Price Gouging?

by Alfonso Colombano

Our warmest sympathies go to those who lost their lives and homes in Galveston and all along the Gulf Coast. I hope that Southeast Texas gets back on its feet as quickly and pain free as possible.

Every time there is a devastating natural disaster, just as we witnessed this week with Hurricane Ike, we hear claims on the media about “gouging” First of all, what is “gouging”? How do you define it? Is it a profit level about a certain percentage?

To begin with, almost all transactions, except for taxes of course, are voluntary in nature. Why do I say that? Because valuation is subjective, in other words, the buyer of goods values the goods dearer and the seller values the money more. Otherwise, the transaction would not happen. If one part or the other is taking advantage of the other party, then the transaction would certainly not happen.

What does this have to do with gasoline prices? All week long, the media have been claiming that “consumers are being gouged with gasoline prices” First of all, gasoline prices were destined to increase due to extremely low levels of gasoline stocks (we were close to an 8-yr low) Moreover, the biggest reason for high gasoline prices has been due to the shutdown of refineries in the Gulf Coast (last I heard, about 13 out 20 Texas refineries were shutdown) Back from Econ 101, a decrease in supply, given the same level of demand, or perhaps an increased demand, simply means that prices will go up. If politicians “do something” about high prices, they will simply worsen the problem by implementing any sort of control.

The response by politicians, whatever it might be, worries me a lot. Absent major disruptions like hurricanes, thankfully, we haven’t had any gasoline shortages or lines at gas stations. In the 1970’s, when politicians implemented energy price controls, shortages began. Can you imagine trying to evacuate a hurricane and not having gasoline to flee? Or not being able to have gasoline for your generator? As we speak, companies , such as ExxonMobil, are rushing in to ship as many refined products into the gulf coast area as possible. Why do they do that? Because they’re kind hearted? No, because higher margins attract supply from other places, which is what we need right now, more supply.

Moreover, gasoline production regulations have crippled our gasoline supply (the last refinery in the US was built in the late 1970’s) Adding fuel to the problem, no pun intended, is the plethora of different gasoline specifications. Gasoline from say, California, cannot be shipped to the Gulf Coast under their current condition, must be reformulated through expensive processes. These constrain the ability of companies to have a single market for gasoline in the US (commonly called boutique gasoline specs) and having large economies of scale.

Lastly, the consequences for freedom are quite big. Being that gasoline is a scarce commodity, like everything else, in a free market, its natural ration system is through prices.

What we can currently do to lessen the problem is use less. Until companies can get their refineries back online, we should do everything we can to decrease consumption. From driving less, carpooling, to combining trips, consumers can help alleviate this problem. The only long term solutions to lower gasoline prices are less consumption and more supply. Don’t fall for politicians “solutions”