“As Important as Food and Water”

When Hurricane Sandy was forecast to make landfall on the East Coast, I advised people to top off their automobiles with fuel. There were a number of reasons for that, and some people in New York and New Jersey are learning those reasons the hard way.

When a hurricane hits an area, it can damage refining infrastructure, fuel terminals, and service stations. Prolonged electrical outages can make fuel deliveries next to impossible, which has been the case around New Jersey since the hurricane hit. Any of these conditions can lead to fuel shortages. CBS News reports:

Gasoline situation increasingly dire in days after Sandy

Gas is being rationed in parts of New York and New Jersey. The pumps are running on empty — and so is patience. According to the motor club AAA, 60 percent of the gas stations in New Jersey and 70 percent on New York’s Long Island are now closed.

One fuel buyer said, “This is crazy, it’s like post-apocalyptic scenarios, you know with this gas. It’s as important as food and water to people. It’s a dogfight out here.”

I am often amazed at how we take our energy supplies for granted. Ask someone about the basic necessities of life, and few would mention gasoline. But once you are forced to do without it, it becomes pretty clear that modern life for most Americans is utterly dependent upon gasoline.

Fear of being accused of price-gouging has exacerbated the problem. In situations like this where fuel supplies are scarce, one of three things can happen. 1). Prices rise in response to scarce supplies; 2). Prices are frozen and the scarce supplies quickly run out; or 3). Prices are frozen and fuel is rationed.

If prices are allowed to rise in response to scarcity, then people who don’t really need fuel — but are making matters worse by buying fuel “just in case” — are discouraged from buying fuel. People who really need fuel will have to pay more, but more availability will be assured.

If prices are not allowed to rise, then retailers will simply run out. This was in fact the case as retailers were afraid to raise prices due to fear of being penalized for price gouging. This led to widespread gasoline shortages because there was no price signal that would ordinarily stem demand for a scarce resource.

The shortages eventually led to the only other option for keeping prices from rising while ensuring that supplies don’t run out:

N.J. residents experience mixed results on first day of gas rationing rules

Gov. Chris Christie’s implementation of 1970s-style gas rationing rules appeared to shorten lines slightly. Under the rules, vehicles with license plates ending in even numbers can fuel up on even-number days; odd-number plates can fill up on odd-number days.

I fully understand the sentiment behind laws against price gouging, but there is no free lunch. There are consequences from tampering with the rules of supply and demand. This situation reminds me of the time a liberal arts professor of mine expressed outrage that medicine I took for migraine headaches cost $9 a tablet. I told him that if my alternatives were no medication, or paying a lower price but then not getting enough medication to treat all of my migraines, then I would gladly put up with what he considered price gouging by a pharmaceutical company. I suspect some in New Jersey and New York feel the same way about gasoline.

 R-Squared Energy Blog by Robert Rapier