The Ike Spike
Continuing on my oil and gasoline prices theme, I thought I would mention something that is already obvious to many of you, and that is how much gasoline prices have skyrocketed, in spite of the drop of crude oil prices below the $100 mark. As I write this, on the Sunday evening after Ike hit the Texas coast, gasoline prices in Thibodaux, Louisiana range from $3.79 per gallon at my neighborhood convenience store to $4.68 near downtown Thibodaux. (For a basic lesson on gasoline pricing, take a look at this primer from the Energy Information Administration of the U.S. Department of Energy.)
Before your knee starts to jerk, and you want to scream “price gougers,” stop for one moment to consider where Ike hit and the industry in that area. Ike struck Galveston and Houston, but caused flooding all the way to the Mississippi coast. Lake Charles, Louisiana, which was badly damaged by Rita in 2005, was flooded worse by Ike. The Gulf Coast from Lake Charles, Louisiana to Corpus Christi, Texas, has more than 39 percent of the U.S. capacity for producing gasoline (I found refining capacity information also at the Energy Information Administration site).
With workers to nearly 40 percent of our domestic capacity to refine gasoline unable to get to work, many still in the dark and the sweltering Southern September, with no electricity in their homes and their workplaces likely damaged by the winds and floods, it is perfectly reasonable for the refineries to raise their prices to send the gasoline consumers a clear message: “Conserve! We don’t that have much to go around, and it will have to last until we get these refineries back on their feet.”
Clearly a worse situation would be one where we forced the refineries to keep their prices low, keep them from price gouging, and instead, run out of gas in a week and a half.
Many of us in the aftermath of Gustav, with memories of Katrina still all too fresh, know the feeling of not being able to get gasoline, electricity, fresh water and sometimes even food. We know that running out of some things, such as gasoline, can sometimes have dire consequences. I have run out of gas before and probably will sometime in the future. But if we all run out of gas, our society grinds to a halt. The food on the grocery store shelves runs out very soon. Food does not make it from producer to consumer. We starve.
The large price variation of almost a dollar a gallon from low to high prices should tell us that something else is going on, that is failing to keep prices in their usual close range. I cannot be sure that this is the reason, but it may have something to do with what we observe: Many states, and Louisiana is one, have laws that force gasoline retailers to charge a price in accordance to the wholesale price they paid for gasoline. In Louisiana, before Katrina, gasoline retailers were forced, by law, to charge a 6% markup over wholesale price. After Katrina, the Louisiana legislature allowed prices to fall to the wholesale price, but no lower. As explained, wholesale prices went up as Ike wound his way to the beaches and refineries of the Texas oil coast. Some gasoline retailers still had cheaper gas (as far as the already paid “wholesale price” was concerned), while others had empty tanks and were forced, by law, to charge the new, higher price.
High prices during low production periods send us the same message as a ship captain putting his crew on half rations upon learning that half of his galley supplies became contaminated. To fail to put a crew on half rations in such a situation would be reckless and irresponsible. High prices let consumers decide which uses are important enough to pay the high prices and which are not important enough.
You can listen to a brainless, jerking knee and call $4.68 a gallon for regular gasoline “price gouging,” but I call it something else: “social responsibility.”
—-An update: It seems the fears of the refiners were not borne out and Ike did little damage to our refining capacity as reported by Bloomberg.—-
-MC
