Gasoline Prices are Too Low Down South
Posted September 29, 2008 at 6:25 am 
Filed in: It is 1:00 a.m. Monday morning and I just returned to my parents’ house after wandering around Atlanta, Georgia, for an hour looking for gasoline. I am here visiting family, who have explained at length their frustration with gasoline shortages resulting from reduced refining capacity in the aftermath of Hurricane Ike. They told me that over the past few days they have on occasion had to try more than 10 different gas stations to find any gasoline, and that at least twice they were at stations that ran out of gas while they were in line or filling their cars.
While they were unhappy with my observation, I told them that the problem was that gasoline was too cheap, despite its $3.89 per gallon price.
The Southeast and Gulf Coast are suffering shortages as a result of reduced refining capacity. There is, literally, less gasoline available for sale than when refineries are operating at normal capacity. The shortage is being exacerbated by rational individual consumer behavior that collectively makes the situation worse. As a general matter, the gas tank in the typical vehicle in Atlanta would probably usually be half full or a little more than that. When gasoline is in short supply, however, consumers continuously fill their tanks because they are unsure as to when they will next be able to find gasoline. For instance, my parents indicated that every time they pass a gas station with gas, they now fill their tanks, no matter how little gas they have room for. As the gas tank in the average car is fuller, demand for gasoline grows above its normal rate. Thus consumers are simply exacerbating the problem created by the refineries.
What is the solution? I’d suggest that it is letting markets work which, in this case, would mean higher gasoline prices.
A functioning free market results in a natural price point that represents equilibrium between supply and demand. When supplies are short, the price has to be allowed to rise high enough to reduce demand and reach that equilibrium. If the price is not allowed to rise sufficiently in order to depress demand, there will be shortages. While today’s price in Atlanta may be sharply higher than just two weeks ago, it is only about what I have been paying in Washington, D.C. where there are no shortages. For better or worse, until the Gulf Coast refineries are back on line, the price of gasoline needs to be allowed to rise to its natural equilibrium level, which will inevitably reduce demand—some people will make the rational economic decision to drive less, while others may choose to get off the road entirely, instead turning to buses, the subway, carpools and telecommuting. Today, instead, there are gas stations with signs indicating $3.89 gasoline but no gas. If you have to get to the airport for a trip, would you rather have no gasoline available at $3.89 a gallon, or the option to purchase just the two gallons you need to get to the airport at $8 a gallon?
Why hasn’t this happened? As Ike approached the United States in mid-September, Georgia Governor Sonny Perdue signed an executive order activating the state’s anti-price gouging law, which makes it illegal to sell “goods necessary to preserve life, health, or safety at a price higher than the price at which such goods were sold or offered for sale immediately prior to the declaration of a state of emergency.” Many states have such laws, and even in those that don’t, gas station owners do not wish to be featured on the local evening news for charging what some believe are exorbitant prices in a crisis.
Such charges, however, have no economic basis. Price gouging is commonly thought of a charging an unreasonable price for a product or service. Who, however, is to say what is unreasonable? At my local grocery store I can buy 24 bottles of water for $3.99, which is 17 cents a bottle. I can buy the same bottle of water on the National Mall in front of the U.S. Capitol from a street vendor for $1.75. Is that gouging? What about $3 or more for the same bottle at the Washington Nationals baseball game? Am I being gouged? No. I’m paying for the convenience of buying a single cold bottle of water where and when I want it instead of having to lug around the whole case that I could have bought at the grocer.
While it may be appropriate for government to limit prices in the event of an imminent crisis, such as an evacuation ahead of a hurricane, refinery closures after the storm has passed, during which people are not facing imminent harm, are not circumstances that justify imposition of price caps.
In fact, any economist will tell you privately that gouging is a political term, not an economic one. In June 2000, a pipeline supplying the Chicago area with the base fuel for gasoline broke. Prices rose sharply, and cries of price gouging commenced. Politicians asked DOE, EPA and the FTC to investigate allegations of price gouging by gasoline suppliers in the area. At the time I was responsible for energy matters at the White House; I asked a member of the President’s Council of Economic Advisers what constituted price gouging. He responded that there really was no such thing from an economic perspective. He pointed out that prices generally reflected a real shortage, and no one was being forced to purchase something that they deemed too expensive.
Back to Atlanta and the Southeast. If a gas station were to try and sell gasoline for $8 a gallon, it would probably be excoriated on the front page of the local paper and on the evening news, perhaps nationwide, and could face prosecution. But, for those who really need some gasoline, is it better to have the option to buy some at $8 or face station after station with signs saying “$3.89 – NO GAS”? I bet the guy who runs out of gas on the side of the road on the way to the airport, waits 2 hours for AAA to bring him a gallon of gas, and then misses his flight would think $8 for a gallon seems pretty cheap.
Ron Minsk
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