"First they ignore you, then they ridicule you, then they fight you, then you win." -- Mahatma Gandhi

“Hot Fuel” Regulations Would Harm Consumers

September 14th, 2007 by mopns · No Comments

By Eric D. Dixon

Nobody likes high fuel prices. In recent years, as gasoline costs have soared, consumers have looked for solutions — ranging from attempts to increase efficiency, like carpooling and converting to biodiesel, to ineffective gestures, like those perennial calls for singleday gas station boycotts. The recent movement to regulate “hot fuel” at the pump belongs to the latter, ineffective, category — only worse. Hot fuel regulations would increase gasoline prices across the board.

There’s no disputing the physics of hot fuel. Heat expands gasoline and cold contracts it, so that if you were to buy a single gallon of gas in, say, Florida, you’d actually be buying a somewhat lower amount of energy output than if you were to buy a gallon of gas in Alaska. This temperature dichotomy is particularly relevant for a state like Missouri, with both infamously hot summers and cold winters. Consumer groups claim that people are being overcharged for the gas they buy as thermometers climb.

There’s no reason to think, though, that this variation in purchased energy output actually results in overcharging. Price is a function of both demand and supply. So, in a competitive market, when temperatures rise and the contents of fuel storage tanks simultaneously expand, gas stations have a slightly increased supply of fuel to sell. The competitive drive to outsell the station down the street gives each gas station an incentive to lower its prices slightly — precisely because they have that temperature-increased supply of fuel.

Overcharging for gasoline is only taking place if we assume gas stations aren’t competitive, which is obviously false. Individual gas stations wouldn’t stay in business long if they didn’t lower their prices to compete with other nearby stations. This sort of fierce competition is one of the reasons gas in Missouri now costs well below $3 per gallon. When overall market price drops, so do individual station prices.

Proponents of hot fuel regulation call for temperature-adjusting technology to be required for U.S. gasoline pumps, of the sort now used in Canada. This equipment would ensure that a pump dispenses a higher amount of fuel when the weather is hot, so that each “gallon” would have the same energy output as a non-adjusted gallon at 65 degrees Fahrenheit — the standard industry temperature for fuel delivery in other market sectors.

If equipment like this is installed, though, the price charged for each one of those larger “gallons” would also naturally rise. Just as prices would fall slightly when hot temperatures bump up the gas supply available in storage-tank reserves, the prices would increase accordingly if that extra supply were, instead, parceled out to motorists a little at a time with each gallon purchased. This is an obvious drawback — if gas stations are required to dispense more fuel per unit than before, each unit will cost more. There would be no consumer savings as a result of such regulation.

Temperature-adjusting equipment might at least provide a greater degree of information at the pump, though. It might initially seem like a good idea to make sure that consumers know exactly what they’re getting in terms of energy output when they buy a gallon of gas. As useful as this information might be, though, it’s necessary to weigh its value against the cost of obtaining it.

Temperature-managed pumps would require a huge investment, which would be reflected in even higher gas prices — or higher taxes, depending on how the upgrades are financed. The fact that this investment would be required by law means that economic valuation would become less relevant. It wouldn’t matter much whether consumers actually think the information is worth the cost — those who need to fill their tanks would be getting the information, and paying the cost, regardless.

In a competitive market, prices will already reflect the seasonal variation in energy output per gallon that changing temperatures bring. So what really matters when buying a gallon of gas isn’t knowing its energy output in relation to other temperatures, but in relation to other nearby stations. If you can be sure that the gallon of gas you’re buying at one station is the same size as the gallon of gas you might buy down the street, you can make an informed decision about which relative price is worth your hard earned money. Legislation mandating pump adjustments for hot fuel would increase the already steep price of gasoline, all in the service of providing consumer with information that’s not relevant to comparative fuel shopping. Hot fuel regulations would harm consumers — not help them.

Eric D. Dixon is the editor for the Show-Me Institute, a Missouri based think tank.

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