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Wednesday, May 12, 2021

Why Politicians, Not Hackers, Are to Blame for the Gasoline Shortage

Milton Friedman explained how prices are your best friend in an energy crisis.

Image Credit: The U.S. National Archives

Gov. Roy Cooper declared a state of emergency in North Carolina on Tuesday in response to a cyberattack that has caused the state’s biggest pipeline to temporarily shut down.

His declaration triggered a North Carolina law which “prohibits excessive pricing during states of disaster, states of emergency, or abnormal market disruptions.”

In a tweet reinforcing this law, Cooper urged Carolinans to “report” price increases.

The state complaint form even includes a special checkbox for reporting gasoline price-gouging. In other words, price controls are in full effect.

Yet, in the wake of these measures, residents across the state have been encountering long gas lines and empty stations.

How Price Controls Cause Shortages

Basic economics shows that Cooper’s prohibition of price gouging is largely to blame for the gasoline shortage

When an unfortunate event, like a cybersecurity attack, causes less gas to be available, one way to adapt to the new reality is for companies to raise the price. Raising the price has two beneficial effects.

First, when prices rise, consumers have to be more careful with their buying decisions. If gas is double the price today than it was yesterday, you may decide to only buy a little gas in hopes that the price will return to normal soon, leaving more for others. Or you may decide to delay gassing up, which means fewer lines.

Second, if consumers pay more for every gallon of gas, producers can justify spending more to hire more drivers to transport gasoline to the station, for example. Or, they can buy gas from neighboring states that aren’t suffering from the shortage and pay the higher transport costs. The higher price consumers pay makes these decisions worth it.

On the other hand, when prices don’t rise, there is no incentive for a consumer at the pump to conserve gas for others. That leads to politicians resorting to moral suasion to get consumers to stop pumping.

Consumers who ignore such pleas aren’t bad people. They just recognize, at least implicitly, that if prices can’t rise they have no reason to expect markets to adjust quickly.

The initial cybersecurity attack that shut down one of North Carolina’s biggest pipelines did cause the supply of available gasoline to decrease. But it didn’t cause the market dysfunction we are seeing in the long lines and empty stations. Only the latter is what economists refer to as a “shortage.” And shortages are caused by government price ceilings.

To immediately resolve the shortage, all Gov. Cooper needs to do is reverse his price gouging prohibition. If prices were allowed to rise, gas stations could afford to pay other more expensive oil suppliers to transport oil in, and consumers would be induced to economize gasoline, rather than topping off their tanks out of fear or resorting to “panic buying.”

Doomed to Repeat History

This isn’t the first time this has happened.

In 1974, it wasn’t hackers tightening the oil spigots, but Middle Eastern nation-states. The Organization of the Petroleum Exporting Countries (OPEC) decided to cut fuel production. With less oil available, it became necessary for gas stations to hike oil prices to make sure there was enough to go around.

However, similar concerns about higher prices by US politicians (especially President Richard Nixon) led to the widespread imposition of price controls. As a result, lines formed at gas stations around the country. This period was so influential, it inspired the post-apocalyptic film series, Mad Max.

Economist Milton Friedman, writing for FEE’s magazine The Freeman in 1974, chronicled this disastrous policy response. As Friedman points out, the OPEC oil production cut affected the supply of oil in many countries across the world, but Germany avoided gas lines by letting prices rise:

“Germany imposed no price controls on petroleum products … The price of petroleum products jumped some 20 or 30 per cent, but there were no long lines, no disorganization. The greedy consumers found it in their own interest to conserve oil in the most painless way. The greedy oil tycoons found it in their own interest to see to it that petroleum products were available for those able and willing to pay the price.”

If politicians refuse to learn from Germany’s success in the 70s compared to the failure of US politicians, we will be doomed to repeat the failure.

Scarcity Cannot Be Legislated Away

Some may contend that higher prices would make gasoline inaccessible to those who need it, but the opposite is true. Allowing people to pay higher prices is precisely the way to make sure the people who need fuel most get it.

To understand why, it’s important to recognize that the desire for gasoline exceeds the amount of gasoline freely available. In other words, gasoline is scarce. When goods are scarce, individuals must compete for them because there aren’t enough to go around. In our society, we usually compete on prices. The person most willing to pay for a resource gets it.

Instead of competition through prices, North Carolina residents have been forced to compete through waiting. If scarce resources aren’t bought with money, one way they can be bought is with time.

However, the nice thing about price competition is it forces individuals to signal how valuable gasoline is to them compared to other resources. If, for example, you have a family emergency that requires you to travel to another state, you’re willing to sacrifice more resources to fill your tank. Willingness to pay communicates urgency.

Waiting in line, on the other hand, does not discriminate based on urgency. If you’re in line with a family emergency, and someone else is in line because they want to go on a drive and don’t mind a little waiting, you pay the same amount of time either way. And if the leisure driver fills up his SUV with the last of the gas, you will be left in the lurch in spite of your greater need.

The scarcity caused by the cybersecurity attack is real, and it cannot be legislated away with price controls. When politicians take away price competition, it is replaced by competition by waiting, and that kind of competition guarantees gasoline will be inaccessible to some who need it.

A Way Forward

Governor Cooper’s state of emergency isn’t all bad. Some aspects of the state of emergency include deregulating suppliers of gasoline. The Biden administration has also announced it is temporarily lifting certain environmental mandates in key states. This should help alleviate the shortage somewhat. However, to eliminate the shortage, the path forward is clear.

To ensure the quantity of gasoline that consumers demand is equal to the quantity that gas stations supply, Cooper needs to let prices work.

Prices are signals which communicate people’s desire for different goods and services. In a crisis, we can’t afford to silence this fundamental form of communication.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.