California governor plans to penalize oil companies amid high fuel prices

California Gov. Gavin Newsom proposed imposing a limit on the gross gasoline refining margin. An upper limit has yet to be set in cents per gallon. According to Newsom’s proposal, oil companies would be penalized if the margin exceeds the price ceiling. The companies would be charged a civil penalty by the California Energy Commission. All the penalties would go to the “Price Gouging Penalty Fund” and then would be redistributed to the consumers.

Many problems may arise when reviewing this price cap. The main one is that it is impossible to impose price controls in a market economy. David R. Henderson, a research fellow with the Hoover Institution, highlighted that prices were dependent upon the interaction of demand and supply.

Any attempts to control prices will lead to a supply and demand mismatch. A clear example is the 1970s, when price controls resulted in shortages and rationing, greater dependence on foreign oil, and higher prices.