if so, at what price), keep in those tanks, or burn it. To force someone to sell it or to dictate their price, is essentially stealing some (or in some cases all) of that person's ownership of that property.

    Given the situation that the government is putting everyone in the entire supply chain, I personally would be vindictive and burn all the gas that I had (provided I had enough money that I could survive such a statement). I think such a move, though it certainly would inflame the passions of those who want to nationalize the oil industry (which is frankly scary), which create a more vivid illustration of just who provides a service to whom.

  • nick d

    I think some in congress are trying to repeal the ethanol tarriffs (http://www.lincolncourier.com/story.asp?SID=1397&SEC=8). Of course, I'm pretty sure the factory farm companies of the midwest are opposing their sweet deal.

    I wonder if in an emergency they had fuel to sell, but they being bidded up by random people wait, would they sell to the person who wanted to buy it the most (offered the most $), or just not sell it at all to avoid "gouging" anyone. I think the seller would just not sell it at all and horde it. Which means the demanders are just going to go for their guns and steal/confiscate/"appropriate" it. But I guess no one is being "gouged" then....

  • Atlas May Shrug

    Increased regulation helps big corporations improve market share, and will only end up creating higher prices and harder-to-find gas for consumers. I said before that this problem will only improve when individuals start to see government as the prob...

  • Max

    Carter redux.

  • TC

    The attys in our congress will NEVER get anything done FOR the People! They are too busy padding their own trust accounts and such.

  • outahere

    Careful, denying gas to customers could be construed as price gouging! You'll be raising the cost for those who are 'dependent' on you for fuel supplies.

  • David

    Re:consider:

    Opening up exploration in the ANWR and on the US east coast
    Making it easier to build new refining capacity in the US

    If it were your money would you really invest billions in those operations, knowing that what one Congress passes, another takes away? Or that two years from now, President Hillary, or John Kerry, or Al "Earth in the Balance" Gore might take a different stance on producing plentiful, cheap gasoline?
    If Exxon/Mobile is making "record profits" in the current market, why risk anything on such fickle policy? They'd be better off in Bolivia...

  • JohnDewey

    Great post, Warren! You've helped me understand the full implications of this outrageous proposal.

    I only disagree about reducing the gasoline tax, which is basically a user fee. 80% or 85% of the tax funds highway building and maintenance. If we can't eliminate government owned highways (a different issue), the gasoline tax seems the cheapest and fairest funding mechanism. That tax has not been adjusted for inflation or for increased fuel efficiencies.

  • JohnDewey

    Great post, Warren! You've helped me understand the full implications of this outrageous proposal.

    I only disagree about reducing the gasoline tax, which is basically a user fee. 80% or 85% of the tax funds highway building and maintenance. If we can't eliminate government owned highways (a different issue), the gasoline tax seems the cheapest and fairest funding mechanism. That tax has not been adjusted for inflation or for increased fuel efficiencies.

  • dearieme

    I've been wondering why our British politicians - ever prone to populist or socialistic stupidities - have not done something like this. Suggestion: our retail gasoline prices are less sensitive than yours to the market price of crude oil, because we already pay much more tax on gasoline than you do.

  • Matthew

    Well I think the reason for things like this is that we never see the market mechanism in the gas industry. I've never driven through a block of gas stations and seen competitive pricing. They're always the exact same price. Perhaps if you drive 50 miles to the next city you will see a different price, but never locally. Why isn't the market working there? I don't know.

  • JohnDewey

    "I've never driven through a block of gas stations and seen competitive pricing. They're always the exact same price."

    What would you expect to see when retailers are competing on price? If I own a gasoline station on a busy corner, I'm going to immediately match the price change of the station across the street.

    For what it's worth, I rarely see the exact same gasoline price all over the Dallas suburbs. The Murphy stations outside Wal-Marts are usually lowest, but also generally have queues. Valero and its subsidiary, Diamond Shamrock, are generally just a few cents higher but without the wait.

