What Is Behind Surging Gas Prices?

As gas stations raise prices in the wake of Hurricane Harvey, there have been numerous accusations of price gouging. Especially on social media, some are quick to conclude price gouging if they see gasoline prices go up by 10 or 20 cents per gallon over the course of a couple of days.

At the same time, there are widespread reports of gasoline hoarding, even as reports of shortages were spreading across Texas. The photo above, which has been widely circulated on social media, shows a motorist in Texas putting gasoline in two plastic trash cans in the back of his pickup (which, to be clear, is extremely dangerous). I tracked down the photographer — Miguel Jimenez — to obtain permission to use the photo. He confirmed this incident took place at the gas station located next to his Nomad Bar in Austin.

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These issues — gouging, hoarding, and shortages — are all interrelated, and they demonstrate why the issue of price gouging isn’t always as simple it seems.

Here are the options that a gas station may face. If a service station’s gasoline inventories are depleting at a faster than normal pace (for example, deliveries are delayed), they have three choices. One, they can do nothing and just hope they don’t run out of fuel. Two, they can raise prices to slow down demand (especially from those who are hoarding gasoline) and to provide an incentive for more supplies to flow into the region. Or three, they can ration gasoline.

There are disadvantages of each approach.

In most cases, a station will opt to raise prices. This, effectively, is rationing by price. It provides a disincentive against hoarding while stretching gasoline supplies for those who really need it. The downside is that it will make many people angry as they find themselves paying more for gasoline. They will generally conclude gouging. But keep in mind that the alternatives are that the station may have no gasoline to sell unless they raise prices, or they will limit how much consumers can buy.

We have seen all three approaches and the consequences of each. Many stations who didn’t raise prices either ran out of gas or are now being forced to raise prices as other stations run out and their demand goes up. Those that ration must often contend with long lines of customers who are only getting a partial fill.

When is “gouging” not really gouging? I would not consider it price gouging if a service station raises prices because either 1). They are legitimately concerned about running out of fuel before they are resupplied, or 2). Their supplier raised prices, and they are passing on that cost.

There is an exception to this rule of thumb. If a service station has no real worries about its gasoline supplies and is only raising prices to take advantage of the situation, then I would consider that price gouging.

However, note that even this situation comes with a caveat. If there is one supplier who has a steady supply of gasoline while everyone else is running out, that supplier will suddenly see a huge spike in its demand. As long as it can continue to feed that demand, that supplier may have a difficulty justifying any “need” to raise prices in response to a complaint. But as soon as its supplies begin to deplete faster than they can be replenished, it will have to make a choice to raise prices, ration, or risk running out of fuel.

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So don’t presume that a gas station is gouging just because they raise prices. It’s fine to register a complaint, but often these complaints are resolved in favor of the supplier when they show that the price increase was justified because demand began to outstrip supplies.

Without a doubt, this does cost money for consumers. At the same time, refiners and fuel marketers are making money from this situation – provided they can continue to supply product to the market. Otherwise, the increase in gasoline prices is unlikely to be compensated by the loss of production.

Note: Let me be clear that this article isn’t a “defense” of price gouging, but rather an explanation for why raising prices in a disaster isn’t always as simple as just price gouging. Some readers jump in and comment simply based on the title, but I am trying to provide more background about what is often going on in these situations.

By Robert Rapier

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