Hawaii’s Gas Cap, Twenty Years After Katrina: A Policy Experiment Revisited

When Hurricane Katrina struck the Gulf Coast in late August 2005, the storm not only devastated infrastructure in Louisiana and Mississippi but also sent shockwaves through the nation’s fuel markets. Spot gasoline prices in New York Harbor, the Gulf Coast, and Los Angeles spiked dramatically as Gulf Coast refineries shut down and distribution networks from Houston to New York faltered.

In Hawaiʻi, this timing could not have been worse. Just days later, on September 1, 2005, the state’s gasoline price cap went into effect, tying wholesale prices in the islands directly to those very same volatile mainland benchmarks. The result was a real-time policy stress test that quickly revealed the weaknesses of the gas cap formula.

Enacted as Act 77 in 2002 and modified in 2004, Hawaiʻi’s gas cap law required the Public Utilities Commission to set a weekly wholesale ceiling price for gasoline. The cap was calculated using the average of spot prices in the three key U.S. markets – Los Angeles, Gulf Coast, and New York Harbor – plus adjustments for shipping and neighbor-island differentials. The goal was to protect consumers from what policymakers perceived as high and uncompetitive fuel prices.

But instead of insulating motorists, the cap imported mainland volatility into the islands. As Katrina disrupted refineries and pipelines, Hawaiʻi’s cap ratcheted up in lockstep, as shown in the figure below. On Oʻahu, the state’s largest market, retail prices rose faster than they likely would have absent the cap.

Hawaii vs. U.S. Regular Gasoline Retail Prices (2005-2006)

Analyses by the Department of Business, Economic Development & Tourism (DBEDT) estimated that during the brief life of the cap (September 2005 to May 2006) consumers paid a net premium of roughly $55 million. Oʻahu drivers bore the brunt of the increases, while neighbor-island motorists saw modest, temporary relief.

Meanwhile, wholesalers and retailers were caught in a bind. The formula dictated the wholesale ceiling, reducing the incentive for price competition and effectively transferring the role of price-setter from the marketplace to the regulator. Refiners warned of supply risks if capped prices dipped below their cost to deliver.

By May 2006, just nine months after implementation, the Legislature passed Act 78, suspending the cap indefinitely. In its place, the state launched the Petroleum Industry Monitoring, Analysis, and Reporting (PIMAR) program. Rather than attempting to dictate prices, the PIMAR framework required regular reporting on wholesale and retail transactions, margins, and supply conditions. The focus shifted to market transparency and oversight – tools better suited to identifying anti-competitive behavior without distorting pricing signals.

The PUC later confirmed that during the cap’s life, wholesale prices ‘moved in sync’ with the cap formula rather than responding to competitive pressures – evidence that the regulation was displacing, not disciplining, the market.

Two decades after Katrina, Hawaiʻi’s experiment with price caps stands as a cautionary tale. While well-intentioned, the policy exposed consumers to mainland volatility, created uneven regional impacts, and undermined competitive dynamics in the state’s fuel supply chain.

If the cap had remained in place through the dramatic run-up and collapse of crude oil prices in 2008, it might have cushioned some price spikes, but it also would have delayed relief during the rapid downturn. For a small, isolated market like Hawaiʻi, flexibility and accurate price signals proved more valuable than a rigid formula.

Today, as policymakers revisit fuel affordability, supply security, and the transition to cleaner energy, Hawaiʻi’s gas cap experience offers a timely reminder: interventions must be tested against real-world market shocks. Katrina exposed the fragility of the cap almost immediately. Transparency and monitoring, not price ceilings, ultimately proved the more resilient policy tools.