  • markm

    Mathew: Perhaps the market is working perfectly - with prices posted on huge signs at every gas station, operators know that being even 1 cent higher will send most of their customers to their competitors.

    First off, understand that they all sell the same stuff and pay the same for it. For all the different brands of gasoline out there, there are really only three kinds in any one town - the government-mandated regular, premium, and in-between mixes. (Drive to the next town, and it might be a different government recipe at a different price, but every brand still has to be the same.) Ignore oil company advertising, they know there's nothing special about their products and will quite happily buy and sell gasoline with the other brands to keep their stations supplied. Your Mobile station may actually be pumping Shell today, and the Shell station may be pumping Mobile next week. If one brand was delivering fuel for half a cent less, they'd probably get orders from every station in town until they ran out - and you'd have station operators trying to figure out if they could afford to throw in another half cent of their own money to take customers from the other stations, but soon after one of them does that, the others will notice a drop in their business, look at their competitors' signs, and rush out to match them.

    OTOH, when costs go up, they estimate the bare minimum price raise needed to stay profitable, and then keep an eye on their competition as everyone changes their signs.

    You don't get perfect price tracking like this for other products because most markets are imperfect. You have to walk into the stores to find the prices, and unless your time is worthless and you aren't burning gasoline to go to the next store, it takes more than a few cents price difference to make shopping around worthwhile. Different brands are actually different, so comparing prices also involves trying to estimate how much quality and feature differences are worth.

  • Matthew

    Well I certainly don't think companies are colluding, so I know price competition takes place. But we just don't see it as with other consumer goods. I know that there are windows where one gas station has 1 cent lower prices than the 4 other stations, but that window is so small that even though I fill up 3 times per 2 weeks I can't remember the last time I was lucky enough to be around during that short window. So I can understand why consumers are suspicious with what appears on the surface as planned gouging.

  • JohnDewey

    Sorry, Matthew, but I just don't see how stations matching the posted prices of other stations can possibly appear to you as "planned gouging".

    What exactly is "price-gouging" anyway? Is it charging as much as you can for the product you sell? Isn't that what we all do when we sell our homes? Isn't that what supermarkets do and restaurants do and E-Bay merchants do? I work for an airline, and I'm positive airlines sell their product for as much as they can. Why is it suddenly "price-gouging" when a gasoline station does exactly what everyone else does?

  • Sol

    I'm utterly dumbfounded at Matthew's "I've never driven through a block of gas stations and seen competitive pricing." Where the hell does he drive? He's never pulled into a gas station and then realized the place across the street was cheaper? I thought that was a universal human experience.

  • Matthew & others: there are some good papers on why different gasoline retailers often show the same price even when they are in hypercompetitive environments. In some markets with high consumer price sensitivity (e.g., ex-urban Canada) anecdotal evidence indicates that a one cent price disparity can mean losing 50% or more of your volume within a few hours, so the windows where prices are not matched are very short and most consumers see only a single price. The dynamics of the game mean that prices ratchet down slowly as retailers compete (but most consumers just see a single price at any one time) and then at some point margins have been cut too low and a fast restoration occurs (one leader resets to a new, higher margin). Nobody notices the slow decay but consumers are very aware of the fast restoration.

    Because consumers are so sensitive to the price of gasoline it makes an excellent loss leader - what other product could a supermarket draw so many customers with by discounting 40 cents off of a total purchase? Customers are already trained to scan the price signs out on the curb for the lowest price in town. Thus big retailers could theoretically sell at zero (or negative) margin and make it up on lift on in-store items.

    The upshot of these two phenomenon (perceived collusion during hypercompetition and the efficiency of some business models at zero gasoline margin)have led over a dozen states and provinces to pass minimum price laws that prevent discounting gasoline below a certain positive margin, often calculated to keep efficient independent service stations in business.

    Some references:
    http://econ-www.mit.edu/about/download_pdf.php?id=12
    http://economics.ca/2006/papers/0571.pdf