A Federal Price Gouging Law: Let’s Not and Say We Did

Christine C. WilsonMarch 30, 2006

2

Winston Churchill On Supply and Demand

• Allowing the laws of supply and demand to reestablish market equilibrium is the worst way to respond to a supply shock . . .

• Except for all of the other more interventionist mechanisms that have been tested or proposed

3

Prices Go Up

• Hurricanes Katrina and Rita severely limited the supply of crude and light refined products

• Simultaneously, demand increased due to uncertainty about future supply availability

• The decrease in supply coupled with an increase in demand meant an increase in price that receded with the floodwaters

4

Prices Go Down

• Prices following Katrina’s landfall increased for less than a week, and then declined

• Hurricane Rita led to increases in prices in some, but not all, areas of the U.S.

• Prices returned to pre-hurricane levels rapidly• Close scrutiny by State AGs found only

isolated violations of state price-gouging laws

5

Markets Work (Really)

• Companies worked quickly to restore domestic production and distribution capacity

• Industry members dramatically increased imports of finished products

• Companies sought and obtained EPA (fuel specification) and Jones Act waivers

• Refineries maximized gasoline production• Supplies were rerouted to affected areas• Prices moved within the range predicted by demand

elasticities and the magnitude of the supply shock

6

If It’s Not Broke . . .• Price caps necessarily interfere with the

natural ebb and flow that leads from one equilibrium to another

• Instead of higher and lower prices, we get higher transactions costs in the form of long lines, supply shortages, and private caches

• Welfare losses attributable to the inevitable by-products of price controls are significant (see, e.g., Frech and Lee)

7

Hayek’s Lament

• We could rely on firms facing the pressure of market forces to make decisions about investment, inventories, and price . . .

or

• We could employ command and control regulation to

– Determine levels of inventories– Require installation of costly back-up facilities– Cap returns to be had when prices increase

8

Myths Aboutthe Petroleum Industry

• The oil industry has artificially constrained capacity

• Refiners manipulate existing capacity to raise prices

• Oil industry mergers have increased prices• This industry is the most profitable in the

history of man

9

Some Ideas That Would Work

• Limit the number of boutique fuels to facilitate shipments across regions

• Modify the EPA waiver process to quicken supply responses

• Expedite the Jones Act waiver process to provide greater supply flexibility

• Remove barriers to expansion of refining capacity

10

Conclusion

• Market forces provide the most efficient means for addressing supply shortfalls

• Pending proposals would generate inefficiencies, ultimately imposing additional costs on the very consumers they are intended to protect

• Instead, legislative proposals should enhance the ability of industry members to respond quickly to supply disruptions

• Creating unique antitrust rules for this industry is unnecessary and would constitute bad public policy