Gasoline price controls and the blackout

Thursday's blackout created a similar scene across the Detroit area Friday, as small gas stations in small outlying towns not affected by the blackout were inundated with fuel-seekers. Considering I was one of the unfortunate with only 1/4 tank left when the lights went out, I decided to take the half-hour drive and join the 1.5 hour line to wait for fuel Friday. I only needed enough to last a day ... basically, to stop by the grocery store in the area, pick up a few things, and head back home.

It was a given that I, in my small car, would have to wait a while in the line for every SUV's Olympian-sized gas tank to be filled to the absolute maximum. However, many of the same customers were filling multiple portable gas cans as well. With gasoline prices so cheap relative to the situation, there was no incentive to purchase limited amounts.

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"A frustrated Sam Zahr, owner of a Sunoco gas station on Michigan Ave. near the I-96 service drive, yells out to customers about the shortage of gasoline, Friday, Aug. 15, 2003, in downtown Detroit. The blackout affected a large portion of the eastern half of the U.S."(The Detroit News)

Given that Michigan's governer had already announced that all of Metro Detroit should have power by the next day (Saturday), how many in line really needed to fill up? How many in line needed to not only fill their gas tank to the brim, but fill muliple gas cans as well? How many needed the gas to fill generators, and how many were just 'stocking up' through the next decade? And, moreover, when was this small gas station in the middle of a small town going to run dry?

The price of gas at this station was in the $1.60s, average for the region. Based out of fear of state prosecution if they nudged their gasoline price up, the price didn't budge at all. Would a boost to $1.85 or $1.90 for regular unleaded have been such a bad idea?

Why not let the laws of supply and demand work here? Only those with a real need would've gladly paid the higher price. Those who could've easily 'survived' one more day through Saturday would've only filled their tank to the three-quarters level, or the half-way point, or simply not wait for gas at all. A higher price would've produced a more honest demand.

Indeed, with prices artificially very low across the area, those who didn't truly need so much gas were likely prompting stations to run dry. Not to mention unnecessarily adding to lines that snaked the corner and down the road.

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I agree with you, given the

I agree with you, given the particulars of this situation. A marginal increase would be warranted and efficient.

On 9/11/01, in Texas, some stations doubled or tripled their prices. People still payed. This was utterly irrational, even more so than the folks stocking up for the decade in the greater Detroit area.

They were prosecuted, as far as I know. It could be said they were taking advantage of irrational fears caused by a national crisis.

But you could also say that market forces should be the only determinant of price. In other words, at that moment, the people paying $4/gallon were doing so voluntarily. They were being provided a good at a price they were willing to pay. Presumably, there is a price beyond which no consumers would be willing to pay, and market forces were keeping the station proprietors from charging that amount.

So where do we draw the line between gouging and raising price to meet increased demand?

Kevin, I think that Doug's

Kevin,

I think that Doug's point is that so-called 'gouging' has a beneficial effect through at least two mechanisms:

1)It decreases demand. Higher prices during emergency situations result in allowing those who most urgently desire gas to obtain it. Those who seek gas for more 'frivolous' reasons such as perhaps using it for their lawn mower will be much less likely to pay the higher prices and more likely to hold out till the crisis subsides.

2)It increases supply. Profit-seekers will be enticed at the idea of making a high-margin on sales and will bring supply in from outside sources and inordinary means.

The high prices serve a purpose by carrying information that best allocates resources - filtering out demand to those who most urgently desire it, and increasing supply to those areas where demand is greatest.

In such a situation, price controls, far from protecting the consumer, make things much worse.

'Gouging' is a meaningless term; a price is simply the terms of a voluntary exchange. It is no different from a thermometer giving a temperature reading.

Those are all valid points,

Those are all valid points, and I agree. And on 9/11, I took the position that paying $4 or $5/gallon served these people right for being so senseless.

But I think the reason Rick Perry (Texas Gov.) went after "gougers" is because of the inelasticity of demand for a good with gasoline's particular properties. Well, Perry probably did it because he thought it was amoral (and illegal).

But in other words, the reason there are *some* price controls (to the point where a station can't go from $1.42 to $4.80 in one day, for example) is that gasoline has a low elasticity coefficient.

If Mercedes Benz wants to price a new car at $300,000, that's their business -- it's between them and their customers. There are still plenty of alternatives for consumers. A Mercedes is almost perfectly elastic.

Gas isn't like that. It's not regulated to the point that some utilities are, but demand for gas is relatively inelastic. In other words, if the price shot up to $20/gallon, people would *still* have to buy it, to some extent (some of the demand IS elastic -- folks would do less joyriding or road trips and make different choices about travel).

