September 04, 2005
Lockyer to the rescue
I'm starting to think that every day some politician is going to come up with a new idea for how to make the current gas situation worse. California's Attorney General provides today's illustration.
Roseville Conservative is none too pleased with Attorney General Bill Lockyer's (D-CA) plan to keep California gasoline prices low. The Attorney General's press release explains the idea (hat tip Jurist):
Attorney General Bill Lockyer today launched an investigation into possible illegal profiteering by gasoline retailers and oil companies in the wake of Hurricane Katrina, announcing he will subpoena records from refiners and probe the pricing practices of gas station owners.
Lockyer noted California receives little or no refined gasoline from the Gulf region, and no crude oil. He questioned whether disruptions in the oil and gasoline infrastructure caused by Hurricane Katrina, while no doubt severe, could legitimately explain any significant effect on California's market. "Certainly, the storm cannot be used to justify gouging Californians while thousands of our fellow Americans suffer," said Lockyer.
Let's evaluate Lockyer's logic from four different perspectives, considering from each perspective what it would mean if gasoline were to sell for $4 a gallon in Georgia (where Lockyer agrees there has been an effect) and $3 a gallon in California (where Lockyer believes there should be no effect).
First, let's ask what would be the economically efficient thing to do if gas sold for $3 in California and $4 in Georgia. There are any number of steps you could take if you want to reduce your gas consumption, such as combining or reducing the number of trips, car-pooling, taking public transportation, and putting more of your mileage on your more fuel-efficient car if you have two vehicles. Nobody wants to do these things, and each of us has some maximal price we'd be willing to pay for gas before we start to make any of these changes. Some people made some of these adjustments when gas reached $2.50 a gallon, some won't until the price reaches $4 a gallon, others won't until the price reaches $6 a gallon. If another gallon of gasoline were shipped from California to Georgia and the price in California rose, the person in California who would end up doing without the gas would be the one who was willing to pay $3 for that gallon and no more. The person who would end up getting the extra gas in Georgia would be the person who was willing to pay $4 for that gallon and no more. Thus if the price in California were $3 and the price in Georgia were $4, it would be economically more efficient to ship some gasoline from California to Georgia, because the value of what somebody in California would give up is less than the value of what somebody in George would receive.
Second, let's look at the issue from the perspective of fairness. Why should drivers in Georgia have to pay a dollar more for gas than drivers in California? Any Californians inclined to blame Georgians for living so close to the Gulf might want to check where the nearest earthquake fault is to their home, and ponder whether we might want Georgia to share some of their gas with us if we get into a similar situation some day down the road. The principle of fairness would seem to suggest that the whole country, not just those living closest to the hurricane damage, should help share the burden.
Third, let's look at the issue from the perspective of what would maximize the profits of those who sell the gasoline. If gas sells for $3 a gallon in California and $4 a gallon in Georgia, obviously anybody could make a profit by buying the gas in California and transporting it to Georgia. The natural consequence of profit-maximization by firms is to reduce the price differences across different regions. In other words, the inevitable result of profit-seeking behavior would be to distribute gasoline across the country in a way that achieves the efficiency and fairness objectives described above, unless someone like the California Attorney General intervenes.
Finally, let's look at this question from the perspective of what would most help Bill Lockyer politically. The majority of California voters have not taken a principles of economics course and don't understand points (1) through (3) above-- Exhibit A: They elected Lockyer to be attorney general. Voters are frustrated by high gas prices and are anxious to find a scapegoat and a leader who will claim to do something about the problem. Besides, it is Californians, not Georgians, whose votes Lockyer cares about.
When you look at it from all four perspectives, I'm sure you'll agree with me that Lockyer has made a very smart move.
Posted by James Hamilton at September 4, 2005 07:23 AMdigg this | reddit
Listed below are links to weblogs that reference Lockyer to the rescue:
» Bill Lockyer: Economically Ignorant from Outside The Beltway
Bill Lockyer, California’s Attorney General and all around fool (It was Mr. Lockyer that implicitly advocated the rape Ken Lay) has come up with another way to show that he has absolutely no understanding of economics. Mr. Lockyer is going to i... [Read More]
Tracked on September 4, 2005 11:27 AM
» Bill Lockyer: Economically Ignorant from Deinonychus antirrhopus
Bill Lockyer, California's Attorney General and all around fool (It was Mr. Lockyer that implicitly advocated the rape Ken Lay) has come up with another way to show that he has absolutely no understanding of economics. Mr. Lockyer is going to investiga... [Read More]
Tracked on September 4, 2005 11:34 AM
» Updating Katrina's economic ripples from Houston's Clear Thinkers
Six days after Hurricane Katrina hammered a main conduit of the U.S. energy and shipping industries, much of the crucial infrastructure on the energy industry in the Gulf Coast region those remains shut down. Although a full assessment of the... [Read More]
Tracked on September 4, 2005 01:18 PM
Tracked on September 5, 2005 09:32 AM
Mr. Lockyer has been one of the most destructive of California's politicians to our energy security. His remark during the 2001 electricity crisis - "We'll put the energy producers in a cell with Spike" - drove off investors - I know this from first hand experience.
