Michigan Attorney General Jennifer Granholm is pursuing legal action against gasoline stations that substantially raised their prices at the pump in the wake of the Sept. 11 terrorist attacks in New York and Washington.  Is this sound economics and good public policy?   

First, let's recount what happened.  When news of the attacks spread, many citizens did what seemed to make sense given the extraordinary situation: They began to "stockpile" gasoline in case of a disruption of fuel supplies.  Long lines formed at gas stations across the country by mid-afternoon on Sept. 11.  In other words, demand soared.  And just as Economics 101 teaches us, prices rose as a result.

If the crisis had indeed slashed world fuel supplies, then the public's initial reaction would have been both smart and prescient.  Buying more when prices are low, in anticipation of higher prices later, actually has the effect of spreading today's relatively abundant supplies over a longer period, assuring that future prices will be lower than would otherwise be the case.  The rising prices then send a powerful signal for somebody to find new supplies quickly.  This is the way a free price system works—in gasoline, green beans, coffee, or anything else.

Eventually, it became apparent that there would not be any disruptions in the flow of oil or the production of gasoline.  So demand ebbed and the lines at the gas stations evaporated. 

That should have been the end of the issue, but it isn't.  Attorney General Granholm is pressing forward under the authority of a vague and ill-conceived provision of a law signed by former Gov. William Milliken.  Section 3(z) of the Michigan Consumer Protection Act (Act 331 of 1976) makes it unlawful to "charge the consumer a price that is grossly in excess of the price at which similar property or services are sold."  Just what constitutes "gross excess" is left up for grabs.  To the attorney general, "gross excess" means charging at least $2.50 per gallon, compared to the approximate average price of $1.79 on Sept. 10. 

Other politicians also have jumped on the bandwagon.  State Rep. Mike Kowall, R-Waterford, introduced HB 5156 to make it a felony to sell an essential commodity during an emergency at a price greater than 10 percent above the "prevailing" price for comparable goods before the declaration of an emergency, regardless of actual supply and demand factors.  Rep. Mike Bishop, R-Rochester, introduced HB 5155 to establish sentencing guidelines for the evil culprits. 

But while politicians pile bad law on top of previous bad law, the marketplace effectively works its magic.  People shop elsewhere or find ways to do with less while prices are high.  Suppliers round up more supplies.  Prices come down.  The upward spike in prices sets into motion the market forces that solve the "problem."

Sonja Sturgeon of Midland manages Bobbie's Point Citgo, one of the gas stations targeted by the attorney general.  Sturgeon readily admitted to the Midland Daily News that the store boosted prices to $3 per gallon at about 8:30 p.m. on Sept. 11.  "The whole point of raising the prices was to send customers down the road to buy gas," she said.  "It had nothing to do with gouging the customers."  Faced with long lines at the pump and no prospect of supplies being replenished until later in the week, Citgo upped prices to encourage customers to go to stations whose supplies were more plentiful, said Sturgeon.  But even at $3 a gallon people still were lining up. 

Perhaps the attorney general and Reps. Kowall and Bishop would have advised Bobbie's Point Citgo to behave like nothing had changed in the wake of Sept. 11.  Pretend that customers were demanding no more gas on Sept. 11 than they wanted on Sept. 10.  Keep prices the same or raise them no more than 10 percent.  Then the lines would have been many blocks longer and station after station would have run out of gas completely, leaving people at the back of many lines without hope of getting a drop in their tanks.  Which is better: Gas at $3 after a 15-minute wait, or no gas at $1.79 after sitting in line for an hour? 

All the fuss about the price of gas on Sept. 11 was, it turns out, nothing more than the wrong solution in search of a nonexistent problem.

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(Lawrence W. Reed is president of the Mackinac Center for Public Policy.  Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.)

For more detail on this issue, see Current Comment Archives for November 21, or click on http://www.mackinac.org/pubs/comments/3854.

Summary

Michigan Attorney General Jennifer Granholm and other politicians are accusing gasoline stations that raised their prices following the Sept. 11 terrorist attacks of "price gouging." But basic economics explains the disastrous effects that result when politicians get involved in deciding how much things "should" cost.

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