A very first world problem from which I’m fortunate to suffer is that the list of books I’d like to read grows approximately fifty times faster than the amount I have time to read. Recently, I’ve been reading Making Great Decisions in Business and Life, by David Henderson and Charley Hooper, which has occupied space on my intended list for much longer than it should have. It’s a great read, and while there is a lot in the book to recommend and discuss, a recent news story caught my eye that both reminded me of a lesson from the book and, it turns out, almost perfectly matches an example the book itself used.
The recent story comes from NPR. California Governor Gavin Newsom is upset about how high gas prices are in California relative to the rest of the country. His explanation? Greed, of course, along with a conviction that high gas prices show the California state government is insufficiently aggressive about intervening in and regulating energy markets. The NPR report notes:
California has the second-highest gas tax in the country and other environmental rules that increase the cost of fuel in the nation’s most populous state. Still, Newsom said there is “nothing to justify” a price difference of more than $2.50 per gallon between California’s gas and prices in other states.
“It’s time to get serious. I’m sick of this,” Newsom said. “We’ve been too timid.”
One wonders what degree of price difference would be justified in the Governor’s mind by the regulatory and taxation burdens created by the California state government. Unfortunately, we are left guessing on that point, because he never says, nor does he show his work revealing how he came to his conclusion.
The lesson from the book the Governor (and Californians generally) ought to apply is to ask what changed. If the price of gas is changing, some other factors must also be changing to lead to that price change. Appealing to the greed of businessmen is explanatorily inert. Trying to explain high prices by appealing to greed is like trying to explain an airplane crash by appealing to gravity. Yes, there is a trivial sense in which a plane crash is caused by gravity, but gravity is a constant factor for all air travel, and the vast majority of planes don’t crash. Using the desire of businesses to sell their products for a high price as an explanation for high prices is equally inert as an explanation, for the same reason.
Governor Newsom isn’t trying to ask what’s changed, nor is he asking what makes California different from the rest of the nation. He’s trying to explain a variable by appealing to a constant. That’s bad reasoning – and I suspect he knows this.
But like I said, this news story isn’t new. In Chapter 4 of David and Charley’s book, they describe a very similar situation, where the price of gas increased rapidly in California relative to the rest of the nation. The parallels are pretty remarkable. For example, in the NPR story, we read how “gas prices jumped 84 cents over a 10-day period.” In the book, the authors note how in “the summer of 1999, Californians were upset because gas prices had jumped 40 cents a gallon in the few months since March.” The NPR story reports that “while gas prices have recovered somewhat nationwide, they have continued to spike in California.” In the book, the authors note “this gas price hike happened only in California and not in the rest of the country.” In a 1999 article, quoted in the book, David Henderson applies the “ask what changed” lesson to show why arguments rooted in greed don’t work:
Why did California refiners suddenly get greedier in the last three months? Can’t we assume that, whatever their level of greed, they’ve been that way for quite a while? So what changed in California that didn’t change in the rest of the United States? The answer is the amount of gasoline produced in California.
David goes on to point out that two major oil refineries in California had been damaged in a fire, reducing supply. So that’s one thing that changed. This was made worse by California regulations that make the state particularly vulnerable to supply shocks by “requiring that all gasoline sold in California be a specific kind, different from that sold in neighboring states.” And in the recent NPR story, we read how California regulations have “caused refineries to close and tightened supply because California requires refineries to produce a specific fuel blend.” As the old saying goes, the more things change, the more they stay the same.
One thing that hasn’t changed is the final observations David and Charley make as they close their chapter:
The reason for the price increase was the fires. The reason the price increase was so severe was the regional nature of gasoline production in California. When people notice higher prices at the gas pump, they want to explain the change, but they frequently resort to explanations that rely on factors that haven’t changed. Some of these factors may have made the change more severe, as with the California gas refining laws. Some of these factors were just “there” and didn’t necessarily exacerbate the change, such as the greed of the gas companies, who are just as greedy elsewhere. We need to consider what really caused the change. Because if nothing changed, why did something change?
READER COMMENTS
Dylan
Oct 16 2022 at 12:12pm
I agree that asking what changed is important, but I am curious, aren’t the prices across other west coast states nearly as high? Did Washington, Oregon, Nevada, Hawaii, and Alaska all adopt the same gasoline requirements as California? Are California refineries the sole suppliers for those states?
Dylan
Oct 16 2022 at 12:17pm
I agree asking what changed is important, but isn’t the price change nearly as dramatic across the entire west coast? AAA shows that Alaska, Hawaii, Washington, Arizona, and Oregon all have average prices above $5 a gallon. Have they all adopted the same regulations as California? Are they entirely reliant on California refineries? What is preventing greater arbitrage in those other states to bring costs down closer to the national average?
Jon Murphy
Oct 16 2022 at 2:39pm
Alaska and Hawaii are transportation costs (eg Jones Act). Washington and Oregon have extremely high taxes.