In addition to that, part of the complaint here was about collusion. Several gas stations in a region got together to run a miniature cartel for a couple of days. A cartel (in general) is an aberration that doesn't allow for free market forces, as the price is articially high (helped along, again, here, by the fact that their product is something that, to some extent, people MUST have).

But the failure of the Michigan stations mentioned in the post to incrementally increase their prices is an unfortunate by-product of TOO MUCH intrusion into pricing strategies, in my opinion. Doug mentioned an increase from the $1.60s to $1.85 or $1.90, which seems perfectly rational, reasonable, and efficient to me. But that's a far cry from an increase from $1.65 to $5.00.

Nobody *has* to buy gasoline

Nobody *has* to buy gasoline at all. Its not either water or food, after all.

When there is a crisis, the regular intersection of demand and supply no longer exists, and the task of the market is to figure out what the "true value of X" is- and that is done via pricing. At $20/gallon, even idiots can't afford to indulge their idiocy, which they can evcen at $5/gallon. Setting a price at $20/gallon would quickly show the supplier that he had overvalued his gasoline.

Vice-versa for keeping prices low during a "panic". Demand has spiked, price should spike- period. Otherwise you're out of whack, and resources are going to be used inefficiently (and rational calculation cannot be done on the parts of producers and future consumers).

But in other words, the

But in other words, the reason there are *some* price controls (to the point where a station can't go from $1.42 to $4.80 in one day, for example) is that gasoline has a low elasticity coefficient.

Gas isn't like that. It's not regulated to the point that some utilities are, but demand for gas is relatively inelastic. In other words, if the price shot up to $20/gallon, people would *still* have to buy it, to some extent (some of the demand IS elastic -- folks would do less joyriding or road trips and make different choices about travel).

I agree about that last part. The price of any good is determined not only by demand for that good, but also at least in part, competing demand for all other products. Each potential purchased good has to compete with alternative purchased goods, and with the possibility of the buyer acting to hold on to his money without making a purchase at all. Nobody has to buy.

Further, the free market price of a good is something that is very important to the functioning of a market. Prices describe exchanges at the margin, and are the result of interactions between buyers and sellers, and potential buyers and potential sellers. They tell other potential buyers how willing the marginal buyer is to buy and how willing the marginal seller is to sell, and thus give information on how to best allocate their own resources in the crisis. They tell potential suppliers the same information.

Then the question arises - Is there a beneficial outcome from *any* price cap, even small ones?

I do not think there is. Violent intervention in the market via price caps is hurtful, not just because it is a violation of the property rights of the supplier, but also because it destroys the very useful effects of market prices. It disallows individuals to make rational appraisals of the state of the market, and fails to reduce demand and increase supply. Price caps inevitably lead to shortages, bribes, and political favoritism to those in power.

The further away from the market price that the price cap is set, the more distorted the market becomes, and the larger the shortages that result. If 'large' price controls are bad, then 'small' price controls may be less bad, but bad nonetheless.

When the question is asked, "What is gouging?", the answer usually given is something along the lines of, "I know it when I see it," or "Charging $2 for a gallon isn't gouging but surely charging $20 for a gallon is." These answers leave me entirely unsatisfied. Even at $20 a gallon, the marginal buyer and marginal seller set the price voluntarily. The high (some might call it 'egregiously' high) price still serves a purpose. Again, it is like a thermometer reading, reflecting the relatively high level of demand in relation to supply. It tells just how much the two are out of balance. Even at $40 a gallon. Even at $100 a gallon. Surely the information contained in a price of $100 a gallon is useful, letting buyers, suppliers, potential buyers, and potential suppliers know that the current state of the market is different than if the price was $40 a gallon, or $20 a gallon, or $1.69 a gallon.

In the end, gouging is a meaningless term that is used to label conditions that simply lie outside the norm of everyday experience. In their daily lives, people do not pay $10 for a gallon of gas, so when a crisis causes marginal buyers and sellers to determine the price at that level, 'gouging' becomes the accusation. Price caps not only violate the property rights of the supplier, but also exacerbate an already tenuous situation. The 'gouging' price is essential to solving the crisis by giving individuals useful information to plan the use of their own resources, decreasing demand, and increasing supply.

I would not know how to

I would not know how to organize my idea but maybe somebody who reads this can.

By state or more regional groupings a published "week of boycott" for , shall we say Mobil. The next week a boycott of Sunoco etc.

Not one of the big name brands of gasoline can deal with significantly reduced sales....so if enough people boycott Mobil in one week they would
(I think) be forced to lower their price to unload the gas they have.

If the announced boycotts of each brand are not predictable sooner or later this type of boycott ....might be effective...All this idea needs is publicity on a national level.

Bob Farley
Elizaville NY
845-756-2456