After the crisis past, his law suits against electric producers were more publicity stunt than serious legal work - the Feds repeatedly told him that he didn't have standing.
The man is running for governor and I, for one, will work to oppose him.
As to California politics, Tom McClintock, who ran a respectable race during the recall, has declared for Lt. governor. That's a shame; he should run for Attorney General. His years in the legislature would give him some background for investigations to clean that place up.
Posted by: Joseph Somsel at September 4, 2005 10:10 AM
Smart, but also venal and cynical. Of course, this is California...a really stupid place when it comes to energy policy.
Posted by: Steve Verdon at September 4, 2005 11:43 AM
"The majority of California voters have not taken a principles of economics course and don't understand points (1) through (3) above-- Exhibit A: They elected Lockyer to be attorney general."
I think Lockyer was elected more for his legal experience and ability to run a political campaign than for his knowledge of economics. I would also be willing to bet that most politicians did not take econs 101 and of those who did, they would have probably forgotten most of what they learnt by now. Lockyer was somewhat successful in prosecuting some cases against energy companies because they did break the law in 2000/2001 energy crisis. I think he is wrong this time but I can understand where he is coming from.
Posted by: RayJ at September 4, 2005 03:05 PM
Don't simian (and human) studies show a fairly innate sense of "fairness" in economic matters?
I get the idea that the population's gut-response to "gouging" is centered in that kind of human "fairness" judgement.
A little profit is fair, and too much is unfair gouging.
Posted by: odograph at September 4, 2005 04:01 PM
Here's an especially effective way to cause no gas at all instead of high gas - cap the price at the price before the "emergency":
I wonder how people in the exurbs think they're going to survive if they have to wait hours to tank up, and then get only 8 gallons or something - or if the gas stations just close altogether for a time. But then the public is not educated to understand consequences, only "gimme", "gimme."
Posted by: PaulS at September 4, 2005 05:43 PM
Its seems to me he was right about Enron.
Posted by: me at September 4, 2005 06:01 PM
He's not totally idiotic.
He's going to investigate for antitrust and unfair business practice issues -- that's perfectly fine, I'm sure you would agree.
He's also going to look into the state law that aims to cap price increases at 10% during an emergency.
Well, that *law* is bogus, certainly, but as attorny general, he'd be hard-pressed to overlook it entirely. And at this stage, he's only investigating, not pressing charges.
So, good rehearsal of economic principles but the ad hominem towards Lockyer seems a bit out of place.
Posted by: Tom Lord at September 4, 2005 06:21 PM
Democratic politians in California have repeatedly run to the microphones suggesting conspiracy whenever energy markets cause a surge in prices. As we established in an earlier thread, Barbara Boxer did something similar when a refinery was to be closed in Bakersfield. Time and again, these all turn out to be innocent workings of the market.
In this case, the EPA over-ruled the boutique fuel requirements meaning that California gasoline can be co-mingled in a broader national market and would be affected by Katrina. Besides, prices were trending up in any case!
As to Lockyer's electricity victories, all that I know of were settled out of court. I know of none where California has collected in an open jury trial - someone correct me if I'm wrong.
In any case, my disdain for Lockyer the public servant is the result of my taking citizenship seriously - it's my duty to pass judgment on elected officials - their character and their performance. It is very much an "against the man" position because that's how we vote. I offered at least three specific issues and could add many more decisions from his office that I disagreed with and judged his motivations inappropriate with his duties.
Of course, if Jerry Brown gets the job next election, I might wish Lockyer were still AG!
Posted by: Joseph Somsel at September 4, 2005 08:46 PM
"Don't simian (and human) studies show a fairly innate sense of 'fairness' in economic matters? I get the idea that the population's gut-response to 'gouging' is centered in that kind of human 'fairness' judgement."
"Hunter-gatherer societies are scrupulously egalitarian. But not harmoniously so. They are violently egalitarian."
-- Dr. Herbert Gintis, University of Massachusetts, in the NY Times, 1/22/02
One can have fun speculating about other areas where evolutionary tendencies conflict with sensible economic policies as well.
Posted by: Jim Glass at September 4, 2005 10:58 PM
If it is all so obvious, then why have California prices always been so much more expensive than Georgia? Why the economic inefficiency, the unfairness, the lack of profit maximization? We have already heard all the excuses. That being said, this is just campaigning by press release and will result in no action as usual.
Posted by: Lord at September 5, 2005 01:25 AM
I know tihs site often discusses China's oil shoratge. I just read this post on Peking Duck website as it was linked on InstaPundit:
It seems that the oil shortage ins't only due to the inefficencies of the non-market economy.
