Demand for Gas: You Can't Have It Both Ways

Includes: OIL, USO
by: Mark J. Perry

Do a Google news search for "gas stations" and "running out of gas" and you'll find more than 400 news reports like this one:

NASHVILLE, Tenn.- Hurricane Ike's presence near refineries in the Gulf of Mexico, drove many drivers in the midstate rushing out to get gas and leaving many gas stations tapped out.

Along Stewart's Ferry Pike gas seekers saw one of three things at gas stations: long lines, gas pumps covered, or no gas at the station at all. Some of those gas stations with no gas have been placed on a waiting list by distributors because of the high demand.

Do a Google news search for "price gouging" and you'll find more than 2,000 stories like this one, also from Tennessee:

The state of Tennessee has seen a significant spike in the number of calls reporting price gouging over the past 24 hours. Tennessee state law prohibits businesses from unreasonably raising prices on essential goods, commodities, or services in direct response to a natural disaster, whether the natural disaster happened in Tennessee or not.

Observation #1: Demand for gasoline has gone up due to panic buying by consumers "rushing out to get gas" at the same time as gasoline supplies are falling, or expected to fall. It's simple economics that when demand for a product rises at the same time that the supply of that product falls, prices naturally rise to reflect the change in market conditions. Market prices always transmit accurate information about "relative scarcity," and act as a truthful "scarcity-meter." Since gasoline has become relatively more scarce in the last few days, the price naturally rises.

Observation #2: There's the joke about the son who says to his father, "Dad, I want to grow up, and be a musician." The father says "Well son, you're going to have to make a choice, you can't have it both ways."

In the case of gasoline, you can't have it both ways: If you don't want gasoline shortages, and you don't want gas stations running out of gas, you have to let the price rise to ration the scare supply. If you don't allow prices to rise and prohibit "price gouging," you'll have guaranteed shortages and stations running out of gas. But you can NOT have low gas prices and high gas supplies (inventories at stations) at the same time, in the face of rising demand and falling supply.

Observation #3: Buyers complain about high gas prices, but it is largely their fault that gas prices rise, due to panic buying and "rushing out to get gas." Without panic buying, the prices wouldn't have risen as much.

Observation #4: Remember also that gas stations make most of their profits not on gas, but on the other items they sell inside (milk, cigarettes, groceries, etc.). When a station sells out of gas, they lose out on sales of items with the highest profits, so it would be natural for them to raise prices so that they can ration their current supply of gas until the next delivery, which might be days away.