Dylan
Oct 16 2022 at 5:51pm
I’m going to paraphrase something I heard a very wise person say once, and asked if any of those things have changed since June? Many states on the east coast have taxes that are just as high or higher than Washington and Oregon, but are currently paying ~$2 less a gallon than the western states.
I did a 10 year price history looking at Washington (#5 highest gas tax state, NY #6, and Alaska #50). Interestingly to me, Washington and Alaska are pretty much in lock-step the entire period. NY prices are consistently lower, particularly over the last 5 years or so, but only by about $0.30 or so (eyeballing the chart). That all changes in June, when NY prices plunge and Washington and Oregon keep going up (they got a couple of weeks reprieve before they bounced back to the highs, while other states kept falling sharply)
http://www.washingtongasprices.com/Retail_Price_Chart.aspx
Dylan
Oct 16 2022 at 5:57pm
Quick correction, Washington is supposed to be #8 on the gas tax list and NY #9, according to Tax Foundation.
Jon Murphy
Oct 16 2022 at 8:31pm
We’re talking levels here. You asked a level question, not a change question.
KevinT
Oct 18 2022 at 5:07pm
I seem to recall that NY suspended their state gasoline tax when fuel prices spiked. So that would explain the “plunge” in June when other states’ prices do not behave similarly to NY.
Dylan
Oct 20 2022 at 8:43am
NY did suspend their gas tax in June, but the decline in prices was similar in other states that did not suspend their gas tax.
Kevin Corcoran
Oct 18 2022 at 1:42pm
Hey Dylan –
You ask a good question, but it’s on a different topic from what this blog post was meant to discuss. It’s true that many west coast states have higher gas prices than the national average. But the phenomenon under discussion here isn’t “why are gas prices higher in some states than others” – though that is a worthwhile topic and there are no doubt all kinds of different factors affecting gas prices in different states. And though gas is more expensive in Washington and Oregon than the national average, as you correctly note, the difference between California and the national average is almost twice as big as in those states, so California is still pretty distinctive.
But Governor Newsome wasn’t merely objecting on the difference in gas prices between California and the rest of the nation – his specific gripe was on the direction gas prices were moving. Though gas prices are above the national average in other west coast states, in recent months they have been coming down, as the chart you linked to shows for Washington. But while gas prices have been coming down nationwide, including in states like Washington, gas prices have continued to increase in California. That is what is under examination here. Why is California alone seeing prices continuing to increase when everywhere else the price has been decreasing? Pretending, as the Governor does, that refiners are just greedier in California than they are everywhere else in the country is a lame explanation – although, unfortunately, one that is likely to be politically popular and politically successful.
As far as what’s changed in California, as I mentioned in the post, the NPR story points out that the restrictive nature of California regulations have “caused refineries to close and tightened supply because California requires refineries to produce a specific fuel blend.” So that’s one thing that’s changed in California which is distinct from other states. I’d speculate there’s at least one other factor at play here – with emphasis that this is only speculation on my part. California has announced that by the middle of the next decade, all new cars sold in state must be electric. Gas powered cars won’t disappear, obviously – people will still have their existing cars and the used car market for gas cars will presumably still exist. Still, building and maintaining refinery capacity is a hugely complicated and time consuming endeavor. If I was an oil company and asking where I should be expanding capacity, or even using resources to maintain current levels of capacity, California would be at the bottom of my list. It would be a poor use of those resources in the long term. That seems plausible as a factor to me.
Dylan
Oct 20 2022 at 8:39am
This part isn’t true though. Gas prices nationwide started declining in June, including in California. In September, gas prices continued to go down in most states, but they spiked in all of the western states by a similar amount. This leads me to suspect that the thing that changed is something that effects the western states as a whole, and not just California. So, if I was interested in figuring things out, I’d start there. It could be that the common factor is a reliance on California refineries and the reasons you outlined that are specific to there spillover into the other western states, but I don’t know the market well enough to say that’s the case.
Also, I should note that since the start of October, gas prices have started coming down in the western states as well, but opposite of what you said, the decrease in California is much greater than in Washington. California has come down by about $0.60 a gallon and Washington has only come down about $0.25 (~9% vs. 5% declines)
Dann Thomas
Oct 17 2022 at 5:23am
Governor Newsom, greed for money does far less damage than greed for power and with incentives that are far less sinister.
Mark Barbieri
Oct 17 2022 at 9:08pm
I read that book a couple of years ago. It was excellent. I highly recommend it.
I’ve been using the “what changed” question to lots of people that have been blaming general inflation on greedy companies. I usually ask it in the form of “Why were companies not greedy for so many decades? Why did they suddenly start price gouging now?” Sadly, people usually miss my point and respond with off-the-wall answers like “deregulation under Trump”, “too many mergers”, or the like.
nobody.really
Oct 18 2022 at 12:35am
I recall people blaming various terrorist acts on the Muslim faith. I found it difficult to conclude that the most proximate cause of contemporary events was a faith that had existed since the 7th century. Yes, some dependent variables are lagged in time, but this was ridiculous.
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