Monday, August 15, 2005

To Cap or not to Cap? Preferably Not to Cap

Bit of a debate starting in Hawaii on capping oil prices now that it has reached $65 a barrel.

News about Price caps always draws attention to their alleged need - prices must be going up - which could provoke a run to the nearest petrol station to fill-up, in case by the time a cap is introduced the price has gone up to $70, or the cap is not imposed and they go up anyway.

Those that can afford $65 a barrel, divided into gallons (since we went to litres, I have lost track of the comparative price per gallon) will continue to consume at the old rates; those that feel or fear the pinch will start to consume less.

Already, the price system should be kicking in, causing people to economise on their use of petrol, alternative fuel research programmes should start receiving favourable responses, and development expenditures related to alternative fuels likewise should attract more attention, and no doubt government departments will start thinking of uses to put their windfall tax gains as the pump price rises.

If the government cuts its tax take, this would add to the 'subsidy' effect of lower relative prices. US petrol (gas) prices are relatively lower than in the UK. From this we expect consumption to be higher per household (and higher depending on the proportion of high consuming vehicles that are driven). If the government (more likely in the UK) taxes what it call "excess profits", it will slow the search for alternative supplies or fuels (but it make politicians look good).

The Hawaii Reporter (freedom to report real news, Sunday 14 August) carries a short piece:

“Gas Caps Won't WorkLegislators Who Supported Caps on Price of Gasoline Need to Go Back to Economics 101” By John M. Corboy, MD, and a board member of the Grassroot Institute of Hawaii, writes:

“Some legislators just don't get it.

Price controls, like in the case of the legislators attempting to control the price of gasoline by imposing a cap on the wholesale price beginning Sept. 1, 2005, always distort the market.
Price caps lead to shortages or lower quality goods or services. It is hardly surprising that government meddling may now lead to higher gas prices, according to a recent report by the Public Utilities Commission. "Unintended consequences" as usual.

Adam Smith discovered over 200 years ago: Government regulation of the natural market place always harms consumers, directly in proportion to the degree of interference.”

Slight exaggeration, but Dr Corboy's is the right approach to price caps.


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