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Government Intervention

August 10, 2015

A few weeks ago the Wall Street Journal published an informative editorial about petroleum product pricing issues in California.  California’s situation is an example of what happens to markets when governments choose to interfere inappropriately.  

Last week, gas prices in Los Angles averaged $4.10/gal. hitting as high as $5/gal. in downtown, and $3.80/gal. in other areas of California.  We pay about $2.30/gal. in south Texas.  Motorists in Los Angles are paying double the national average and this with oil prices plummeting.

Prior to 2000, California gas prices compared equally with the nation.  By 2006, they were paying on average 25 cents more per/gallon, 40 cents more by 2014, and now over a dollar more.   Consumer activist have been blaming collusion by the major oil companies.

Actually, these huge price disparities have appeared since the gradual enactment of many layers of “green laws".  In 2000, Governor Davis helped pass legislation banning the use of a gasoline additive called MTBE.  (MTBE is a gasoline additive, used as an oxygenate to raise the octane number. Its use is declining in the U.S. due to its having been found in groundwater and due to ethanol subsidies. Use worldwide continues abated).  Gas taxes in California were raised and refining cap and trade purchases -- meant to reduce carbon dioxide -- began this year.  

Over the last twenty years, small refiners have shut down due to the high costs of doing business under California environmental regulations, leaving only 14 large refineries to make the specially formulated California gasoline.  Few refineries outside of the state make their special blend. 

When shortages occur (i.e. a refinery shuts down unexpectedly) it takes weeks for outside shipments to arrive.  Prices soar from competition among buyers. In a free market, higher prices encourage investment which in turn supplies demand. Long years of historical data point to the positive and self adjusting effects of allowing free markets to work.  In California, laws prevent the natural tendency of humans to seek solutions and businesses to provide those solutions, from functioning properly.

We acknowledge the special geographical/environmental issues facing the small “bowled-area” in which 15 million people live and work around Los Angles.  But why punish the rest of California or allow this type of intervention to spread nationwide?   

We find most interesting, the response to these high gas prices, from Sacramento's multiple-billionaire and self-proclaimed environmentalist, Tom Steyer. Steyer referred to the high fuel prices as, “an oil extraction tax.”  He is right to call it a tax because much of the price is added by government!

We also remember well, and suffered through, the inflated fuel prices and artificial shortages of the 1970's, created from cash only purchasing. A kind of "let’s meet behind the store" black-market that resulted from President Nixon’s ill-guided wage and price controls.

The bottom line? When government interferes with markets, consumers and citizens suffer.  It is time for government to step aside and let the free market work.  It will, if we just give it a chance!

Mark, John and Bill

 


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