Posted by: Rich at September 5, 2005 06:07 AM
Lord, the reason that California prices are usually higher than Georgia is because in normal times, California gas stations are precluded by law from selling the kind of gas that they use in Georgia:
I presume that if we had a California crisis, those requirements would be temporarily suspended, as they have been in the current situation:
Posted by: JDH at September 5, 2005 07:06 AM
T, Lockyer "questioned whether disruptions in the oil and gasoline infrastructure caused by Hurricane Katrina, while no doubt severe, could legitimately explain any significant effect on California's market". In this statement he is either revealing himself to be uninformed, or deliberately attempting to take advantage of voters whom he judges to be uninformed. Take your pick.
Posted by: JDH at September 5, 2005 07:11 AM
"One can have fun speculating about other areas where evolutionary tendencies conflict with sensible economic policies as well."
You got a chuckle out of me there. Yes, there are a number of amusing conflicts.
As well as the implication that economic policies, taken too far afield from human nature, themselves lead to ruin.
On this gouging investigation itslef - I don't feel that agitated by it one way or the other this morning.
Posted by: Anonymous at September 5, 2005 08:30 AM
"He was right about Enron."
Fish in a barrel.
BTW, here's how Amory Lovins provided the intellectual and policy framework for Enron's "Death Star" scam:
Posted by: Joseph Somsel at September 5, 2005 09:03 AM
Couple questions: (1) Does price gouging ever take place during catastrophes? (2) Does the public sphere have the right to ask such questions? (3) What are the exact volumes of gasoline that have been diverted to explain the jump in prices in California? (4) Do politicians pander?
If (1) Yes, (2) Yes, (3) Not much and (4) Always, the inquiry into gouging makes complete sense to me. Why be surprised? Who is really uninformed?
Now don't get me wrong. I'm all for letting price clear markets. Up to a point.
Here’s a different issue I’ve been thinking about. Rationing versus clearing markets through the price mechanism. Ten people in a room. An overweight gluttonous selfish industrialist and his armed guard, and 8 of the hurricane displaced. The industrialist has a ready supply of cash. A small window into this room is the only source food and water. Is it better to (a) using the pricing mechanism to clear the market or (b) ration. As an added consideration, let’s say that the amount of food and water is expected to decrease a bit over time.
This is not a hypothetical problem. It’s an extreme case of course. A variant of the lifeboat problem—or perhaps it is the lifeboat problem. If we use the pricing mechanism, the industrialist might purchase all the food to serve his gluttonous needs. The others will die. One can argue that allowing the others to starve is better. It provides the necessary demand destruction. It produces an outcome that is efficient, putting demand, long-term, into better sync with supply. (Homework problem: is it right for the 8 dispossessed to storm the glutton and the guard? What is the definition of property rights under these circumstances? I think the question of property is always an interesting one. I think the Native Americans do as well. (“White man come from far away, import concept property—low and behold—their concept of property says they own our land.”).
Now consider how this applies to energy. If in fact energy is going to become more dear, more expensive, it’s going to have to either (a) be rationed or (b) priced to clear the market. I suppose rationing can be in the form of price caps (which means some get it, the rest don’t) or some distribution scheme.
I have to say that long term, I can see no alternative but the price mechanism. Society has to restructure. But then again, can rationing—or regulation by another name—help with the transition?
And then again, are politicians and our political system able to put in place regulations that would actually help with the transition. Unfortunately, we know what the answer to the latter is. Probably not. But that argues to fix the political system (hah!!!). These issues can be considered from the economic/regulatory perspective and then the practical/political perspective (selling the regulations—perhaps call it the marketing perspective). I think discussions sometimes mix up the two areas, making it seem like there are no good regulations—which I think is false. I think free markets are chaotic, misallocate resources, and there is a place regulation. Even if only in theory.
Anyway, just a couple thoughts.
Posted by: T.R. Elliott at September 5, 2005 09:24 AM
Yes, no doubt California gas is more expensive, but is it more expensive than it should be? Afterall they could always produce California gas in Georgia and ship it here. Are prices higher due to costs or due to an increased ability of Californians to pay and reliance on it? Even the oil companies admit to altering neighborhood pricing to maximize profits by exploiting price sensitivity at the same time as reducing the number of stations to reduce local competition. The market is competitive, but is it as competitive as we think after so many mergers?
The industry tends to suffer from groupthink. They apparently can't anticipate supply and demand sufficiently to make the necessary investment for when it is needed, so it careens from crisis to abundance to crisis. No doubt it is difficult to predict as the economy changes continually but maybe if they profitted less from crises, we would have fewer of them.
Posted by: Lord at September 5, 2005 10:29 AM
Any place of price caps will not help the transition at all. People are going to keep consuming energy untill one day they won't be able to because the marginal costs of supply them will get extremely high. Look what happened to price caps on natural gas in the 70s.
Posted by: Brian at September 5, 2005 10:50 AM
Are there pipelines that could send significant quanitities of west coast gasoline to the midwest and southeast? If not, if the two markets are relatively unconnected, then it seems that a price increase in California would indeed be unjustified price gouging.
