176 PETROLEUM TECHNOLOGY, ECONOMICS, AND POLITICS
be induced by healthy but reasonable profit margins, and that
the gasoline profits are largely unanticipated and unearned. As a
result, oil companies are reaping very large profits at the expense of
consumers, and maintain that price controls and /or windfall profit
taxes would simply redistribute wealth from producers to consumers without any significant effect on supply.
However, government intervention may improve overall economic efficiency if prices do not reflect total costs or if the market in
question is not competitive. No matter how imperfect markets may
be, government intervention poses new problems. Accordingly,
evidence that market imperfections exist is a necessary, but not sufficient condition for government intervention.
In gasoline markets, no evidence supports any market failure
claims in a manner that would support reduction of gasoline
prices. For example, the social costs associated with gasoline consumption that are not fully reflected in the price of gasoline at
the pump, but the implication is that market prices for gasoline,
compared to the prices in many oil importing countries, are too
low — not too high.
However, laws prohibiting retail gasoline outlets from pricing
gasoline below cost, such as a mandatory minimum markup above
a legally defined wholesale price, exist in many states. Several other
states have more general minimum mark-up laws that pertain to
gasoline as well as other products while other states prohibit vertically integrated oil companies from owning retail gasoline outlets.
The intended effect of such laws is to keep some entrants out of
the market such as (1) those companies that may sell gasoline at or
near acquisition cost in order to encourage traffic and thus sales of
other more profitable products, and (2) those companies that may
undercut the prices charged by independent retail operators. This
is to the detriment of gasoline consumers.
But crude and gasoline prices can diverge even in perfectly competitive gasoline markets. The temporary increase of gasoline prices
following Hurricane Katrina illustrates this point. Approximately
2 million barrels of refining capacity a day (approximately 11%
of total refining capacity in the United States) were shut down as
a consequence of the storm causing a disruption in fuel delivery
from Gulf Coast refineries. The supply of gasoline at retail outlets
greatly decreased and, hence, increased retail prices beyond what
might otherwise have been expected from the overall 2% decrease
in world crude oil production as a result of the storm. Furthermore,
be induced by healthy but reasonable profit margins, and that
the gasoline profits are largely unanticipated and unearned. As a
result, oil companies are reaping very large profits at the expense of
consumers, and maintain that price controls and /or windfall profit
taxes would simply redistribute wealth from producers to consumers without any significant effect on supply.
However, government intervention may improve overall economic efficiency if prices do not reflect total costs or if the market in
question is not competitive. No matter how imperfect markets may
be, government intervention poses new problems. Accordingly,
evidence that market imperfections exist is a necessary, but not sufficient condition for government intervention.
In gasoline markets, no evidence supports any market failure
claims in a manner that would support reduction of gasoline
prices. For example, the social costs associated with gasoline consumption that are not fully reflected in the price of gasoline at
the pump, but the implication is that market prices for gasoline,
compared to the prices in many oil importing countries, are too
low — not too high.
However, laws prohibiting retail gasoline outlets from pricing
gasoline below cost, such as a mandatory minimum markup above
a legally defined wholesale price, exist in many states. Several other
states have more general minimum mark-up laws that pertain to
gasoline as well as other products while other states prohibit vertically integrated oil companies from owning retail gasoline outlets.
The intended effect of such laws is to keep some entrants out of
the market such as (1) those companies that may sell gasoline at or
near acquisition cost in order to encourage traffic and thus sales of
other more profitable products, and (2) those companies that may
undercut the prices charged by independent retail operators. This
is to the detriment of gasoline consumers.
But crude and gasoline prices can diverge even in perfectly competitive gasoline markets. The temporary increase of gasoline prices
following Hurricane Katrina illustrates this point. Approximately
2 million barrels of refining capacity a day (approximately 11%
of total refining capacity in the United States) were shut down as
a consequence of the storm causing a disruption in fuel delivery
from Gulf Coast refineries. The supply of gasoline at retail outlets
greatly decreased and, hence, increased retail prices beyond what
might otherwise have been expected from the overall 2% decrease
in world crude oil production as a result of the storm. Furthermore,