Geoff Style on price gouging and gasoline lines

Michael Giberson

Writing with a calmness and patience not typically seen when economists write about price gouging, here is Geoff Styles, at Energy Outlook, Gas Lines and Bank Runs:

…[W]ith a significant shortfall in deliveries along these pipelines, and US gasoline inventories that were already extremely low going into the storms, local prices should have risen dramatically, in order to balance supply and demand. Yet although an internet search revealed many stations in the Atlanta, GA and Charlotte, NC metro areas pricing above $4.00 per gallon for unleaded regular, the region only averaged 15 cents per gallon above the national average in this Monday’s DOE price report. …. Following the hurricanes, the Georgia and North Carolina state governments triggered their anti-gouging laws, subjecting retailers to strict penalties for increasing their margins over the cost charged by their suppliers.

There are two problems with this well-intended approach. First, it impedes the price signal to consumers that would otherwise alert them to sharply-reduced availability and promote conservation. We’ve learned a lot about the price elasticity of demand for gasoline in the last couple of years. It took an increase of approximately $1 per gallon to reduce average US demand by 5%, and the storm-related disruptions cut supplies to the Southeast by a much larger fraction than that. No one knows how high gas prices would have had to go to constrain demand without gas lines, transaction limits, or other non-price controls, but it is reasonable to conclude that the necessary level would be a lot higher than that allowed by law in these states. By imposing price limits, government makes an explicit choice in favor of gas lines, in order to keep the price of whatever gas is available within reach of lower-income consumers. That may be a popular decision, but it is hardly a market failure.

The other drawback of these “soft” price controls is that they encourage a feedback loop that fosters panic and amplifies scarcity. High prices discourage hoarding, while artificially-low prices amid vanishing availability egg consumers on to get theirs, before it’s all gone. … Moreover, uncertainty about how price gouging laws will be interpreted leaves retailers perceiving an unpleasant choice between running out and being fined or imprisoned. That’s a lot of extra grief for a business that usually only clears a few cents per gallon, after expenses.

[Emphasis added, links are from the original.]

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One thought on “Geoff Style on price gouging and gasoline lines

  1. What can I say? I went out (in the Atlanta area) at 5 a.m. on Wednesday morning to find gasoline. I found only regular, no premium. So, with my first car I struck out. I went back with a second car and filled up. The price was under $4, and there was a slight line. But heck, it was 5:30 a.m. by then. I circled back around with yet another car, but the station was out! So, I found another station that had just received a delivery, and I filled up there. Again, still under $4. There was a growing line, but only because the gasoline was coming out of the pumps at a rate LESS than 1 gallon per minute! Silly, and almost irrelevant. (But who would run a business that way?)

    Again, I’m no fan of paying more, but we’re almost OUT of gas down here, and the price is about the same as it was weeks ago. Style is absolutely correct that the incentive is to fill up while you can. What is the downside? The price won’t fall for quite some time, and we’re glad to pay the going rate at this point.

    As I’ve said before, this is the same way we price water, even though the reservoir is being cleared of trash so the mowers can cut the weeds down. We get what we pay for…

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