Posted by: Steve Bodner at September 5, 2005 12:58 PM
Brian: I'm not for price caps at all. Though my point is that if there is a shortage, price caps just mean running short. Which is a form of rationing, with those in line first getting supplies and those on the end of the line not getting any. It doesn't seem good any way you look at it.
But...consider how economists are into polution credits. Well, what is rationing other than a form of credit. A credit that can be traded in the marketplace. Let's suppose the US decided we wanted to reduce out consumption of gasoline. We create credits allowing X billion gallons of gas to be consumed over the year. Then you must (a) determine how to distribute the credits and (b) determine how people can trade them.
Those are the implementation details I referred to. But one can always--and often should--separate policy or regulation from implementation or procedures.
Now, there is a caveat one can throw into this argument. One can say that a particular policy is so expensive to implement that even considering it is useless. Though even in that case, from a theoretical perspective, it is an interesting exercise to see how it would work--in theory.
So what I'm getting at is that if gas suddenly becomes very expensive, there are a lot of people who will not be able to afford it and will have great difficulty getting to their jobs. They can carpool and use alternate means, but they won't be able to afford the gas because someone with more disposable income is vacationing in his/her H2. Gas is going towards what could be less productive uses in the economy (the hummer driver could still have a productively expensive vacation by renting a prius to do the driving).
So to help the economy transition to lower use of fuel, one rations through credits.
If you say this makes no sense, at the theoretical or policy level, then I think you are really arguing the whole concept of polution credits makes no sense. And then again you are arguing against the whole libertarian--non anarchist version--idea of property rights as the means to create a rational society.
Am I wrong somewhere here? I'd just like to hear what our more free market libertarian friends have to say, those who support credits. A credit is a credit is a credit, isn't it. (practical distribution and tradining issues aside).
Or am I wrong.
Posted by: T.R. Elliott at September 5, 2005 01:21 PM
Lord: I'm wondering something similar. I've not looked at the details, so am only hypothesizing. But I wonder why gas is more expensive in California if we have so many drivers and consume so much gas. You'd think the economies of scale would make it cheaper to produce our gas, though I don't understand everything they have to do in order to produce it. And it could be that the oil companies have to pay off the expenses associated with capital costs to produce california gas. But what were those capital costs?
I'm not complaining about the gas companies. The first thing when gas prices go up, people around me are complaining that it's political, a conspiracy, or greed on the part of the oil companies. I try to remind them that sometimes things just plain cost more because of supply and demand, and that they don't seem to complain when their house goes up in value (as someone else pointed out--here I think).
But then again I'll drive a couple blocks and find relatively large (e.g. 20 cents) difference for the grade of gas at the same branded station (e.g. Shell). One by the freeway, which probably captures vacationers, is almost always higher. A station in Rancho Santa Fe (wealthy community) is almost always higher. And stations in poorer communities are cheaper.
Hey, maybe oil companies are actually doing a good. Making the rich pay a little more!!!! They're socialists.
Posted by: T.R. Elliott at September 5, 2005 01:30 PM
T.R., you've raised a number of very interesting points that I think really deserve a new post to discuss in more depth.
Posted by: JDH at September 5, 2005 01:36 PM
I used to think the gas stations in rich areas were just choosing a price they could get away with ... but maybe because I'm starting to hang around with economists, I've rejudged it. They're sitting on prime real estate, and often have to build and maintain a higher "visual image" than those cheap stations.
If you are lucky enough to buy cheap land and then have a rich town grow up around you, you might do very well indeed - but I bet once those stations change hands the advantage is gone - and those rediculous prices are their survival rates.
Posted by: odograph at September 5, 2005 01:43 PM
Steve, the way this would work in practice is that gasoline from New Mexico or Texas would be piped east rather than west. The bottom line is as if a gallon of gasoline were "shipped" from California to Georgia, though of course the market would accomplish the same thing in a much more efficient way.
Posted by: JDH at September 5, 2005 01:43 PM
JDH - I see so many refineries here in California that I assume the vast majority of our gas is locally made - with *perhaps* some now shipped east. If we have been getting significant quantities from points east that would certainly explain a natural price increase.
Posted by: odograph at September 5, 2005 01:49 PM
That makes a lot more sense. Obviously, the price cap form of rationing isn't going to work because of the income discrepancies that you mentioned. The use of a credit makes a lot more sense.
Posted by: Brian at September 5, 2005 02:20 PM
Odograph: Make sense to me. Prime real estate. Prime prices. And I'm not complaining. People gripe about a few cents difference in gas prices over a few blocks when a soft drink could be significantly different. It would be nice if politicians could get people to look at the big picture: energy is still pretty darn cheap, and it might not be that way forever. People just don't get it. Though I'm seeing increasing notice and questions about my hybrid Insight and my wife's hybrid Prius. People are thinking about it. If energy doesn't drop, and if it goes up over even further: people will start getting it. Big cars will start losing their popularity.
