Special Saturday Gasoline Edition

Dear folks who think they're being gouged at the pump:

First, sit down, take a deep breath, and repeat after me: "I wish I had taken micro-economics in high school or college."

It is true that retail gas prices have shot up to very high values. I won't argue with you there. However, don't immediately pin the outrage on the gas stations. This situation is very much unlike price hikes that have previously occurred. In this situation, it's not that fuel is overly expensive (in that it was overly expensive to produce), but it is simply NOT THERE. Take, for example, my current home of Knoxville, TN. Gas prices have risen dramatically, and some stations are out of fuel. In fact, there are published reports that the fuel terminals (the places where fuel trucks get loads to deliver to gas stations) are out of fuel, and Knoxville is not an isolated case. This is happening all over the place.

So now we have gas stations frantically hunting for fuel to put in their tanks to sell. They're looking for fuel hundreds of miles around their location and coming up empty. When they do find fuel, they are finding that the suppliers (at the fuel terminals) are selling the fuel they do have for $5+ / gallon.

So, why would they do that?

Well, let me give you a little analogy. Perhaps as you tune across the many channels on your TV, you may, at one time or another landed on an airing of the Barrett-Jackson car auction. You watch as they roll a car on stage and then begin bidding ridiculous amounts for a pristine 1969 whatever-mobile. Why do they sell for so much considering that the actual value of all of the components and labor is significantly less?

One of the reasons is that there is a very limited supply. Consider that if instead of there being only one of these vehicles being sold at the auction, there were 12. Would that not reduce the price paid for each one?

Now, what if the auction set a rule that stated "you can only sell a car for $1,000 more than its cost to produce" ? Would people sell cars there? Probably not. Even if they did, the car would simply go to the first person who bid, rather than the person wanted it the most.

The same thing is happening to gasoline. There is a limited supply. Stations who have kept their prices low are out of fuel. Like the auction, the people who got there first, rather than the people who wanted it the most, got the fuel.

Then there are stations that have raised their prices. They are relying of the elasticity of the market to determine how much is sold. In addition, they are simply setting their price in line with their costs (remember, wholesale fuel is at $5/gallon). When you see high gas prices, among the many thoughts and ideas the flow into your head (aside from "that f*#%ing sucks") is "how can I either reduce the price to me or reduce my use of gas?" This is exactly how capitalism works, folks. We chose what we do based on the cost to us. This is one reason why we all don't commute by plane.

So let me now answer some questions you may have about this.

"Hey, I'm not in the South. Our gas comes from the Northeast. This is a total screw. I'm certain I'm being gouged!"

Are you really sure? Remember, we're talking about a shortage here. Prices are higher simply because you do have fuel and others don't. If your local fuel terminal has fuel, chances are that there's a bunch of fuel trucks coming up from the South to get fuel. Thus, there's more demand and even if there's not a shortage, per se, the terminals only have so much fuel available at any given time, and don't continuously get pipeline deliveries.

"I can't believe it! I'm sure that I'm being gouged. Somebody (i.e. the government) should do something."

They have, and they will. One of the issues we face in this country is that we not only have several grades (i.e. octane levels) of gasoline, there are also different formulations that are required in different parts of the country at different times of the year to comply with local EPA guidelines. Any given refinery can only produce one of these many formulations at a time. Therefore, fuel refined in Utah can't simply be distributed in Tennessee (unless it's the right formulation for the right time period). To help the fuel shortage situation, the government has rolled back these restrictions in terms of time period (allowing "winter blend" to be sold now), smog reduction (reformulated, low vapor point fuels) and fuel quality (allowing foreign distillates, which are not as tightly refined, to be allowed for use in the U.S.).

In addition, local, state and federal government is on alert for price gouging. To be honest, there will be a few cases where gouging really occur. But on the whole, the prices are simply set a given amount above cost (usually 5-15 cents). Most price gouging hearings will go like this.

State senator: You've been accused of price gouging. You charged $5.50 a gallon for gasoline.

Gas station owner: I'm sorry your honor, I wish it were cheaper, since I don't like to upset my customers. I rely on them coming into my store to by drinks and snacks to make my business work. However, here's my wholesale invoice showing that I paid $5,40 a gallon for fuel. I made 10 cents a gallon, which is no more than what I made when gas was $1.50, $2.50 or $3.50.

State senator: Uhh, ok. I guess you didn't.

So folks, instead of getting mad, please count to ten, and think about what the market is really saying. I will paraphrase for you. "Gas is currently in short supply. Try to cut down on its use. If you don't, you will pay what the market dictates."

So, why isn't there any fuel? That's another excellent question, but it's one for another post. I'll give you a hint: most of the shortage is not Ike's fault. It's Ike's brothers fault.

Also, if you're still confused, here's an excellent post that describes it better than I did: http://shotsacrossthebow.com/archives/003044.html#003044