…being stupid. A little over 8 months ago, Hawaii effectively put a price cap on the wholesale price of gasoline.
Like almost all price caps this cap did not due what it was intended to do. With a hard soft cap that uses pricing lags on gasoline in the wholesale market this will lead to a shortage if the wholesale price goes above the wholesale market clearing price. This in turn would lead to a price increase in the retail markets which would ration whatever gasoline is left.
This last month gasoline prices in Hawaii rose by about $0.45. Yes, in just one month the price went up by $0.45/gallon.
Gov. Linda Lingle on Friday signed a bill to suspend the state’s wholesale gasoline cap, welcoming its suspension, but criticizing aspects of the bill inserted by supporters of the cap. In a statement, she called the cap a “failed experiment to artificially control gas prices” that bound refiners and distributors by an artificial formula.
Guess, the Nixon price cap failures and the fiasco in the California electricity markets were not enough to convince Hawaiian politicians that such a policy was a bad idea.
On a side note, the comparison of gasoline prices in Hawaii and Los Angeles maybe somewhat of a red herring, IMO. The two states may have different requirements as to the blend of gasoline that can be used in each state. Thus, the gasoline in Hawaii is not a substitute for gasoline in Los Anegles or anywhere else in California and vice-versa. Somebody who says, “Yeah gasoline is expensive here in Honolulu, but it isn’t as high as Los Angeles” is very much like somebody saying, “Wow, the price of beef here is expensive, but at least it isn’t as expensive as ice skates in Florida.”
Update: I initially thought the price cap in the wholesale market was a hard cap, i.e. a price that is fixed at a given dollar amount. In actuality, Hawaii had a soft cap that used a formula that was based on historical prices. While this isn’t as potentially bad as a hard cap it can still lead to shortages. If the formula leads to a price of say $2.00 in the whole sale market and the whole market clearing price is $2.15 then there will be a shortage.
Soft caps can help in certain circumstances. In CA during the electricity crisis a soft cap was used. The price was capped at the marginal cost of the producer who cleared the market. Here is an example, suppose the market demand is 1,000 MW for a given hour. There are 6 producers with marginal costs of $30/MW with 300 MW, $40/MW with 400 MW, and 2 with $50/MW and 250 MW each and the remaining producers all have a marginal cost over $50. In this case the price would be set at $50 and bids would be accepted from the producers who have a marginal cost below that cap. This would mean that there would be 1,200 MW available for the system to use. In this situation witholding load limits the impact on the price.
