“Hot Fuel” Regulations Would Harm Consumers

According to a piece in yesterday’s Kansas City Star, Sen. Claire McCaskill filed legislation on Friday to regulate gas pump measurements "to adjust volumes to account for the effects of temperature." McCaskill said in a statement that the bill was inspired by last year’s series of hot fuel articles in the Kansas City Star.

Heat expands fuel and cold contracts it, so that if you were to buy a single gallon of gas in 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.

From yesterday’s article:

The stories, which began last August, found that consumers are being overcharged about $2.3 billion per year because of the effects of temperature on fuel.

“We have the technology to change that, and there’s no good reason not to utilize it,” McCaskill said.

As the article also notes, the "physics of hot fuel are fairly straightforward" — but it’s not at all clear that this undeniable variation in purchased energy output actually results in consumers being overcharged. 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 an 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 it has that temperature-increased supply of fuel. "Overcharging" is only taking place if we assume gas stations aren’t competitive, which is an absurd assumption. Individual gas stations wouldn’t stay in business long if they didn’t ever lower prices to compete with other nearby stations. This sort of fierce competition is one of the reasons we’re not still at $3.00-plus-per-gallon pump prices — when overall market price drops, so do individual station prices.

The article continues:

The bill would give the Federal Trade Commission, working with the National Institute of Technology and Standards, the authority to implement its provisions. If the legislation is approved, its provisions would go into effect within a year of enactment.

The legislation calls for all retail dispensers in the United States to be equipped to adjust for fuel temperature fluctuations within six years. State inspectors would determine whether the necessary equipment had been installed.

A trust fund also would be established to help pay as much as $1,000 to upgrade each retail pump. To be eligible for the subsidy, however, the retail fuel stations could not be owned by a major oil company. Details on financing the trust are to be disclosed later.

If equipment like this is installed, and gas stations are required to dispense slightly more gas per "gallon" when temperatures are hotter, the price charged for each one of those larger gallons will 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. There would be no consumer savings as a result of this regulation.

But there might at least be more accurate information at the pump. So, aside from the illusory specter of hot fuel "overcharging," it might seem at first glance like a good idea to make sure that consumers know exactly what they’re getting when they buy a gallon of gas, in terms of energy output per gallon. 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, and would be reflected in still 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 becomes irrelevant. It wouldn’t matter whether consumers actually think the information is worth the cost — they’d be getting the information, and paying the cost, regardless.

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 patronage.

In short, this legislation would increase costs across the board, all in the service of providing consumers information that’s not relevant to comparative fuel shopping.