Last week the U.S. House of Representatives voted by an overwhelming margin to guarantee gasoline shortages the next time we face a significant disruption in petroleum supplies.
One of the common complaints I hear from noneconomists is, why should the price of gasoline go up as soon as there is any news of a disruption in oil flowing from somewhere like Nigeria, when the gasoline in the pipeline and the station’s tanks have already been bought and paid for by the company at a lower price?
Why, indeed? The answer is, because if the price didn’t spike up immediately on the news, the result would be a disaster for the public. I presume we can agree that the supply disruption will eventually mean that the price will have to be higher and consumers are going to have to make do with less gasoline. How should you as a consumer behave, if the price did not go up today, but you know that in the future, you might not be able to buy gas or will have to pay a much higher price than you do today? The answer is, you should rush out and top off your tank right now, while gas is still available and cheap.
Of course, when all your neighbors get the same idea that you had, the result is a huge surge in the quantity of gas everybody is trying to buy, which the system won’t have the resources to deliver. Panic buying by consumers would create shortages even if there had been no disruption in supply.
Fortunately, it would not ever be in the personal financial interests of gasoline station owners to allow this to happen. Why should they run their tanks dry selling gas for $3.00 a gallon, if there would be someone willing to pay them $3.50 for that same gas? A station owner who was trying to maximize profits would never do this. What we would expect to see in a properly functioning market is for the price instantly to jump significantly above the value it will be at next week. That creates an incentive for consumers to let their tanks run a little lower right now rather than top them all off, which is exactly what we need to see happen in order to deal with the crisis.
Anyone who has taken an introductory economics class will recognize this as an example of exactly how capitalism is supposed to function. The gasoline seller and buyer are both just doing what is in their own selfish interests, yet the outcome is a sensible and appropriate response to the challenge.
Unfortunately, 389 members of the U.S. House of Representatives evidently skipped that econ lecture, and think that if the owner’s already paid for the gas in the pipe, you shouldn’t have to pay any more at the pump. At least, that’s the margin by which representatives voted for the Federal Energy Price Protection Act of 2006, which declares
It shall be an unfair or deceptive act or practice in violation of section 5 of the Federal Trade
Commission Act for any person to sell crude oil, gasoline, diesel fuel, home heating oil, or any biofuel at a price that constitutes price gouging as defined by rule pursuant to subsection (b).
And how do economists define “price gouging?” Here’s Professor Craig Depken from the University of Texas:
I bet my students a full letter grade that they can’t find a published definition of price gouging in an economics textbook. There might be one out there, but to date I have never had to pay up.
It is thus with great interest that we turn to subsection (b) of said Energy Price Protection Act:
Not later than 6 months after the date of the enactment of this Act, the Federal Trade Commission … shall define “price gouging”, “retail sale”, and “wholesale sale” for purposes of this Act.
I suppose this little finesse, of leaving a minor detail like the definition of what the heck this law is supposed to prohibit, up to the FTC to decide, is part of what helped garner the votes of at least some of these 389 representatives who must know better. I have no doubt that, whatever the FTC ends up deciding that “price gouging” means, it will be a more sensible definition than anything the current Congress is capable of coming up with.
Even so, I also have to believe that, whatever definition the FTC comes up with, it has to alter the calculation of the gas station owner in the situation I described above. With this legislation, if I were the owner of a gasoline station, I would not see it as being in my best interests to raise the price on the news of a major disruption in shipments from Nigeria. The picture at the right of gas lines in China’s Guangdong Province last summer, is a reminder of what that means.
Communist China, of course, is another place where the government does not believe that the appropriate price is the one that equates supply with demand.