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What Is Behind Surging Gas Prices?

Gas

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.

Related: Will Hydrogen Break The Battery Market?

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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  • jack ma on September 09 2017 said:
    Plain and simple theft. The true character of man is sickening and greed is the toxin that flows through the blood like poison. Instead of helping people in a crisis, they are thieving from them and it is truly sad to the point that no future species on Earth could miss the reasoning as to why mankind with his lack of milk of human kindness, went extinct. I am ashamed to be a member of the human race when I see what is happening in Florida with all supplies, not just gasoline. Even the airlines. My God! Then all the heroes will come out later with the sun to say they helped those in need. The hypocrisy has no bounds. IMHO
  • JACK MA on September 10 2017 said:
    Gas in the Phoenix area I up almost 30 cents a gallon, and there is no rain or little wind that the drama news calls a hurricane. Theft is underway and never waste a crisis if you are a vulture capitalist. IMHO
  • Central Texan on September 11 2017 said:
    The day Harvey struck the Texas coast I had to make a trip into DFW... and was totally shocked to see the lines of cars at the filling stations! As I hail from a very rural area between Ft. Worth and Waco, and adamantly REFUSE to ever logon to Facebook (I see nothing useful on it or for it); and a friend explained that a rumor had started that morning declaring there would not be any gas available anywhere in the metroplex very soon due to the closing of the refineries near Houston (while I had kept up on the storm news, the closing of refineries on the coast has happened before due to weather, etc. so that was kinda expected). However, the speed with which the crisis happened was indeed suspect in my opinion - but with social media now in place I just chalked it up to the new way the world is nowadays. Of course, any adult who has lived in our society knows that there are usually some hidden mitigating factors involved so while trying to not be so pessimistic you also know not to be foolishly naive either (hard sometimes to balance these opposites though).
    This article did a good job of keeping a open mind which is usually very difficult on this type of subject during times like this - unfortunately it also leaves a sour taste when you really think about it; either way it still exposes greed as the deciding issue regardless of the circumstances.

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