Thursday, September 01, 2005

Hot Gas

Last year I warned that whenever a politician starts whining about price gouging, there is one thing you can be absolutely sure of: you are in no way, shape, or form going to have any chance of getting whatever it is that they're supposedly keeping cheap for you.

That could shortly be the case with gasoline, if President Bush's comments today are any indicator. The president has taken the politically easy postion against "price gouging at the gasoline pump." Hopefully it's only talk. Otherwise, you will soon be able to pretty much forget about getting any actual gasoline.

To review a little bit of basic economics as we like to do from time to time: prices are not (as many popularly imagine them) tools by which the producers of goods and services exploit and "stick it to the little guy." They are a way of allocating resources. Prices reflect the demand for a particular product relative to the supply (or perceived supply) of it.

Currently, gas prices are rising quickly. Why? Because the demand is the same as it has always been (or perhaps even rising), but the supply has been reduced. Even more importantly, people perceive that there is a gas shortage, which makes them want to get it as quickly as they can. Though higher gas prices don't thrill me either, they serve a purpose in this situation. If people are going to buy gasoline now, they have to do some prioritizing. They have to decide if they want to spend their $3 on a gallon of gas, or if at that price it would be better spent on something else. These are the decisions the market is designed to force in order to keep resources available to those who want them most.

When prices are not allowed to rise to naturally reflect the market, people (recognizing a bargain when they see one) will begin to hoard things because they don't have to make those choices. The artificially cheap price suddenly looks so good that people will even buy extra "just in case."

Last week here in South Florida immediately following the hurricane, I saw more than a handful of people at Home Depot buying three or four generators at a time. Why? Because the price of generators, by law, was frozen. The price was kept artificially low due to the hurricane (thanks to "courageous" anti-"price gouging" politicians). But the demand had just suddenly skyrocketed. What did this mean to most consumers? It meant that by the time they got to Home Depot, there were no more of the now conveniently inexpensive generators left to purchase.

It works the same way with gasoline. Suddenly, there is a perceived gas shortage. Even as I type this, people in my office are running out to fill their cars up before the gas pumps "run out." If anything (silly rhetoric about "big, evil, greedy oil companies notwithstanding), people rushing out to buy gas would seem to indicate that it is actually still too cheap. The price is not yet reflecting the true demand, which is still quite high.

Most people (especially radio talk show hosts, for some reason) complain about the rising price of gas, but I still don't see any decrease in traffic during rush hour. Gasoline is not yet "too expensive" since just about everyone who was driving alone in their cars to work a year ago is still doing it now. The "right" price for gasoline will have been reached when there are no gas lines and there are about as many cars filling up at the pumps at any given moment as there were six months ago.

Understand something: higher gas prices will be the only reason you will still be able to actually get gas. If some politician somewhere forces the price artificially lower, he will have just insured that gas will be a lot cheaper--and that you won't be able to actually find any.

For more on this, check out Walter Williams, Thomas Sowell, or my post from last year, "Why I'm Glad for High Gasoline Prices."

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