Gas Cap a Low-Octane Idea, Officials Say

April 29, 2011

Investigative Reports

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The NerveIf a Grand Strand legislator has his way, South Carolinians will see their gasoline prices capped for an entire year, beginning June 1.

Good news for Palmetto State residents tired of paying through the nose for petrol, right? Not quite. Those in the know say it would likely be an unmitigated disaster for the state, even as gas prices currently top $3.70 a gallon in some S.C. locales.

“We’ve endured price controls since Roman days when they capped the price of salt; it didn’t work then, and it won’t work today,” said John Felmy, the American Petroleum Institute’s chief economist.

“For a state like South Carolina, which has no refineries, it’s a particularly bad idea because if you’re unwilling to pay the market price for gas, you’re unlikely to get anyone outside the state to send any gas your way,” he added.

Sponsored by Sen. Dick Elliot, D-Horry, a bill (S. 850) would cap the wholesale price of gasoline as determined by the S.C. Department of Revenue on June 1. The price ceiling would be in effect until the following June.

Elliott’s bill would put any excess charges by retailers above the wholesale gas price into a trust fund. The Legislature would decide how to use that money.

Elliott’s bill was introduced Wednesday and referred to the Senate Committee on Agriculture and Natural Resources.

Elliott could not be reached for comment Thursday. However, The Associated Press reported that Elliott said the bill is needed because high gas prices are slowing the state’s economic recovery.

No other state in the nation has a cap on gas prices, although Hawaii instituted a limit on wholesale gasoline prices for a nine-month period beginning in August 2005. It was suspended amid public outcry and generally decried as a failure.

One study showed the gas cap cost Hawaiian consumers 5 cents more per gallon. The analysis, by the state’s Department of Business, Economic Development and Tourism, estimated that island motorists paid $54.9 million more than they otherwise would have in the first five months alone under the cap.

“The gas cap did raise prices higher than I ever imagined,” Hawaii State Rep. Mark Moses, R-Makakilo-Kapolei, was quoted as saying afterward.

Opponents argue that gas caps bring the same problem as most government efforts to control prices – they inhibit the laws of supply and demand. They allege gas caps interfere with market prices and invariably produce the exact opposite of the intended result.

If prices naturally decline, they say, caps don’t matter. If prices rise above the caps, then consumers will be unable to secure fuel because refiners will ship gasoline elsewhere, where they can get the market price for their product.

Also, if the price of gasoline gets close to the cap, local retailers will buy supply as fast as they can for fear of a shortage when the price hits the cap. That causes prices to rise further and faster than they otherwise would.

Capping gas prices would totally disrupt the petroleum distribution chain in the Palmetto State, said Michael Fields, executive director for the South Carolina Petroleum Marketers Association.

“I understand the frustration that Sen. Elliott and his constituents are feeling, but government price controls are not the answer,’’ he said. “It’s the slipperiest of slopes that we don’t even want to pretend like we want to go down.

“You’re talking about government intervention in a commodity that is traded globally every day,” Fields added. “And, theoretically, that could open the door to intervention in any number of areas.”

Price controls are typically promoted by individuals who either don’t understand the market, or don’t want to understand the market, said Felmy, the American Petroleum Institute economist, who is based in Washington, D.C.

“If you mandate this and the market price for gas goes higher than the cap, how are you going to get gas in South Carolina? he asked. “You don’t have any refineries, so it’s not like you can order gas refined in South Carolina to be distributed within the state.

“I supposed you could commandeer one of the pipelines that runs through the state, but that’s not really a realistic solution, either,” Felmy said. “Something like this is not going to be helpful.”

Reach Dietrich at (803) 779-5022 ext. 110, or kevin@thenerve.org.