A Federal Price Gouging Law: Let’s Not and Say We Did Christine C. Wilson March 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 About the 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