Congresspeople, Being Idiots, As Always: Gasoline Price Edition
Mark Twain never grows old:
“Reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”
This came to mind when reading about the proposal of Rep. Katie Porter to impose some sort of price control on gasoline:
Since the beginning of recorded history–and that is not hyperbole–the stock government response to high prices is price controls. The Pharaohs. Hammurabi. Diocletian. And many other examples. And it continues through the ages to more recent history, e.g., rent control in NY starting in WWII, Nixon in 1973.
And the result is always the same: economic disaster. It is price controls result in real shortages: people standing in lines, empty shelves, etc.
Always. If price doesn’t clear the market, waste (e.g., time spent standing in line) will.
But politicians never learn.
Nancy Pelosi (who is old enough to remember gas lines–hell, she’s probably old enough to remember the Code of Diocletian, if not that of Hammurabi) is of course fully on board. Which is an illustration that the adage “those who don’t remember the past are condemned to repeat it” is wrong: many who can remember the past repeat its errors nonetheless.
Elizabeth Warren hasn’t weighed in on this yet, but you know she will, because she’s the main spokes-shrieker for The Gouger Theory of Prices.
The Gouger Theory is stupid on its face. Did oil companies wake up one morning and realize: “Whoa! We coulda jacked up prices and gouged the suckers! What were we thinking?” Did they have some sort of epileptic fit in 2020, when prices crashed? What were they thinking?
No. This isn’t gouging. This is-as it almost always is-fundamentals.
Oil prices are high. But in this week’s edition of “Find the Bottleneck,” that’s only one of the drivers (no pun intended) behind high gasoline and diesel prices. The bottleneck is in refining.
How do we know? Let’s look at the diesel crack:

It’s gone from around $22/bbl to as high as $70/bbl. (And the $22 is high compared to what it was a year ago). (Gasoline crack somewhat similar though not as bad–though it is likely to get so when the peak demand season kicks in.)
A high refining margin means that refinery capacity is constrained. And yes, it is constrained: it’s not as if refiners are exercising market power (i.e., gouging) by withholding output. Here is the capacity utilization in the US over time:

It’s running at pre-Pandemic levels.
And here’s another thing: post-Pandemic capacity is well below pre-Pandemic capacity:

That drop from pre-Pandemic levels is around 5 percent. That’s a lot.
So refineries are running flat out, and refinery capacity is down. What do you get?: big refining margins and high prices at the pump. Yes, it’s good to be a refiner now (though not so much two years ago). But it’s not good because you get to exercise market power. It’s because even under competition it’s highly profitable because of supply-demand fundamentals.
A variety of factors have contributed to this. The loss of a good chunk of Russian oil output is keeping the price of oil up, but the loss of Russian diesel supplies to Europe is probably a bigger factor. The US is to a large extent filling the gap, to the extent it can, by exporting.
But no matter how you break it down, it is clear that this is fundamentals driven. It is not gouging. And capping prices on the delusional belief that it is gouging will wreak economic havoc.
Which has never stopped the Democrats before, I know. (And Republicans too, e.g., Nixon).
One thing here does deserve emphasis. The decline in capacity is directly attributable to the Pandemic. Correction: it is directly attributable to the horrible policy choices that politicians and bureaucrats forced on us in the name of the Pandemic. The lockdowns in particular.
Like many, many things going on in commodity world right now, the current spike in product prices overall, and relative to crude, is yet another baleful consequence of completely mental decisions to shut down economies and crater the economics of producing and processing commodities.
In other news of economic-related political hysteria, there is also a lot of finger pointing going on about baby formula. I don’t have the information at hand to analyze in the same way as I can refined petroleum prices, but I can say what it isn’t. It isn’t “oligopoly.”
But again, those educated in politics (did I really use “educated” and “politics” in the same sentence?) and not economics immediately seize on this as an explanation.
Er, the baby formula business was an oligopoly a year ago. And a year before that. And a year before that. So . . . why all of a sudden did they supposedly decide to create a shortage? And pray tell–how do you make money if you aren’t selling stuff?
So whenever Congresspeople, or people who buzz around them like insects (yeah, I’m looking at you, journalists) come up with some economic brainstorm, remember Twain. They’re idiots. Dangerous idiots.