This Just in: Free Markets Work
Good thing the Hawaiian Public Utilities Commission doesn’t run the U.S. government.
In August, that body decided to cap gasoline prices in Hawaii—where gasoline prices are the highest in the country, as one might expect given the fact that everything else in Hawaii costs more than on the mainland—to teach those nasty, price-gouging oil companies a lesson in the wake of hurricane-related price spike.
Such a gas cap sounds like a good idea, I suppose, unless you were around in the 1970’s, when the U.S. government decided to cap prices on crude oil in the United States and helped create a long-term oil crisis that didn’t get resolved until Jimmy Carter signed the law deregulating crude oil prices.
Carter did the right thing: by freeing oil prices to market-clearing levels, he exposed U.S. consumers to the fact that oil prices had gone up—which, naturally, caused consumers to implement all sorts of energy-savings techniques. He also, however, unleashed a short-term inflationary spiral resulting in the ultra-high interest rate policy of Fed Chairman Paul Volcker designed to crush that inflation.
Energy demand fell and so did oil prices, which in time set the stage for a disinflationary economic environment that triggered one of the greatest bull markets of all time.
Unfortunately for Jimmy Carter, he was not around to see the great bull market, because American consumers had voted him out of office owing to the inflationary spiral and the interest rate spike triggered by his decontrol of oil prices.
Like Richard Nixon’s wage and price controls back in the 1970’s, the 2005 Hawaiian PUC’s response to the hurricane-inflicted oil supply disruptions was sorely misguided, as proven by the recent price trend at my local Gulf Station.
After hitting highs around $3.25 a gallon for unleaded regular a month or so ago, the price at the Gulf Station has been falling steadily. More recently it’s dropped like a rock: just yesterday it was down a dime, from $2.67 a gallon to $2.57, overnight.
Seems rising gasoline and deisel and jet fuel prices caused total oil product demand in the U.S. to fall more than 3% year-over-year in the last month, reversing a steady upward climb over the last decade that helped put us in the position whereby world oil supply was barely keeping up with demand.
Combine that demand reduction with the surge in supplies shipped over from Rotterdam and elsewhere to make up for the lost hurricane-related supply; and you get lower prices at the Gulf Station in New England.
Now, $2.57 a gallon is still up 20% from last year—and U.S. consumers are still not out of the woods.
But they’re a lot better off than the dark post-hurricane days when the folks in Hawaii decided to do something about the free market price of gasoline.
Jeff Matthews I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.