Credits issue: Note I'm not saying gas credits are exactly similar to pollution credits. Gas is a product extracted and manufactured. Pollution is different. Both gas and pollution have capital expenses and investment associated with them though. And the practicality of gas credits is orders of magnitudes more difficult than pollution credits.
Here's the issue in my mind though: energy, like money itself, is a key component of an industrial economy. Money is regulated. Some will argue that it should be unregulated--e.g. get back to the gold standard. I somehow find those arguments to be promethean. Cro-magnon. Whatever the right word is. What happens to monetary stability if India dumps all that gold jewlery they've got stashed away. Same thing that happened to spain I suppose when the raped--I mean developed--the western hemisphere. Inflation. Monetary instability.
Anyway, money has the fed. Energy had OPEC. And while there are many complaints about Alan )Bubbles) Greenspan through the years, and similar arguments about OPEC, they've both had difficult problems to deal with and deserve some credit for maintaining some semblance of stability while the financial world and industrial world and trade went through a variety of revolutions.
So now, in addition to losing Greenspan (I'm going to assume something similar will be available--Fed Chairman are hopefully a fungible resource, aren't they), it's not clear whether we have a similar replacement for OPEC. Some level of regulation may be in order in the world of energy to insure some type of stability while the economy transitions to those higher pricing regimes.
Anyway, just some random thoughts. I'm not an economist and I don't play one on TV. And if Ben Stein is an example of one who does play one on TV, count me out.
Posted by: T.R. Elliott at September 5, 2005 03:40 PM
If the markets are really disconnected, that does not mean that high prices are gouging. it means high prices won't CLEAR THE MARKET. And if they do clear the market, then the markets are not disconnected.
Posted by: TCO at September 5, 2005 03:46 PM
clearing the market ... you might be back to price elasticity and (i know you are going to hate this one) the social contract between oil supplier and the supplied.
Posted by: odograph at September 5, 2005 05:45 PM
Didn't Frank Wolak at Stanford produce analysis modeling ISO manipulation in the CA energy market ? This model convinced many that something more than a conspiracy was at play.
And if a Stanford economist produces the finding are CA Dems not allowed to draw reasonable conclusions from that analysis ?
Posted by: self at September 5, 2005 06:08 PM
Based on past posts' quality, I was expecting a nice back of the envelope calculation highlighting the demand for CA gas and various assumptions of market linkage that the positions of gouging/no-gouging are predicated upon. This econ 1 thing you've laid out is rather unconvicing.
The one thing I do get from your post is your dislike for Lockyer...okay, now what ?
If refinery outages explain the price patterns, perhaps there would be additional price moves from refinery uncertainty in other markets, but what dynamics might allow us to distinguish one situation from the other ?
Posted by: self at September 5, 2005 06:43 PM
TR writes:"... (1) Does price gouging ever take place during catastrophes?"
Some economists, including JDH I presume, do not believe there is anything like price gouging as long as the buyer pays the price willingly without any duress. The presumption is that a rational buyer will dispassionately consider all other alternative uses for his money and will only pay the high price if he determines that is the best use of his money. This leaves the seller free to extract the maximum value from the buyer. So, for example, if someone needs a gallon of gas during a catastrophe to take a dying relative to the hospital, the seller is entitled to extract a $1000 from him if the buyer has $1000 and values the life of that relative at more than $1000**.
I think the rational logic of the market needs to be tempered by the emotional logic in any social system. That's why I think that if we get into a peak oil scenario, some sort of tiered pricing will have to be introduced as compromise between physical rational and pure market pricing.
**The example above is deliberately chosen to illustrate a point but unfortunately it happens all the time in the healthcare choices the elderly and those who care for them have to make.
Posted by: RayJ at September 5, 2005 07:00 PM
Joseph Somsel writes: "After the crisis past, his law suits against electric producers were more publicity stunt than serious legal work - the Feds repeatedly told him that he didn't have standing."
Federal Energy Regulatory Commission Press Release 8/15/05 (http://www.ferc.gov/press-room/pr-current/08-15-05.asp): "Today's announcement follows last month's announcement of a $1.5 billion settlement between the FERC staff, other parties and Enron Corp. 'These settlements reflect the solid work of the Commission's staff, and bring to nearly $6.3 billion the amount of settlements relating to the Western energy crisis that the Commission has either accepted or helped realize,' Chairman Kelliher said."
Note that $6.3 billion is within shouting distance of the $9 billion California initially claimed. The companies accused of gouging initially offered $1.5 billion.
Joseph Somsel writes: "As to Lockyer's electricity victories, all that I know of were settled out of court. I know of none where California has collected in an open jury trial - someone correct me if I'm wrong."
Companies regulated by FERC usually have to go through the FERC process which involves 1) ADR, 2) hearings in front of a admin law judge, and finally 3) litigation. Companies and regulators settle out of court after assessing the likelihood and costs of prevailing in court. Having read some of the transcripts, I think it would be a brave company indeed which would be willing to face a California jury with the evidence collected on tape recordings of their traders' discussions of how to game the California electricity market.
