Of "Gouging" and Gasoline

The following article originally appeared in the November 16, 2001 issue of the MIRS newsletter in answer to the question: "Acting under the authority of the state consumer protection law, Michigan Attorney General Jennifer Granholm is pursuing gasoline stations that substantially raised their prices at the pump in the wake of the September 11 terrorist attacks. Is she on the right track, and is this a proper function of state government?"

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Suppose someone offers to buy my house for twice what I paid for it a year ago and I refuse the offer.  It's my house and I really don't want to move, but I announce that if someone wants to give me 10 times what I paid for it, I'll take it.

Am I "gouging" somebody?  Most people would say no, but they would be hard put to explain what the difference is between my action and that of the gasoline stations Attorney General Granholm is threatening.

It's true that my house is private property, but so is gasoline.  When it's in the underground tank at the gas station, it's the private property of that station until somebody else buys it.  It's not public property, and it certainly doesn't belong to people who never took a risk and invested a nickel in it, and that includes the attorney general.

If it's wrong to sell gas at $3 a gallon, what if the owner of a gas station decides to not sell it at any price?  Wouldn't that be even more wrong?  Yes, but only if one distorts the concept of private property to mean that it's really not yours if somebody else wants it.

There are plenty of people out there—perhaps some readers of this column—who will scoff at any defense of gas station owners on the basis of the "antiquated" notion of property rights.  But of course, those same scoffers will defend their own property without hesitation; it's only other people's property about which they can afford to be cavalier.  This was the first of many thoughts that came to mind as I read about the attorney general's crusade in the early October newspapers.

When news spread on September 11 of the terrorist attacks in New York and Washington, many citizens panicked.  Not knowing whether this was the start of something much bigger, they did what seemed to make sense given the extraordinary situation—they began to "stockpile" gasoline because a world crisis could easily disrupt fuel supplies.  Long lines formed at gas stations all over the nation by mid-afternoon on September 11.  Demand, in other words, soared.  Just like Econ 101 was supposed to teach us, prices rose.

If the crisis had indeed slashed world fuel supplies, then the initial reaction of the public 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 into the future, assuring that future prices will be lower than would otherwise be the case.  And the higher prices now send a powerful signal for somebody to go find new supplies quickly.  This is the way a free price system works—in gasoline, green beans, coffee, or anything else.

(In Havana and Pyongyang, prices aren't allowed to reflect supply and demand conditions.  The government fixes them so as to protect the people.  Thus, food and fuel and lots of other things are real cheap in those places, but food and fuel and lots of other things are also very hard to find.  Food's cheap, but people starve.  Fuel's cheap, but people drive rickshaws.)

It became apparent within a day or two that though the events in New York and Washington were shockingly tragic, they did not produce any disruptions in the flow of oil or in the production of gasoline.  So people calmed down and the lines at the gas stations evaporated.  Today, with gasoline selling at least 70 cents below the average price of two months ago, it would seem embarrassingly silly for our attorney general to spend a moment of time or a nickel of the taxpayer's money attacking gas stations.

Attorney General Granholm is acting under the authority of a vague and ill-conceived provision of a law passed by the Michigan Legislature and 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, a perfect opportunity for politicians seeking reelection or higher office to grandstand and demagogue their way into the headlines.  To Michigan's attorney general, "gross excess" meant charging at least $2.50 per gallon, compared to the approximate average price of $1.79 on September 10.  

Rep. Mike Kowall, R-Waterford, introduced HB 5156 to make it a felony to sell an essential commodity during an emergency declared by the Governor at a price greater than 10 percent above the "prevailing" price for comparable goods before the declaration of an emergency, notwithstanding actual supply and demand factors.  Rep. Mike Bishop, R-Rochester, introduced HB 5155 to establish sentencing guidelines for the evil culprits.  Politicians ignorant of marketplace economics rattle their sabers and pile bad law on top of previous bad law.  Meanwhile, the market 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 September 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 were still 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 the September 11 attacks.  Pretend that customers were demanding no more gas on the 11th than they wanted on the 10th.  Keep prices the same or raise them no more than 10 percent.  Would that have done anyone a favor?  Surely, the lines would have been many blocks longer and station after station would have run out completely, leaving people at the back of many lines without any hope of getting a drop in their tanks.

Let's see, which is better: Gas at $3 after a 15-minute wait, or no gas at $1.79 after sitting in line for an hour?  This is not rocket science.  

Oil and oil products have long borne the brunt of misguided thinking.  Demagogues and charlatans came out of the woodwork in droves in early 1981 when President Ronald Reagan decontrolled oil prices.  They warned that prices would soar and wreck the economy.  The fact is, in real terms (after adjusting for inflation), average gas prices have never been higher than they were on the day Reagan ended federal price-fixing.  

What's more, federal and state governments have been piling on the gas taxes in the years since, and still the real price of gasoline is less than it was in 1981.  In Michigan, 43 cents of every gallon goes for direct state and federal taxes alone.  And that doesn't even count all the hidden taxes paid by drillers, refiners, and distributors along the journey from well to pump.  All these taxes are paid to governments which invest no money and take no risk in the production of oil products.  Just who is the real price gouger here?

So what's all this fuss about the price of gas after September 11? Why the threats against gas stations by state officials?  I wish I could say it was all about wise and altruistic crusaders rushing to the rescue of us hapless consumers.  But that's the stuff of fairy tales.  No, this was all about something very different.  It was about the wrong solution in search of a nonexistent problem. 

"Long lines formed at gas stations all over the nation by mid-afternoon on September 11. Demand, in other words, soared. And just like Econ 101 was supposed to teach us, prices rose."