i don’t think so.
Governor Newsom called a special session of the Legislature to consider a plan centered on minimum inventory requirements for gasoline distributors. The idea is that if there is a spike in California due to a supply shortage, some state agency or entity will authorize or require the release of inventory, thereby increasing supply and pushing down prices.
This is a message from Severin Borenstein.Can increasing reserves solve California’s gasoline price problem?” Energy Research Institute blogSeptember 23, 2024.
When most economists think about rising prices for storable goods like gasoline, they immediately think of futures markets. Why don’t futures markets address this problem? And if gasoline producers can predict price increases, even in the absence of futures markets, why cut sales now and wait for prices to rise when prices rise? Why not try to make more money?
Borenstein is an economist who thinks a lot about gasoline prices. But reading his posts tells us nothing about the futures market. Perhaps there are reasons, and it may be obvious to him why they do not work in this case. But it’s not clear to me.
He continues:
If implemented carefully and operated without political interference, inventory requirements could help consumers. California’s specially blended gasoline and limited sources make it vulnerable to supply disruptions, especially in the fall when refineries often undergo maintenance that reduces production. These events can upend the finances of low-income working families. And because of that, increasingly concentrated ownership When you look at the number of refineries that produce our blends, it’s not at all clear that producers have strong market incentives to increase supply that would drive down prices.
Therefore, Borenstein acknowledged that regulations to replace the apparently non-existent futures market would need to be “carefully put in place and operated without political interference.” In other words, it doesn’t work. why? This is because those who introduce and operate regulations have no incentive to do so prudently.
Borenstein later wrote:
Other opponents of inventory requirements, such as the governors of Nevada and Arizona, argue that holding these inventories reduces supply, which in turn increases prices. However, this argument ignores the essence of inventory, which is to obtain inventory when there is sufficient production capacity in the system and to make inventory available when the system is likely to run out. Sellers meet minimum inventory requirements by building up inventory in advance of periods when high demand or low supply may strain the system. While the price increase caused by increasing inventory during less constrained periods will almost certainly be minimal, price declines when stockouts occur can be significant.
That’s sound reasoning, but why aren’t companies already doing it? Does Governor Newsom have special information about the gasoline industry that gasoline producers don’t have?
To his credit, Borenstein points out several problems with the proposed regulations.
My own concern with this proposal is that actual implementation is likely to be much more complex than legislators and proponents realize. Someone has to set and enforce the rules for inventory requirements. That is, what counts as inventory (blending ingredients? Imports arriving soon?) and what are the sales criteria for calculating the required quantities (total gasoline sales? CARB gasoline sales? Refining? Tokoro’s ability?). , What is the required inventory-to-sales ratio?
More importantly, you need to decide when to waive requirements to address price gouging, how to reliably release inventory, and when to require sellers to rebuild inventory.
This leads to my other concern that inventory will be managed in an unpredictable and political way. If governors or other political appointees decide when to release stocks, they may do so for political interests, such as suppressing gasoline prices (as happened with the National Strategy) even when there is no evidence of a shortage. It could end up being used for this purpose. oil reserves). Therefore, inventory requirements are subject to either predictable rules about when they will be released (for example, if the spot price in California exceeds the Gulf Coast price by more than a certain amount) or by an independent committee making the decision. must be accompanied.
These are all good, well-thought-out concerns. Hopefully, we can have a thorough discussion with other supporters and opponents of this regulation.
