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Gas Shortages: A Solution

03 Oct

by Joel McDurmon

Here in the Atlanta area we are suffering from gas shortages. We are one of a few pointed regions of the Southeast (also particularly Nashville and the Carolinas) that has experienced a squeeze at the pumps since Hurricane Ike (we have no local refineries, and our gas is trucked from one main pipeline that routes petrol from the gulf refineries that Ike shut down). Most stations within 60 miles of the city have no gas. Stations are hurting not only due to decreased volumes of gas sold, but also due to decreased in-store sales since people don’t come in where there is no gas. This article offers a review and a possible solution some station owners might want to consider a possible solution which would benefit consumers as well.

 

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Fear of continued shortage has sparked panic, and thus heightened demand. As soon as a tanker arrives at a station, lines begin to form and then last until that station is empty again. There are many stories of people following tankers to see where they arrive, and then buying gas where it unloads. (This makes me wonder how many people have been out there mistakenly following milk, sugar, or liquefied fertilizer trucks thinking they are gas trucks. Just FYI, if the truck doesn’t have a red placard with the number “1203,” don’t waste your time (or gas)).

On September 12, Georgia Governor Perdue signed an Executive Order outlawing “price gouging.” A state of emergency has been declared and stations are not allowed to sell gas at prices higher than what they were before the emergency. Yet supply is diminished, and basic economics tells us that when supply drops and demand remains, then prices must go up in order balance the two. Government does not think this way: high prices in the wake of a disaster are called “unfair.” So prices remain low while demand remains high, and, guess what? The supply runs out. Now we no longer have even high-priced gas, we have no gas.

This basic rule of economic is most clearly seen in times of crisis. In 2 Kings 6:24-29, the siege of Samaria caused famine in the city. “There was a great famine in Samaria; and behold, they besieged it, until a donkey’s head was sold for eighty shekels of silver, and a fourth of a kab [about 1/2 pint] of dove’s dung for five shekels of silver.” Ever had donkey’s head or dove’s dung for dinner? Would you pay $385 to eat a donkey’s head dinner, or $25 for a cup of bird dung? This is what naturally happens in times of scarcity: prices rise in order to distribute scarce resources to those willing to pay. If the crisis is bad enough, some people will pay very high prices for even very low-quality necessities.

And of course, when times get so bad, people look to government to help them: “As the king of Israel was passing by on the wall a woman cried out to him, saying, ‘Help, my lord, O king!’” In this case, however, the king did not foolishly decree price controls, but responded, “If the Lord does not help you, from where shall I help you? From the threshing floor, or from the wine press?” This is a wise ruler: government cannot help if the invisible hand of God in the market does not do so first. (The woman then goes on to confess to having eaten her son-an example of the extents of immorality to which people will run in times of crisis).

The current shortage (hardly a siege or a famine) has drivers circling stations hoping to find gas, and then jamming a station when it is found. A local owner told me he was pumping 1000 gallons per hour. If the tanks start out empty, and are refilled by a standard 8,000 gallon truck, then the simple math tells you that even a full shipment won’t last 8 hours in this demand. Something needs to slow the demand in order to ease the effects of the shortage.

Perdue’s executive order is a classic case of government “doing something” in response to a crisis, and as usual that “something” is something not so helpful. I believe this is a classic government show for the people. The problem is that it is just that: a show. And it is shallow but not easy to see through for the average person. The State responses have everyone pointing fingers at everyone else, and ultimately calling on the Federal government for a solution (government calling for more government control). So, along with these misguided actions comes a good dose of propaganda: “State’s on top of gas shortage but do your part, too“; “Perdue urges Bush to tap reserves to help with gas shortage“; “Officials: Panicking Motorists Contribute To Gas Problems“; anything to point the finger away from the government’s interference in the market. “It’s Ike’s fault, Gustav’s fault, the station owners’ fault, Your fault. Sellers are to blame, and consumers are to blame; government is just trying to help!

It’s the old familiar refrain we hear every time something forces gas prices sharply higher, or when some event causes a temporary shortage of anything: high prices are inevitably demonized as “price gouging.” At least one local news writer sees through the standard government propaganda, and gives a free-market explanation to the problem; this story is good if a bit wordy. His point is right-on: “The unhampered market will always move towards the market-clearing price. Sellers can’t sell anything for more than what people are both willing and able to pay, without going out of business. . . . If there are runs on gas stations, then prices are too low.” It’s a simple fact, if any station owner genuinely raised prices above what people were willing and able to pay, then people would not buy from him, period. The price may go high, but there is a point where he must stop if he wants to compete with other sellers.

I have heard the shortages being blamed on greedy consumers who, it is claimed, don’t really need to fill up-perhaps they have 3/4 tank-but dive into a station anyway as soon as they spot gas available. Why do people “greedily top off” like this, extenuating the shortage and causing others to go without? The simple answer is price-not “greed,” but price. Taking advantage of an opportunity is not “greed,” it is wisdom. If, however, prices were allowed to rise until they reached the equilibrium which the market demands, wisdom would then dictate that those 3/4-tank people save the extra money until they really do need to fill up. Yeah, it may be true, they don’t currently need to fill up, but finger-pointing won’t change their minds. Raising prices may.

