Friday, September 12, 2008

The Hurricane Ike gas price hike

Local news outlets are reporting that folks are all in a panic because of the spike in gasoline prices in South Carolina related to Hurricane Ike. Indeed, one upstate news report noted that wholesale gas prices could be as high as five dollars a gallon.

Is it right? Does it make sense? Is there gouging? Who if anyone should do something about this?

First, lets take a look at the fundamental principles of economics. While there might be gasoline station owners and wholesalers who jack up the price of gasoline during such a crisis, their efforts are actually marginal compared to to the actions of the consumers of gasoline. Sure, Hurricane Ike will temporarily cut the supply of refined gasoline in the eastern United States by around 20 percent. Sure, there are those who will try to make what they can off the situation. However, what makes up the bulk of the reasoning for huge gasoline prices spikes, is us, the consumers.

First, gasoline demand rose when millions in Texas decided to fill their tanks and evacuate their homes for safer locations. Then, that rise in demand was compounded by those in other regions who heard reports that gas prices were going to spike. The latter went to the gas stations and topped off their tanks. Topping off one's tank seems be an act of common sense, until one considers that only compounds the supply versus demand problem.

Suddenly, the laws of supply and demand create a situation in which those gas stations owners who kept their prices at pre-Ike levels quickly sell out of gas and those who have the gas raise their prices and even add limits to how much gas consumers can buy. It is nothing sinister, it is simply the market reacting to the demands of the consumers.

Politicians will, of course, try to find otherwise. It would not surprise me in the least if Attorney General Henry McMaster found some gas station to go after for gouging. Such an act by the Attorney General would be politically popular.

However, such an act would not address the real problem that arises in times such as these when we face a storm like Ike. It is not the gasoline dealer who is truly at fault for the spike in gasoline prices. It is the consumers. We as a people panic when we learn of such things, and actually buy more gasoline than we actually need and would use in a normal week. Thinking we are being smart and looking out for our families, we top off the tanks, not really knowing that by doing so, we vastly increase demand and thus make the price spike even worse then a cut in supply could cause.

That brings back the question of who is to blame for the gasoline price spike. Is it the big oil companies? It is the local gas station owner? Or, is it we, the consumers, who panic and overreact and purchase more gasoline than we normally do when we hear that there might be an uptick in price?

Who can do something about this? You can. Buy only the gasoline you typically need. Do not panic. The normal supply will be returned shortly.

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