Supply problem + price gouging law = rationing gas by running out

Michael Giberson

Robert Rapier at R-Squared Energy Blog noticed the EIA showing gasoline inventories at their lowest levels since 1967, and because consumption rates are higher now than in 1967, he pointed out that “days of supply” in inventory is probably at its lowest level ever. Rapier comments:

Someone asked during a panel discussion at ASPO whether we were going to have rationing by price. I answered that we are having that now. But prices aren’t going up nearly as much as you would expect during these sorts of severe shortages. Why? I think it’s a fear that dealers have of being prosecuted for gouging. So, they keep prices where they are, and they simply run out of fuel when the deliveries don’t arrive on time. If they were allowed to raise prices sharply, people would cut back on their driving and supplies would be stretched further.

Rapier quotes favorably this explanation by Gary North:

Instead of raising prices, in an attempt to reduce demand for gasoline, thereby allocating gasoline that was in short supply by means of price, station managers simply let people fill up their tanks until the pumps were empty. Anyone who wanted gasoline after that was out of luck.

This is rationing by lining up. It is the alternative to rationing by price. Rationing by lining up creates no financial incentive for suppliers of the item in short supply to allocate new supplies to the region of the country which is experiencing a shortage. Instead, delivery schedules remain the same as they did prior to the shortage. This continues the shortage.

Whenever there are complaints about price gouging during a period of a shortage, sellers get the message. The next time there is a shortage, they hesitate to raise prices. They shift to the other allocation system: first come, first served.

UPDATE: iReport.com offers the following image of a Circle K sign in North Augusta SC with no prices listed for gasoline. The contributor comments, “Places are still out of gas, waiting on more shipments. Either the gas is too high or there is none to buy.”

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Note that the South Carolina Attorney General invoked the state’s price gouging law as of noon on September 12, 2008. Typically state price gouging laws require the governor to declare an emergency in the state. South Carolina’s law allows the Attorney General to invoke the law when the President declares an emergency in another state, and the emergency presents an “abnormal disruption of the market” that affects the market in South Carolina. President Bush had declared a state of emergency for Texas and Louisiana on the previous evening.

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5 thoughts on “Supply problem + price gouging law = rationing gas by running out

  1. Exactly! We’re running out down here. I passed a similar no-price sign at a station on Tuesday as I was leaving Atlanta. About 90 miles outside of Atlanta I stopped at a station that had a really decent (normal) price posted, but there were bags over all the nozzles. It seemed surreal, and there was a delivery truck on site. Thirty miles later I filled up at nearly the same “normal” price. As much as I don’t enjoy paying high prices, this seems insane. This morning a co-worker (110 miles from Atlanta) reported going to half a dozen stations before she found gas.

    I recall a panic price spike in Atlanta after Katrina, and how quickly it spread across the region. This time price signal is perverse, as if nothing is going on, yet there is still panic buying going on because we’re actually running out.

    Last night we were told that “the economy is not functioning properly.” Sorry, but it seems to be functioning only too well within the silly constraints that we’ve imposed on it, and perhaps without some constraints that it may have actually needed.

  2. Here in NC we had a brief run-for-the-pumps on the Hurricane Ike weekend, where some stations bumped their price up 70 cents a gallon in a day. There was so much whining about the high prices that our state Atty. Gen. got all of the local media to focus on him as he declared he would go after those “gougers”. Unfortunately, North Carolina was still in a state of emergency, having been declared to be in one by the Governor after the hurricane (Fay?) that glanced off the coast before heading northeast.

    Currently we (mid-state i.e. Mayberry) have seen prices steady at $3.80/gal but some stations without gas. Western NC has been hit particularly hard with shortages, where police have had to come in and calm people down waiting in gas lines. It will probably get worse in the next 2-3 weeks as it takes about that time for gas to make it through the pipeline from the Gulf coast, and some refineries are still off-line.

    I hope people see through the stupidity of allowing government to bully the market and not allow price to “ration” commodities. How much longer until we see rationing cards/tickets?

  3. Marc V,

    Andy and Barney are still looking for the mimeograph machine in Aunt Bea’s back room, so it may be a while. 🙂

  4. I once heard a Harvard economist quip, “Years ago the U.S. government issued gas rationing tickets. Each one has George Washington’s picture on it.”

    The same economist said (with a grin), “Gouging? What’s *that*?”

  5. This just in from the D.O.U.G.-spouse:

    “Hi….just wanted to update you on the gas availability around here.

    “A panic has set in here and people are resorting to topping off their tanks if they see a station with any gas. This has caused a spike in demand and the pipeline production has still not recovered from Ike. Best advice is still to fill up in areas at least 50 miles outside the perimeter. Another factor around here is the UGA-AL football game in Athens on Saturday. Reports are that all stations along 316 [the highway between Atlanta and Athens]are out of gas with no assurance that new supplies will reach them before the middle of next week.I don’t want to overstate what is going on. I’m just passing along what was reported on the news this a.m.”

    And that was before this was reported in the news!

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