Aloha, Price Control

From IBD:
Posted 5/8/2006

Regulation: The governor of Hawaii has signed a law suspending price controls on wholesale gasoline sales because the state policy has been a failure. And lawmakers didn't see this going in?

Hawaii's law, which took effect on Sept. 1, has been characterized as a cap when in reality it was a control on the wholesale price of gasoline. A cap establishes a ceiling, the highest price allowed by law, while the controls authorized by the now-suspended law set the wholesale price.

That price was divined through a convoluted formula that used the price of gasoline in Los Angeles, New York and the Gulf Coast and, maybe — who knows? — of pork rind futures traded in the pits of some rural commodities exchange.

Trouble is, that arrangement or any other political kitchen recipe makes it impossible to know what the real price of gasoline is. The true price could be higher, though that's not likely, since retailers were not subject to price controls or caps and were charging what they had to to make a profit.

Or it could be lower. Without government interference, the market might set a lower wholesale price. Competition would then force the retail price, the only one motorists really care about, to fall below what Hawaiians have been paying.

Hawaii legislators left Gov. Linda Lingle the option to reimpose price controls if she thinks it necessary. But to her credit, she said she "can't see any condition that I would reinstate the gas cap."

Shame on the Republican governor, though, for suggesting before she signed the bill that the legislature should think about placing limits on oil company profits in the islands.

The oil industry won't put up with a government that punishes profits and would be within its rights to simply pull out if the state levied penalties. Any companies that might remain in the state would have to charge high prices to ensure the shortened supply would not be depleted.

Don't think it couldn't happen. Companies have a history of leaving cities, states, even countries, when the cost of doing business becomes prohibitively high.

Penalizing profits would also cause pain beyond Hawaii's scenic shores. With less in the bank, oil companies would have to cut back on investments that increase production. Lower production would lead to lower supply and higher prices.

Why Hawaii's legislators went to all this trouble is beyond us. A much easier way to lower pump prices would be to cut the state's 60-cent tax — the nation's second highest — on each gallon sold.