I don’t think so.
Governor Newsom has called a special session of the Legislature to discuss his plan, which centers on a minimum inventory requirement for gasoline retailers. The idea is that when a surge occurs in California due to low supply, a state official or organization would allow – or demand – the release of the supply, which would increase supply and lower prices.
This is from Severin Borenstein, “Could More Reserves Solve California’s Gasoline Price Problem?” Energy Institute BlogSeptember 23, 2024.
I think almost any economist who thinks about price spikes for storable commodities like gasoline will immediately think of futures markets. Why don’t the futures markets solve this problem? And even if there are no futures markets, if gasoline producers can anticipate a price spike, why don’t they cut back on sales now to make more money when the price rises?
Borenstein is an economist who thinks a lot about gasoline prices. But read through his post and you won’t see anything about futures markets. Maybe there is a reason and maybe the reason they don’t work in this case is obvious to him. But it’s not clear to me.
He continues:
If implemented carefully and without political interference, an inventory requirement can help consumers. California’s special gasoline blend and limited supply sources make the country vulnerable to supply disruptions, especially in the fall, when refineries often perform maintenance that reduces their production. These events are upending the budgets of low-income working families. And because of the increasingly concentrated ownership of the refineries producing our blend, it is not at all clear that any producer has a strong market incentive to increase supply, which would in turn drive the price down.
Borenstein thus concedes that regulation to replace seemingly non-existent futures markets “must be carefully implemented and operated without political interference.” In other words, it won’t work. Why? Because the people who would implement and enforce the regulations have no incentive to do so carefully.
Later Borenstein writes:
Others who oppose the stockpile requirement — including the governors of Nevada and Arizona — have argued that holding them would reduce supply and therefore drive up prices. However, this argument misses the whole point of inventories, which is to acquire them when the system has sufficient production capacity, and to have them available when the system falls short. Sellers would meet the minimum inventory requirement by building inventories in advance of periods when the system could come under stress, either due to high demand or reduced supply. The price increase caused by building inventories at less limited times would almost certainly be minimal, while the price drop when there are shortages could be significant.
That’s good reasoning, but why aren’t companies doing that already? What special information does Governor Newsom have about the gasoline industry that gasoline manufacturers do not have?
To his credit, Borenstein points out some problems with the proposed regulation:
My own concerns about this proposal are [sic] that real-world implementation will likely be much more complicated than lawmakers or advocates seem to acknowledge. Someone needs to set and enforce the rules for inventory requirements: what counts as inventory (mixing components? Imports coming in soon?), what is the sales basis for calculating the required quantity (total gasoline sales? CARB gasoline sales? refinery capacity?), what is the required ratio between stock and turnover?
More importantly, someone must decide when to waive the requirement to address a price spike, how to ensure inventory is released, and when to require sellers to rebuild their inventories.
This leads to my other concern, which is that inventory would be managed in an unpredictable and political manner. If the governor or other political appointee calls for when to release supplies, this can easily be used for political gain, including suppressing gas prices, even if there is no evidence of a supply shortage (as has happened with the National Strategic Plans ). Petroleum reserve). That’s why any inventory requirement should be accompanied by a predictable rule for when it will be released — for example, when spot prices in California exceed Gulf Coast prices by more than a certain amount — or by an independent board that would make the decision .
These are all good, well-thought-out concerns. Hopefully they will be enough to persuade other proponents, or those on the fence, to oppose this ordinance.