Posted by: RayJ at September 5, 2005 09:20 PM
Note to "Self" (and others):
As long as there remains so much as a single gallon of gasoline whose owner can choose between selling to California and selling to Georgia, it is completely irrelevant what fraction of total California consumption is accounted for by such sources or the elasticities of demand in either Georgia or California. If it would profit the owner to sell the gas to Georgia, not California, the effect of seeking that profit is to lower the price in Georgia and raise the price in California. The price differential between California and Georgia has to decline until it reaches the point at which the profitable arbitrage is eliminated. That conclusion does not depend in any way on the elasticities or the shares.
It is true that in order to calculate how close together the two prices would become as a result of such arbitrage, one would need to know the cost of transportation to either market (including any intangible costs of reducing supply to existing customers). But, even this is quite unnecessary to know for purposes of the point that I was making. Please look again at the statement quoted from Lockyer, asserting that there could be no legitimate reason why disruptions from Katrina would have a significant effect in California. On the contrary, it would be inconceivable if disruptions from Katrina failed to have a significant effect in California. For Lockyer to make such a statement, either he must be ignorant, or else he assumes that you are. I see no wiggle room for defending his statement.
Posted by: JDH at September 5, 2005 10:59 PM
Here's the key: "legitimately explain any significant effect". There is so much wiggle room in "significant" and "legitimately" that in fact, one can interpret his statement to mean that "yes, in theoretical terms prices in California would go up but in practical terms it looks like gouging."
It's those two words. "legitimately" and "significant." Plenty of wiggle room. Enough to drive a oil tanker through.
I don't see why that interpretation is not valid. And if valid, it provide all the wiggle room we need. Again, I'm not defending the guy. Politicians pander. There are no philosopher kings. Ineffiencies abound. Everwhere. In the public and private sphere.
Posted by: T.R. Elliott at September 6, 2005 07:32 AM
I agree with you. People like Lockyer know a simply truth; in the search for profits, companies (and the people who work for them) will sometimes be tempted to bend the rules and possibly break the law. Not all do, but the few that do need to be called to account.
Posted by: RayJ at September 6, 2005 08:43 AM
"Companies and regulators settle out of court after assessing the likelihood and costs of prevailing in court."
Some hot shot trader making embaressing remarks on tape isn't necesarily doing something illegal or giving grounds for a civil suit. Granted, it can sure sound bad but it was California's government that wrote the rules and blocked plant construction, setting themselves up for exploitation under the very rules California wrote.
Again, Lockyer's administration of the California Attorney General office has had the direct effect of making it more difficult for the state to craft sensible energy policy and for private enterprise to deliver the goods and attract the capital needed.
The latest grandstanding is more of the same.
Posted by: Joseph Somsel at September 6, 2005 09:26 AM
It amazes me that with things like this witch hunt on top of the bazillions of NIMBYs, regulations, and such that anyone can muster up the desire to be in the energy business.
Posted by: Allen at September 6, 2005 09:38 AM
Allen: Then you've not looked at the profits of the energy industry. They're in the business because they make lots of money. They're crying about the regulations and the NIMBYism all the way to the bank.
Posted by: T.R. Elliott at September 6, 2005 10:13 AM
RayJ, I realize you've exaggerated to clarify your point, but the alternative is likely to be *no* gallon of gas to transport the dying relative. You can't really mean to let the relative die while the police fuss over the altercation, rather than let somebody get away with overcharging for the gas, can you? If the overcharging disgusts you, but you don't want to kill the relative, then you've got to provide ample reserve supplies in advance, and store them so that they are still accessible after the catastrophe. Alas and alack, you probably have to do that, or at least push it along, partly through the political process.
But if Joe is running for office, and promises to set up emergency reserves, or maintain and upgrade the levees, or light a fire under the indolent folks charged with doing so - but Bill promises to set up a Superdome entertainment palace at public expense where big stupid guys in tights run around and fall down on a 100-yard rug - there's no prize for guessing who's going to win - every time, all the time. In the messy real world, if we want the relative to live, we may occasionally have to suck it up and swallow our emotional disgust while someone "gouges."
And we do actually live in a society that is more than just government. If the gouger actually did real social harm - for example by charging so much that a considerable surplus of needed material was left over in the end - then rest assured he or she will catch holy hell in the end from the neighbors and customers. Which is why you didn't actually see gas trading for $1000, but you did see a very tiny bit trading for up to $8.99.
Posted by: PaulS at September 6, 2005 10:13 AM
T.R. - I'm puzzled by what seems to be your sense of anger.
It seems just fine for people who sink money into oil-guzzling exurban houses, and all the oil-guzzling amenities thereto, to make staggering instant profits, and to be handed mortgage deductions and lifetime capital-gains deductions, and all the other lucrative financial paraphernalia. And to "earn" all that, all they need to do, compared to other people who can't qualify at today's skyhigh prices and therefore rent, is just sit on the couch and watch TV.
