I do not think so.
Governor Newsom has called a special session of the Legislature to consider his plan that focuses on a minimum requirement for gasoline dealers. The idea is that if a spike occurs in California due to low availability, some government official or organization would allow – or require – the release of inventory, which would increase supply and lower prices.
This is from Severin Borenstein, “Can More Finance Solve California’s Gasoline Price Crisis?” Energy Institute blogSeptember 23, 2024.
I think almost any economist who thinks about the rising prices of durable goods like gasoline will immediately think about futures markets. Why don’t futures markets take care of the problem? And even if there are no futures markets, if oil producers can expect the price to rise, why don’t they reduce sales now to make more money when the price rises?
Borenstein is an economist who thinks a lot about fuel prices. But read his post and you won’t see anything about futures markets. Maybe there is a reason and maybe the reason for not working in this case is obvious to him. But it doesn’t seem to me.
He continues:
If implemented carefully and without political interference, the inventory requirement can help consumers. California’s unique combination of gasoline and limited sources of supply makes it vulnerable to supply disruptions, especially in the fall when refiners typically perform maintenance that reduces their output. Those events boost budgets for low-income working families. And due to the increasing concentration of ownership of the refineries that produce our compound, it is not at all clear that the producer has a strong market incentive to increase supply, which would cause the price to decline.
So Borenstein agrees that regulation to replace seemingly non-existent futures markets needs to be “applied carefully and operate without political interference.” In other words, it won’t work. Why? Because the people who would use this law and use it do not have the motivation to do so carefully.
Later, Borenstein writes:
Others who weigh in with the inventory requirement — including the governors of Nevada and Arizona — say withholding the books would reduce supply and therefore raise prices. This argument, however, ignores the whole point of inventories, which is to find them when the system has sufficient production capacity, and to find them when the system may be short. Retailers will meet the minimum inventory requirement by building stocks ahead of times when the system may be disrupted, whether due to high demand or reduced supply. The price increase caused by inventory build-up in periods of low demand is likely to be small, while the price drop when there is a shortage may be large.
That’s a good idea, but why aren’t companies doing that already. What special knowledge does Governor Newsom have about the oil industry that the oil producers don’t?
To his credit, Borenstein points out some problems with the proposed regulation:
My concern is with this proposal [sic] that real-world implementation may be more difficult than legislators or their supporters seem to admit. Someone needs to set and enforce the rules for inventory requirements: what counts as inventory (assembly parts? imports coming soon?), what is the sales basis for calculating the required amount (fuel sales amount? CARB fuel sales? refinery capacity?), what is required inventory ratio for sales?
More importantly, someone needs to decide when to waive the requirement to deal with price increases, how to ensure inventory is cleared, and when to require retailers to rebuild their inventory.
This leads to my other concern, that the inventory will be handled in an unpredictable and political way. If the governor or other political appointee makes the call on when to release the inventory, it can end up being used for political gain, including suppressing fuel prices even when there is no evidence of a shortage of supplies (as happened with the National Strategic Petroleum Reserve). That is why any inventory requirement must come with a predictable schedule for when it will be released – for example, if California spot prices exceed Gulf Coast prices by a certain amount – or with an independent Board that can make a decision.
These are all good, well thought out concerns. Hopefully, they will be enough to talk to other supporters, or those on the phone, to oppose this regulation.
Source link