Price Gouging

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It's understandable to be upset when prices go up suddenly from what they were. It seems unfair if a gas station raises prices on gas they bought cheaply because they know the next gas they'll buy will be much more expensive. This is sometimes referred to as price gouging, but technically speaking it's not. Thomas Sowell criticizes the very notion of price gouging here. He says you should expect prices to go up when a commodity is worth more, even if it didn't cost the vendor any more to get it. It sells for what it's worth. The first thing I thought of as a comparison when I heard people talking about this on the news was the comic book industry. There's a set price for new issues, but it goes up faster than inflation as costs increase for making new issues. The quality of paper, the color detail, and so on has increased over the years. You're paying for more, so you pay much more than inflation would require. That's to be expected.

But it's used comic books that are more parallel to the current gas price increase. Used comic book prices go up according to supply and demand. Rarer comic books are worth more. Ones everyone wants a copy of are worth more. I'm sure that old Star Wars comics go up in price when a new movie is out and go down in between films. Is this price gouging, or is it just selling a comic book according to what it's currently worth? It shouldn't matter that the store owner paid a low price for it before it was worth as much. What they're selling is now worth more and carries a higher price tag. Why should it be different with gas?

I don't like high gas prices, but I don't think it's price gouging. Price gouging would be when people collude en masse to monopolize a price increase, and it doesn't seem as if such mass collusion is going on with gas prices. They're all doing it, but it's not as if every gas station owner got together in some private meeting to decide to increase prices. They just all respond the same way to the market change due to lower supply. I don't see how political solutions will help with this sort of thing. You can't legislate price controls that will make the market price go down. All you can do is make it difficult for small businesses to make a profit on a scarce commodity, which will eventually force them not to provide it anymore. That won't happen on a relatively minor scarcity, as we have now (the oil reserves the oil companies already have should be sufficient to counteract it if necessary). It's the principle of price controls that I think are a bad idea, at least in general. Also, see the above-linked Sowell piece for some arguments why price controls actually harm the consumer by making shortages worse. It's not just about the business owner.

8 Comments

The oil industry sells their gas based on the price of oil at the time of sale. That way they don't have to do all the basically impossible accounting of figuring out what they paid for it and tracking that gas through from purchase, through processing, to point of sale. That is why, the gas prices go up immediately when oil prices do, even though there are probably weeks (or more) between the time the oil purchased now gets to the pump. It also goes down right away ... but nobody comments on that.

Price gouging would be when people collude en masse to monopolize a price increase, and it doesn't seem as if such mass collusion is going on with gas prices.

Well, not on the gas-station level (which is what your post is about) at any rate. But it does seem to be going on at, say, the OPEC level. But then, there isn't really anything we can do about that either.

I totally agree with you on this one. I hate the high prices, and it is going to really hurt my family and my husbands business, but it isn't gouging or OPEC's conspiracy- it is plain economics at work.

Actually it is the only guaranteed way to reduce the major problem which is our consumption quantities. The prices slowly rising weren't doing that, and we were looking at reduced stocks of gasoline before Katrina. Now with the damaged and closed refineries, which produced one third of our nations supply (I understand)... it is a matter of the gas not being available. Even with some support from the emergency stockpile...

I think it is time to help the general situation by reducing how we use gasoline. Less trips, carpools, the types of things I remember from the energy crisis of the 70's when it was OPEC.

I have no problem with those who complain that OPEC engages in price gouging. That seems accurate, since it really is collusion. I don't think they have anything to do with the increased prices because of the hurricane, though.

As far as I've heard, there's plenty of oil. There's no shortage at all, and there isn't really going to be one. We have enough more now than we did a year ago that this will not affect the overall gasoline supply for the U.S. in any noticeable way. The problem is in replacing those buffer supplies that will have to be used to meet ordinary usage. That will take infrastrcture repair, which is not quick or cheap. The higher prices we're going to be paying for the next few weeks or months will be funding infrastructure repair. If things go at a reasonable pace, the oil supply will not be reduced to a real scarcity as happened in the 70s. It will just cost a lot more to return things to a functioning level of supply from new oil rather than the buffer. Prices will be high, but we shouldn't see the long lines.

So my question is, who is Sowell responding to? I haven't seen anyone in the press really worried about price gouging execept for President Bush.

Just to be clear, Sowell wasn't responding to anyone now. He wrote that after the three hurricanes that hit Florida last year.

I've been hearing this complaint over and over again on the cable news networks. It's ever-present on Fox, but the others have people saying that too.

"We have enough more now than we did a year ago that this will not affect the overall gasoline supply for the U.S. in any noticeable way. "

hmmm. I am not sure you have a handle on this, but I am not an expert by any means. The reason I doubt the quoted statement and your extrapolations - and I
m not trying to be difficult,just stating a different view- is due to some stock market research I have been doing for some months now.

The situation has been that our usage is high and stays high, our refineries are few, and with the Katrina catastrophe, a number of those refineries have been out of commission. We have supplies of crude, but our supplies of refined gas are the problem.

At least that is how the reports I read seem to stack up. If this is so, there is a shortage, and we will see prices rise, and likely stay pretty high for awhile.

In the seventies crisis ( which I lived through) there was an overall shortage. During the winter we could not get sufficient gas to heat our home...so the next year is when we started to heat with wood stoves ( supplemental at that time). Although gasoline prices rose then, there were no shortages.

Now, it seems that the talk of queuing up for gas will depend on price caps. If the price rises high enough, the usage diminishes, but I am not looking forward to any of the scenarios that are on the table!

I don't see how what you're saying conflicts with what I was saying. What you're saying seems to be that we'll have trouble replenishing our oil supplies after using what we've got, which is what I said. Then you said it won't necessarily lead to long lines unless there are price controls, which is also what I said.

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