In the past decade, the price of a gallon of gasoline--after accounting for inflation and taxes--fell by as much as 50 percent. Even with the crisis in the Persian Gulf, gasoline is about 40 cents a gallon less today than it would be if it had simply kept pace with the consumer price index.
During the same time period, as Michigan's population barely changed, the price of state government (measured by its spending) rose by more than 60 percent--or about twice the inflation rate.
Yet, in the topsy-turvy world of state politics, guess who is accusing whom of "gouging" the people of Michigan? From their glass houses in Lansing, politicians are noisily throwing stones at a market they want to regulate but don't understand. It's that season again, when sound bites replace sound economics.
The Legislature is currently considering a proposal which would implement what is known as "open supply," whereby oil companies would be prohibited from requiring their franchises to buy their gasoline from one specific distributor.
Another proposal would bar major oil companies from owning and operating gasoline service stations in the state. By legislative fiat, the gasoline market would be substantially restructured: as many as one-quarter of Michigan service stations would have to be "divorced" from their present owners or managers.
Proponents argue that if passed, such laws would enhance competition and thereby reduce prices.
Advocates of either form of intervention show little concern for the moral or constitutional questions involved here. The right of private property would be materially infringed. The sanctity of voluntary contract would be broken. The same state government which recently was assailed for granting half a billion dollars in no-bid contracts, including many for largely political reasons, would be dictating contract terms for private parties in the gas business.
In terms of economics, divorcement is especially anti-competitive and anti-consumer. It would eliminate an entire class of competition, that which comes from refiner-owned stations with all their inherent economies of scale.
The experience with divorcement in Maryland should serve as a lesson for Michigan. Comprehensive studies have repeatedly revealed that the law there has cost consumers millions of dollars per year in higher prices. One of them, conducted by a Florida State University economist, indicated that if every state adopted the concept, Americans would pay an extra $3 billion a year for gas.
That's one reason why divorcement has been categorically rejected as public policy by the Federal Trade Commission, the U.S. Justice and Energy departments, the American Bar Association, the American Farm Bureau Federation, the Highway Users Federation, the National Conference of Black Mayors, the National Alliance for Senior Citizens, Consumer Alert, and many economists as well.
Those who contend that divorcement is needed as a way to "protect" independent dealers from predatory refiners must contend with this fact: all three federal agencies charged with monitoring retail gasoline competition have testified that they have discovered no evidence of predatory pricing. The industry isn't sufficiently concentrated--not by a long shot--for such pricing to be anything other than a theoretical paper tiger.
The "open supply" idea is not what it's cracked up to be either. It would disrupt the system of brand-name identification that assures motorists of a stable supply of reliable quality gasoline over large areas. That's bad news for independent retailing because brand-name marketing gives thousands of small entrepreneurs the chance to start up and operate with far smaller capital investment than would otherwise be required.
According to the American Legislative Exchange Council, "open supply" would encourage the commingling of the products of two or more suppliers in a single storage tank and expose consumers to the hazard of lower average quality gasoline. Political interference with a producer's marketing of his product almost always backfires--assaulting consumers rather than protecting them--and this scheme would appear to be no exception.
One doesn't have to be a defender of Big Oil to raise doubts about the proposals now in Lansing to regulate the gasoline market. It's sufficient to have an understanding of how markets work, a healthy skepticism of government's ability to "force" them to work better, and a recognition that vote-buying with demagogic appeals is an epidemic at election time.
The Mackinac Center for Public Policy is a nonprofit research and educational institute that advances the principles of free markets and limited government. Through our research and education programs, we challenge government overreach and advocate for a free-market approach to public policy that frees people to realize their potential and dreams.
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