Let's reach into the mailbag and pull out one reader's suggestion for actually doing something about gasoline prices. Reader "CW" would like the government to get into the business of producing gasoline.
If you're like me, your first reaction is that having the government compete with private business is last thing we need.
But CW isn't pushing a public competitor. Instead the idea is to build a "yardstick" company -- a company that will let us see what a fair price for gasoline really is.
Every news story on higher gasoline prices comes with an "explanation" (if you believe the oil companies) -- or an "excuse" (if you don't believe the oil companies). Let's have a publicly owned and operated gasoline company -- a very small one will do -- with a mandate to produce fuel at the lowest possible price. The public company's gasoline price serves as a scorecard to let us all know what's a fair price.
If "our" company can sell gasoline cheaper than the private companies, then we know the oil companies are ripping us off.
There's precedent for this idea. Congress set up the Tennessee Valley Authority (TVA) in 1933 to generate electricity. At the time, three companies generated nearly half the nation's electricity. (Today, in Washington, the top three refiners produce about three-quarters of our gasoline.) Congress wanted to use TVA rates as a standard for knowing whether privately generated power was being sold at a fair price.
An important difference between the TVA and a publicly owned refinery is that the TVA became a massive power producer; in some areas essentially a government monopoly. We want the smallest company possible -- one just big enough to be an efficient producer. For the record, the smallest refinery currently operating in Washington state produces roughly 7 percent of our gasoline and is independent of the major oil companies.
We -- the people of Washington -- should have a small refinery of our own. Maybe we should share one with our neighbors to the south, since there are no refineries at all in Oregon.
To get a useful yardstick we need to play fair in two ways. A publicly owned refinery has to pay full cost just like the private sector. No government subsidies, including implicit subsidies such as being allowed to issue tax-free bonds. The publicly owned refinery must comply with all environmental regulations, pay taxes, pay back its bondholders, etc.
On the other side, the publicly owned refinery must have a single mission -- produce cheap gas. It's not a charity. It doesn't get run by the state's political process. It just produces gasoline and sells it at a break-even price.
How much difference would a publicly owned refinery make to the price of gasoline? If we really knew the answer, we wouldn't have to build a refinery to serve as a yardstick.
But we can at least do some informed speculation. The California Energy Commission publishes numbers on refinery costs and profits, subtracting out the cost of crude oil. This year alone, refiners have kept between 22 cents and 74 cents per gallon to cover costs and profits. Since costs don't vary enormously, it's reasonable to speculate that much of the difference between 22 cents and 74 cents is monopoly profit.
The big reason for high gasoline prices is OPEC, and that's beyond our control. But a publicly owned refinery as yardstick might show that another 20, 30, 40 cents a gallon could be squeezed out.
As a rule, asking the government to compete directly with the private sector is a mistake. Readers who think the gasoline companies are doing the best they can in difficult circumstances, ought to oppose this kind of government intervention.
But if you think gasoline prices are artificially high, you might find that a small, publicly owned refinery is just the ticket.
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Dick Startz is Castor Professor of Economics and Davis Distinguished Scholar at the University of Washington. He can be reached at econcol@u.washington.edu.
This column appeared in the following publications:
Bellingham Herald -- June 20, 2004
Tacoma News Tribune -- June 13, 2004