But when people sink money into oil-extracting and oil-processing ventures - perhaps through investments by pension institutions such as CalPERS, and those ventures in turn hire workers to do actual real work in unpleasant places (not just sit on a nice comfy couch) to provide the processed oil products, why, those people are greedy, wicked, thieving sinners who should be locked into the stocks on Puritan Square and pelted with rotten food.
I don't see the difference, or rather, the difference I see is entirely in the opposite direction. Now, you aren't one of those folks, like those at www.communitysolution.org/pdfs/NS2.pdf, who give the appearance of telling us that Cuba sits at the right hand of Paradise? Can you please enlighten us?
Posted by: PaulS at September 6, 2005 11:10 AM
Gee, I was beginning to think well of this blog. And now we have this thread peppered with arrogant and sophistical price arguments as well as cheap shots at California. I am beginning to understand that it may not be economists who give the subject such a bad name. Rather it is shallow thinkers who once read an economic text book and now use those text book theories as a cover for basic meanness self stroking.
Posted by: Roy at September 6, 2005 12:10 PM
PaulS writes:"but the alternative is likely to be *no* gallon of gas to transport the dying relative."
I don't believe that our only choices are between physical rationing at low controlled prices (which will cause shortages) and unfettered market pricing. That's why about 20 states have some form of price gouging law. It will be interesting to see an academic study that compares the outcomes between states with and without such a law.
In the case of California, the anti-gouging law prohibits large increases in prices during an emergency. Whether one agrees with that law or not, it is the current law until it is changed. Meanwhile, the Attorney-General is sworn to uphold the law whether he agrees with it or not. Lockyer is just doing his job.
Posted by: RayJ at September 6, 2005 12:44 PM
Joseph Somsel, you write: "Granted, it can sure sound bad but it was California's government that wrote the rules and blocked plant construction, setting themselves up for exploitation under the very rules California wrote."
In this and your other posts, you seem to hold a deep and strong belief that corporations can do no wrong in their pursuit of profits. I believe that corporations are like people; most are honest most or all of the time, a few are dishonest and will act unethically sometimes.
No matter how much good a person or corporation has done in the past, they should be held accountable if they break the law.
Posted by: RayJ at September 6, 2005 12:56 PM
Paul: I don't understand your question. And I'm not angry about anything. I just said I'm not feeling that sorry for energy companies. I feel sorry for people who've lost their homes recently. Different matter entirely. I suspect energy companies have a hard time. I've had friends who were flying all over the world for energy companies, as you mention. I've got other friends who work for chemical companies in Los Angeles that have to jump through hoops in order to do anything. But you know what? These guys hate the hoops, but they also hate what the companies they work for have done to the local environment before there were any regulations.
So I'm a big fan of energy companies. I'm relying on them right now for many different things--investment returns, the electricity to run this computer, etc.
I'm not sure what your question was. I'm just not feeling sorry for energy companies. Regulations stink, NIMBYism stinks, but so does acid rain and global warming.
And maybe, just maybe, the lack of refining capacity will be the best thing that ever happened to the US. Maybe, just maybe, it will actually speed up the process of adapting to less energy. Rather than just sucking it out of the ground as fast as we can and throwing all that carbon into the atmosphere.
So what was your question?
Posted by: T.R. Elliott at September 6, 2005 02:55 PM
Sure, corporations can do illegal things and so should be prosecuted and/or sued. They can do unethical things and can be publically villified but NOT prosecuted.
It's just that I've heard so many accusations for so many years about the "evil oil companies" that just, by and large, haven't panned out that I'm skeptical of the "little boy who cried wolf" - mostly Democratic politicians. The odds are that a complaint like Lockyer's will prove to have no substance and will be another exercise in demogagory.
On further reflection, I do remember one company, El Paso Natural Gas, that got caught boosting natural gas prices during the 2001 electricity crisis by buying their own pipeline capacity into the state. When the crunch came, they neglected to ship gas in that transport allotment, driving up the price of the gas they owned being transported at the same time. That restricted the physical delivery of the only allowable fuel supply for generators.
Yes, I'm generally on the side of the corporations, especially energy corporations. I've worked in one or another almost all my career. I know that the people whom I've worked with have been dedicated to the public welfare. Sure, we want to make money and the more the merrier. I also know that management can be sneaky and low-down but that there is pressure from the top, the outside, and below to do the right thing and deliver the goods to our customers.
Good, solid, respectable profits over the long run are of much greater value than quicky ripoffs - any fool knows that. And few fools make it to the top.
Posted by: Joseph Somsel at September 6, 2005 04:04 PM
Joseph: I agree with much of what you say. But take a look at FEMA. The place is full of fools. I'm not blaming them. But it is full of fools. The head was asked to resign from his last job because he was considered incompetent. They have no experience with disasters at all. ENRON is another example. Sadly, I'm going to bet that in the corporate world, just as in the private sector, incompetence is often rewarded. Let's face it. Accomplishments are a combination of effort and luck. Skills are a result of effort and luck (good genes, etc). So it comes down to effort and luck. Those who rise to the top, in even the best companies, are often short on skills and long on luck. I've seen it quite a bit.
