Government Gouging


News media throughout the United States and especially here in the southeast have been reporting extensively on gasoline shortages. Over 90% of service stations are without gas at any one time in the metro Atlanta area. When a supply truck arrives, car drivers drive long distances and wait in lines 10 or more cars long, blocking roads and intersections to get gas, typically exhausting the station's new supply within hours. The media also reports on Georgia laws against gas price "gouging" – whereby stations attempting to sell gas at an undefined "too high" price can be subject to $15,000 penalties; other states in the southeast have similar laws. The news media, however, neglect to point out how these two issues are necessarily connected.

It is true that the gasoline supply has been reduced. In the wake of damage and evacuations from hurricane Ike, some refineries still produce below capacity, and a major fossil fuel pipeline in the southeastern US is also not back to capacity. Atlanta in particular suffers from a further restriction in supply compared to surrounding areas due to government restrictions concerning fuel additives which affect what petroleum may be legally sold. Suddenly reduced supply can sometimes result in products running out in the very short term, before information on changes in supply and demand can be taken into effect. However, supply consistently and repeatedly running out over time since it is insufficient to meet demand – a shortage – does not occur when prices are allowed to operate in the free market.

When demand stays the same but gasoline supplies fall, prices naturally rise. Drivers grumble about higher prices, but the higher prices also motivate them to responsibly consider and reduce consumption, such as consolidating trips, working from home, carpooling, and reconsidering vacation travel. This reduces demand for the now-scarcer gasoline. A higher price also motivates suppliers to find ways to provide more, and more quickly. For example, service station operators charging $5/gallon may be willing to pay $4/gallon for a truck to drive from several states away, something they would never consider at a lower price. Higher prices also propagate money down the supply chain, motivating quicker increase in fuel supply by means such as funding overtime work to get refineries and pipelines operational sooner. The combination of higher prices motivating both consumers to use less and suppliers to produce more ensures shortages do not occur.

Unfortunately, the free market price system is currently being forbidden in Georgia and several other states. Politicians have enacted anti-"gouging" laws to punish sellers of gasoline who request too high a price. Whether such politicians are well-meaning but economically ignorant, or know the consequences but are cynically manipulating public distaste for higher prices despite this is up for debate, but the results are the same. Ethically, the results are detestable. Gas station operators are told in effect that they are not free; they must sell their product as an altruistic service to others rather than serving their own individual interests. Legislating an exact price ceiling (a maximum price at which gas could be sold) would be bad enough, but to compound the issue, an exact price is not given in anti-gouging laws. A supplier cannot even know if they may be violating the law, and must be constantly fearful of someone accusing them of charging "too much." In Atlanta for now, the de facto result is gas station operators being afraid to price gasoline above $4–4.29/gallon. Asking a half-dozen local operators who ran out of gas as to why they do not raise prices resulted in the same general response; as one put it, "I cannot raise my price. It would be a crime."

Economically, forbidding gas prices from rising past $4.29 (or some other arbitrary amount) disastrously stops both suppliers attempting to increase their supply, and drivers reducing their consumption. Gas station operators have essentially no motive – or money – to work harder or more creatively to find ways to get more fuel to the area. Likewise, others further down the supply chain lack motive to speed recovery efforts.

Without higher prices as incentive to conserve, drivers quickly exhaust all the limited supply and demand more that is not there. Stations quickly go dry, and the shortage is born. The slight pain of higher prices becomes replaced by more significant problems. People pay for gas instead via increased risk of running out of fuel. They pay for it by a substantial waste of time by driving further to find a station with fuel and waiting in long lines. Ironically, controlling gas prices means drivers even pay for it with more gas –gas is wasted in driving further and idling in line, making the problem even worse. Yes, Georgia drivers do not pay $5/gallon. Instead they are apparently to be comforted by the "$3.99" signs on twenty gas stations with "out of order" bags over their pump handles they must drive past before finally finding a station where they may wait in line for half an hour, in hopes that gas remains when they reach the pump.

None of this should be at all surprising to anyone who lived through the 1970s. In the 70s, the federal government regulated fuel prices. This resulted at various times in substantial gas shortages – long lines, stations running dry, and further government "add another problem on top of a problem" measures such as odd/even number day rationing. At the end of the Carter administration, this price regulation ended. Pump prices rose temporarily, but the much higher real costs of risk and wasted time and gas vanished almost overnight. The shortages evaporated.

The culprit behind the gas shortages this time is individual state governments rather than federal government, but the solution is the same now as it was then – for politicians to stop their harmful efforts to control prices. End anti-gouging laws, end the shortage.

September 29, 2008