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What's the Story Behind Gas Shortages?

Posted By Nicolas Loris On September 30, 2008 @ 5:03 pm In Energy | Comments Disabled

In the 1970s when gas prices were soaring, the federal government implemented price controls [1] to replace expensive gas with scarce gas, causing consumers to wait for hours to fill up their tank.

Today, in the Southeast consumers are experiencing $4-a-gallon gasoline and scarcity. Some gas stations in the area have no gas to sell and fights are breaking out [2] among angry consumers at other stations. Waiting lines range from 30 minutes at some stations to two hours at others [3].

Marsha Lewis of Dacula, Ga., remarked [2], “At first I was a good sport, but this is getting ridiculous. I drive an hour to work every day, and looking for gasoline has become my entire life.”

At a gas station in Decatur, Ga, John Temples said that [2] “this is a friendly town, and right now it’s basically just an annoyance.”

People don’t like wait 30 minutes for a roller coaster ride, so one can imagine the frustration of waiting up to two hours for something that normally takes five minutes. Analysts suggest this could go on another two weeks.

So, what’s the story behind the shortage?

Unsurprisingly, it all boils down to supply and demand. Supply shocks coupled with concerned consumers hoarding when possible are the prime culprits for the shortage. The Atlantic-Journal Constitution has an informative Q&A with officials at the U.S. Energy Information Administration and the American Petroleum Institute [4].

The supply shock:

Hurricanes Gustav and Ike hit back-to-back. The refineries shut down in anticipation of Gustav. Then Ike hit and the gas production and refineries didn’t restart because of power outages. That also affected the operation of major pipelines that move gas from refining areas in the Gulf Coast to facilities throughout the Southeast. The stockpiles of gasoline and other products are lower now than after Hurricane Katrina. So current shutdowns are mainly due to power outages in the areas where there are refineries. The good news is they’re starting to come back online. Production will be restored faster than it was after Katrina and Rita because the refineries weren’t damaged as badly. As of Friday, only four of 56 Gulf Coast refineries remain closed.

The demand surge:

There are pockets of surging demand. People are trying to top off more in fear of shortages, so people are buying more gas than they’d normally buy. But this will not be a permanent situation.”

Gary Harris, executive director of the North Carolina Petroleum and Convenience Marketers adds [3]

There was a lot of panic buying fueled by media coverage of the shortage. “Now, it’s hard to catch up.”

The Los Angeles Times points out that demand is outgrowing supply. Tom Kloza, the chief oil analyst for the Oil Price Information Service, argues that refineries have not been able to grow as fast as the population [5]:

Georgia is one of the states that is the most dependent on those pipelines, and if you compare the population in the Southeast now to what it used to be 20 to 25 years ago, you’ll see that supplies really haven’t kept pace with the growth even when there aren’t any problems.

Why the Southeast, chiefly George and North Carolina? The obvious answer is location; they were the hardest hit by the hurricane, but there’s more to it:

One reason for Atlanta’s shortage was the area’s requirements for a special type of fuel. It’s a unique fuel affecting the sulfur content that’s required in 45 counties in Georgia. But the temporary waiver of the reformulated gas, combined with more refineries coming back online, should ease the shortage. They have more supply options in the Northeast. There are more refineries along the way and they get supply from other parts of the country, in addition to the Gulf Coast refineries and pipelines. The Southeast depends mostly on Gulf Coast refineries and pipelines.”

Making matters much worse, also unsurprisingly, is the government. About two weeks ago Georgia State Governor Sonny Perdue signed an Executive Order that enacted [6]: [6]

Georgia’s price gouging statute to protect Georgia consumers from unlawful increases in gas prices and other products.

The Institute for Energy Research (IER) argues that artificially low prices are to blame as consumers are taking more than the gas stations want to sell them. When supply goes down and demand stays the same, the price should go up. But government officials in Georgia, Tennessee and Florida warned gas stations not to gouge consumers during this time.

Location and gas formulas may explain high prices but only price controls can truly explain lines.  And price ceilings can actually make the cost of hoarding or topping off cheaper.

Here’s an economics Economics 101 for government officials: Prices are used to convey information to consumers. When prices rise, they perform the function of allocation. Some consumers will be willing to pay more for a certain good. Overall, people will use less and suppliers will eventually provide more of the good.

Let’s continue the econ lesson with guest-lecturer George Mason economist Walter Williams. He provides an example of post-Katrina recovery [7]:

Recovering from Katrina means resources must be moved to the Gulf Coast. I ask you, how does one get electricians, plumbers and other artisans to give up their comfortable homes and livelihoods in Virginia and Pennsylvania and travel to Mobile and New Orleans to help in the recovery? If you said pay them higher prices, go to the head of the class.

Dr. Williams’ entire article [7] does a tremendous job of explaining how arbitrary and nonsensical price controls are and the important role that prices play. The point is that oil can be shipped to the Southeast, albeit at a higher price. Here’s Charlotte, North Carolina Larry Jenkins’ take [8]:

Right now, I’ll pay anything for gas. I don’t care if it’s $5 or $6 a gallon. I need it.

Some people will be like Larry and willing to pay while others won’t. Each individual has the opportunity to weigh the costs and benefits of paying more for gasoline or choosing his next best alternative — whether it is public transportation or riding a bike. Simply put, some need gasoline more than others.

Proper prices will restore order and two weeks or less all of the Gulf Coast refineries and pipelines should be in working order – pumping out supply and reducing prices. And that’s the beauty of the market. Class dismissed.

Todd Thurman co-authored this blog post.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2008/09/30/what%e2%80%99s-the-story-behind-gas-shortages/

URLs in this post:

[1] the federal government implemented price controls: http://www.heritage.org/Research/EnergyandEnvironment/wm2004.cfm

[2] fights are breaking out: http://www.nytimes.com/2008/09/30/us/30gas.html?ref=todayspaper

[3] two hours at others: http://www.usatoday.com/money/industries/energy/2008-09-28-Gas-shortage_N.htm

[4] Q&A with officials at the U.S. Energy Information Administration and the American Petroleum Institute: http://www.ajc.com/metro/content/metro/stories/2008/09/28/gas_shortage_explainer.html

[5] have not been able to grow as fast as the population: http://www.latimes.com/business/la-fi-gas30-2008sep30,0,6018721.story

[6] an Executive Order that enacted: http://gov.georgia.gov/00/press/detail/0,2668,78006749_78013037_122469943,00.html

[7] post-Katrina recovery: http://www.washingtontimes.com/news/2005/sep/15/20050915-090251-9667r/

[8] North Carolina Larry Jenkins’ take: http://www.washingtonpost.com/wp-dyn/content/article/2008/09/29/AR2008092902263.html

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