Again, not complaining. But even in the marketplace of private sector promotions, the market is just not that efficient at times. I think long-term studies would probably demonstrate that to be true.
Posted by: T.R. Elliott at September 6, 2005 04:31 PM
Sorry if I babbled incoherently to T.R.. Mr. Lockyer said "Certainly, the storm cannot be used to justify gouging Californians...". He said this at a public press conference, so let's treat his words as plain English. On the face of it he is carrying out his duty to protect Californians from 'gouging'. Now, most A.G. investigations garner little publicity, but this one was launched very publicly. I think it is fair to infer that he must be rather unusually exercised.
But why has he never also launched an investigation into 'gouging' by owners of existing houses and their real-estate agents? Surely the sky-high cost of housing is a far more serious problem than the gas prices, even if it has arrived more slowly. (And surely the massive windfall profits to be had in existing houses have caused people to build and buy far more and far further out than they would have in a calm market, contributing massively to all that "carbon thrown into the atmosphere.")
The gas prices, on the other hand, seem mainly to be inducing people to eliminate trivial trips to amusement parks, or to pay an extra buck on delivery charges on luxuries like take-out pizza.
I simply find the unbalance of un-sympathy between the two classes of 'gougers' to be very curious. Obviously the house gougers have been operating longer in the current cycle than the gas gougers, but that only makes it more curious that Mr. Lockyer never got to them first.
If the distinction is in the law, well, why? And why isn't Mr. Lockyer doing as A.G.'s often do, and calling very publicly to make the law more fair as between classes of gougers? Is the current investigation serving any purpose except to yet again manifest populist ire against "corporations"?
In case I'm still not clear, a similar point is made in the last few paragraphs here: http://www.phxnews.com/fullstory.php?article=25082
Posted by: PaulS at September 6, 2005 04:54 PM
OK Paul. Now I agree with you completely. If the oil companies are price gouging, then so are real estate investors and people who are making money off of their increasing oil investments. In that sense, let's face it: he's pandering.
There is really only one difference. Oil, gas, or more generally energy is a currency in our economy. I think over time we have to think increasingly in those terms. And just as there is a lot of oversight on what happens with currency, there must be increasing oversight on what happens with energy--for the common good.
But you are right. I don't disagree. The guy is clearly pandering.
Posted by: T.R. Elliott at September 6, 2005 05:14 PM
PaulS you ask: "But why has he never also launched an investigation into 'gouging' by owners of existing houses and their real-estate agents?"
In California state law, price gouging can only occur during an emergency and the increase in prices must be determined to be an attempt to take advantage of the conditions caused by the emergency. Therefore all house price increases before the current Katrina emergency cannot be prosecuted under the gouging law. During the emergency, the AG would have to prove that increases in house prices were an attempt to take advantage of the emergency; hard to prove. Note however, if hotel prices suddenly shoot by 10% or more that could be grounds for an investigation. This happened somewhere in the East after 9/11.
Again, the AG is sworn to uphold state law whether he agrees with it or not. He probably agrees with this law but that is beside the point. It seems to me all the different ad hominem conjectures about the AG's motivation say more about the commenters' political beliefs than about economics. A more useful discussion would be about the pros and cons of the gouging laws on the books in 20 states, but unfortunately we cannot seem to get past people's feelings about Lockyer.
Posted by: RayJ at September 6, 2005 06:12 PM
What we call "economics" used to be called "political economy."
"Ad hominem" is the label of a logical fallacy and does not apply here.
Discussions of a politician's political actions and statements concerning economic behavior and his official interference in markets is completely justified.
As I've stated before, this politician has done much harm to economic activity in the state of California.
Granted, it may well be the law but the AG has great discretion as how and where to devote his allocated state resources. This is a misallocation of taxpayer dollars (assuming there is real work being done) and I think we've made a pretty good case, based on economics, for that opinion.
Posted by: Joseph Somsel at September 6, 2005 08:05 PM
Just stopping in again for a quick look ... doesn't this gasoline pricing thing have a relation to The Ultimatum Game which I find in "The Winner's Curse?"
Oil (and not houses) is an "us versus them" thing, and people are trying to enforce a social contract with the oil companies. I think the fact that we can't simply refuse gasoline drives the anger, and is the source of the preceived "contract."
We build our lives around the assumption of (relatively) cheap gasoline. We accept that the oil companies will make a steady income from us. We won't sell our cars and go electric. We don't live upstairs, above the shop. We commute. But in exchange for that we expect fair pricing. Oil companies should make a profit, but not too much. When the make too much, it is "gouging" and we get mad.
... none of this is the way I say "it should be" - this is just my observation of what I see going on.
Posted by: odograph at September 7, 2005 09:56 AM
Update - we build our country around he assumption of (relatively) cheap gasoline. Geez louise, look at the most recent highway bill.
Posted by: odograph at September 7, 2005 10:02 AM