With the economy in a tailspin, the last thing we needed was a gas shortage. Some people have been camping out at gas stations just to be able to fill their cars. John Hood, Mint Hill native and president of the John Locke Foundation, offers a solution to how the crisis could have been better handled: prices for gas should have been raised during the shortage to prevent non-essential users from topping off their tanks.
The ravages of Hurricane Mike (and Roy)
By John Hood
On September 12, tens of thousands of North Carolinians, panicked by incessant press coverage of a hurricane headed toward Texas oil country, rushed out to top off their gas tanks. Many found their local stations were already out of gas. Others found huge gas lines clogging rush-hour roadways and wasting both time and fuel.
Frustrated North Carolinians probably thought Ike caused it all. But here are two other names that will forever be associated with this disastrous episode: Mike and Roy.
That’s Mike Easley and Roy Cooper, whose irresponsible threats of prosecution deterred some service stations from pricing their scarce gas stocks rationally. As reports of rising pump prices proliferated throughout North Carolina communities that Thursday night and Friday morning, these two “leaders” hurried in front of the press to urge consumers to report instances of “price gouging.” Hundreds of phone calls from upset motorists came in. Both independent stations and chains had good reason to take the current and former attorneys general at their word that “unreasonable” price increases would result in legal action: a few days later, Cooper did issue subpoenas.
He added helpfully that there was no good way to define what his office would deem to be illegal pricing.
“It’s one of those things where you know it when you see it,” he said.
Imagine that you own or manage a service station, and just heard this obscene little bit of political demagoguery. Would you take the risk of incurring a $5,000 penalty per violation of a state law even that its own enforcer can’t explain or define? I wouldn’t. I’d leave my price low enough to avoid adverse publicity, even if it fell far short of replacement cost and generated long lines, and let my pumps quickly run dry. That’s what many stations did. They reacted rationally to an irrational government. As a result, motorists had no incentive to purchase only a gallon or two of suddenly expensive gas if their cars were truly empty. Instead, those who arrived first at the station filled up, a form of hoarding. The lines grew long. And the gas ran out.
Prices are signals. They convey information. They aren’t arbitrary, or wishful thinking, or technicalities that can be brushed aside with the wave of some ignorant politician’s hand. In a highly competitive business such as gas retailing, where prices are posted in enormous neon lettering, the information changes quickly as thousands of peoplečmanagers, suppliers, meteorologists, and customersčmake predictions based on the best-available information. Faced with the possibility of supply disruption, if you price your existing stock too low, you’ll run out quickly (meaning that you’ll lose the in-store sales that actually earn your profit) and lack the revenue to replace your stock with tomorrow’s more-expensive supply. Price your existing gas too high, and you’ll lose revenue to your competitors as desperate consumers, mindful of even small differentials, drive right past your station.
It’s hard enough at such times for managers to get their pricing right. Even if Easley and Cooper had managed to keep their mouths shut, there would have been some lines and empty tanks. But by threatening businesses owners with thousands of dollars in civil penalties just for running their businesses, they made a difficult situation far worse.
Products have no inherent “reasonable” price. When circumstances change, perceptions and preferences changečand these determine the price. A bottle of water is worth more in the desert than at the lake. When you artificially reduce the price of water sold in the desert, it will run out more quickly, and few will have an incentive to transfer water
from the lake to the desert to satisfy the higher demand.
When you artificially increase the price of water (governments create price floors, too), you also create perverse incentives, inducing producers to divert resources from bringing more-valuable goods to market and inducing consumers to accept substitutes they would otherwise deem less valuable.
I’m not saying free enterprise engineers perfection. There is no such thing on this Earth. Human beings will always make mistakes. But in general, allowing prices to rise in anticipation of a shortage encourages consumers to
purchase only what they immediately need and businesses to bring more supply to market faster (because they expect to earn a higher return than on an alternative investment of resources). The process may be messy, but it works.
What doesn’t work is for politicians to blunder into the picture with clubs and threaten to bludgeon people. That’s what Mike Easley and Roy Cooper did last weekend, an error for which they deserve condemnation and ridicule.
Hood is president of the John Locke Foundation, publisher of CarolinaJournal.com and a Mint Hill native.