Aloha! It's deja vu all over again out in the People's Republic of Hawaii, where yesterday, the state's Public Utilities Commission became the first in the land to push the panic button and impose a cap on the price of gasoline.
Effective Sept. 1, 2005, Hawaiian wholesale gas prices will be linked to those on the U.S. mainland, with the level of the price cap resetting weekly. The initial price cap has been set at about $2.74, inclusive of taxes, or a little lower than the current average retail price of gasoline on the islands, which is $2.76.
But remember -- the price cap is set on wholesale gas. Hawaiian retailers then jack that wholesale price up by $0.12 on average in order to earn a profit on their sales. Thus, the effect of the price cap will actually be to ensure that gas prices rise over the next few days.
Why are prices certain to rise? Because, not to put too fine a point on it, price controls are stupid. They don't work. They didn't work when President Nixon tried them in 1971 -- which is why Nixon's successor, President Ford, removed them. And bright as he was, President Carter didn't learn from either Nixon's mistake or Ford's correction -- he imposed price controls of his own just a few years later.
Throughout the 1970s, price caps contributed to supply shortages initiated by the Arab oil embargo of 1973 and failed in their primary purpose to curb inflation. On the contrary, while inflation ran rampant, the American economy stagnated, resulting in -- you guessed it -- "stagflation."
Hawaiian refiners Tesoro
Next will come the shortages -- again a la the 1970s. At some point, the local refineries will decide that it's simply not worth it to fully supply the Hawaiian market if they can get better prices for their products on the mainland. They won't shut the Hawaiian spigots entirely, of course, but if it becomes more profitable to ship part of their production to the free markets on the mainland (accounting for shipping costs), you can bet your bottom dollar that's what they're going to do.
And when that happens, don't expect competing refiners like Valero
Hawaiian car owners -- get ready for a remedial lesson in Socialism 101.
Fool contributor Rich Smith does not own shares of any company named above.