The idea of “price gouging” contradicts basic economic sense. Raising prices in response to shortages is not “gouging,” it is common sense. Higher prices discourage consumer greed from manifesting in consumer action. I just took a break from writing this article to go to lunch. As we drove about a mile to the restaurant we passed a gas station which had just received a shipment; lines had just begun to form. I had half a tank, but whipped in to fill up at $3.99/gallon. We sat in line for 20 minutes until a spot opened up and I topped off. Ask yourself the question: would you have spent 20 valuable minutes when you already had half a tank if the price were $6.99 instead of $3.99? Probably not. Neither would, probably, a majority of the people in line. The lines would shrink, supplies would last longer, and at the higher price, people would likely begin to limit their driving to bare necessity until supplies stabilized and prices returned to normal.

Not only would higher prices curtail greedy behavior, they would require consumers to take the further step of self-rationing. The “rationing” in this case, however, would be performed reasonably and freely (that is, willingly and without the clumsy consequences and annoyance of government interference) according to need instead pouncing on the scarce resource at the government’s artificially low price. As it is now, people get as much as they can, when they can, every chance they get, and they continue the same level of gas consumption as normal. The only pain is standing in line again in a few days to top off again. If prices rose, the same people would less likely stop and fill so often, and would curtail driving as much as possible due to the higher cost; but they would have less fear of not finding gas later when they really needed it. Therefore, the free market would correct the shortage by pressuring consumers to fill less frequently, to fill only when needed, and to drive only when needed, until supplies return and prices fall.

From this perspective, higher prices don’t reflect greedy gouging, rather, it is the opposite measure-government price controls-that unleash greed, consumer greed. With higher prices, gas station owners would not be “gouging” because they themselves will have to pay higher prices to obtain the supply, and thus their profit margin would remain virtually the same. The great manifestation of greed comes in the uneducated cry of “gouging” from the people who think that higher prices are somehow “unfair.” When the government capitulates to that plea it suppresses the best possible relief, and sanctions unbridled greed in the name of protecting the masses from greed. The government has therefore become complicit in greed, has unleashed the greed, and, in fact, is the biggest exponent of greed due to its anti-free-market policy; and all of this in the name of fighting greed.

A Genuine Solution?

What follows is not legal advice, but fuel for thought. With the announcement of the price gouging laws, there has been little talk of what the statute actually says (O.C.G.A. § 10-1-393.4). While it does ban selling “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,” it also includes provision for raising prices due to higher cost to the seller. The statute specifically states that the “price may be increased only in an amount which accurately reflects an increase in cost of the goods or services to the person selling the goods or services or an increase in the cost of transporting the goods or services into the area.” Even Perdue’s statement in the Executive Order allows that “we expect the prices that Georgians pay at the pump to be in line with the prices retailers are paying.”

FreedomNomicsSince the State laws can only apply to the sellers and wholesalers within the State, and the very statute in question allows sellers to raise prices in accordance with increase in cost and the cost of transportation, a proposed solution might be for stations to pay higher prices to out-of-state wholesalers and pay more to have supply trucked in from farther away. Then, the stations could legally pass the higher prices on to consumers who were willing and able to pay.

Think about it. If you owned a gas wholesaling business, and you got an offer for $1 or $2 more per gallon for a shipment, would you be willing to ship? A typical tanker carries about 8,000 gallons. That’s an additional $8,000 to $16,000 profit per truck for merely diverting part of your normal shipments to a gas-shortage stricken region. Would you take the offer? Granted there are some slight risks involved-unhappy customers in other regions due to supply tightening when shipments are diverted, but then, prices would rise in those regions and equilibrium would be reached. This would actually help matters, as what was initially a very bad shortage in a few regions becomes a mild to moderate shortage in many regions. In other words, this is a free-market solution to gas supplies instead of government manipulation in several degrees that only make the problem worse in the end.

A problem in this hypothetical scenario is the perceived risk to the local station owner. If he pays extra for a full shipment of gasoline and then the shortage ends, he will be stuck trying to sell that load of fuel at a higher price that everyone else. He will probably have to take a hit on that shipment. But seeing that the gas shortage will not end suddenly and overnight, such a risk is probably overblown, and at worst would last for one shipment.

It may be tempting to object that as long as the government price control remains in effect, anyone trying to sell gas at higher prices would be unwise because people can get gas elsewhere at the pre-emergency price. But, of course, they can’t because the artificial pre-emergency price keeps the other stations drained of fuel anyway. I can guarantee you that some people would choose to pay higher prices rather than even wait in line, even if the long-line gas were much cheaper, let alone rather than not have the gas they needed at all. Further, the station owner who continued to get supplies at higher cost (as long as the shortage continued) would also have a continual flow of business to his store. Perhaps each driver would buy less gas at the higher price, perhaps not, but they would continue to come and he would continue to have supplies as long as his supplier continued delivering for higher profit (and who wouldn’t?).

So then the main annoyance to the station owners would be the barrage of uninformed people who kept reporting the station to the police or the Georgia Fuel and Measures hotline. But this could be remedied by posting a large sign or passing out printed flyers stating that the higher prices are in fact legal and referring consumers to look up the statute in question before calling. This would not deter some, but these stubborn types who would call in the face of information would probably be causing trouble somehow else anyway.

So the greatest obstacle to overcoming the gas shortage remains the government price control. As long as prices are forced artificially low and as long as government perpetuates the belief that high prices are at all times unfair and illegal, then gas will continue to sell out as fast as it can be delivered. Raise the prices, slow the consumption, marginalize the hoarders, and everyone will benefit. Continue the government interference in the market, and the gas shortage will continue longer and more painfully than necessary.

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Posted by on October 3, 2008 in Uncategorized

 

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