The Gulf Coast is oil country. Hurricane Katrina put a big hole in oil production, refining, and pipeline capacity, though we don’t know yet how long that capacity will be out of action. Inventories were already tight.
So there’s going to be less gasoline in the southeast and midwest than people were planning to buy at last week’s (already very high) prices.
The natural result of that situation is that the price of gasoline goes up. In the short run, that doesn’t result in any additional supply, but it does reduce the quantity demanded, allowing the market to clear. Unfortunately, the short-run price-elasticity of demand for gasoline is low, so even a modest-sized supply crunch will naturally cause big price increases.
In economics, this is called “market clearing.” In politics, it’s called “price gouging.”
Of course, it’s possible by law to keep prices below their market-clearing levels. In politics and law, that’s called “price control.” In economics, the result of that policy is called “shortage.” At any price below the market-clearing level, buyers will want to buy more gasoline than sellers have to sell. The result is either waiting in line, which is a very inefficient means of rationing compared to letting the price rise, or some sort of legal rationing system (no doubt with extra rations for SUV owners and others who “need” lots of gasoline).
The fact that this is Economics 101 material doesn’t make it any less true. (And the fact that Enron had the capacity to manipulate the semi-regulated California electric power spot markets has nothing to do with the entirly different market in refined oil producs.)
I was expecting to have to cringe as some politicians and activists from the “Democratic wing of the Democratic Party” pretended not to understand, or perhaps actually succeeded in not understanding, this basic analysis.
I’m not sure whether I should be more amused than disgusted, or the other way around, to find that George W. Bush, who presided benignly and prattled about “free markets” as his friend Ken Lay stole billions from the electric power consumers of California, has actually beaten them to it, talking about “price-gouging at the gasoline pump” as if it were a criminal activity like looting or insurance fraud.
With any luck, he didn’t actually mean what he said, and won’t attempt to cap gasoline prices. But it was still a silly and demagogic thing to say.
Does this man have any principles at all, other than loyalty to himself?
Footnote Of course a temporary excise tax can transfer the gains due to the necessary price increas from those who own supplies of oil to the public treasury; that’s one way to finance the public part of the cost of repairing the damage from Katrina without further swelling the budget deficit. And a permanent excise tax, discouraging people from wrecking the planet and enriching terrorists by buying SUVs, would be even better. But there’s no case for creating a gasoline shortage by preventing the price from rising in the face of a supply shortfall.
Update Jane Galt has more.