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The Role of High Gas Prices – Art Carden: Economics Everywhere, for Everyone

The Role of High Gas Prices

Price “gouging” is not a moral issue. It’s an economic issue with *beneficial* humanitarian consequences. Counterintuitive as it may seem, high gas prices from natural disasters send two very powerful signals into the market: they tell gas producers to produce more, and they tell gas consumers to consume less. After disasters, the news wires fill with story after story about how there is very little gas, very little potable water, etc. This is exclusively due to the fact that prices are not allowed to adjust to new market conditions in the wake of disasters. Suppose the new market price was $5/gallon. It would do several things.

Most importantly, it would make people think twice about unnecessary driving and force those of us in unaffected areas to think twice about unnecessary driving. It would be nice if we didn’t have to make difficult choices, but in the aftermath of a disaster like this, we do.

Second, it would eliminate gas lines. There have been reports of people running out of gas while waiting in line to get gas—this is pure waste. Perhaps more importantly, people waiting in line for gas (or driving all over Alabama searching for gas) are using their time trying to find gas rather than other, more constructive things.

Finally, it would encourage additional production and distribution. If prices along the coast were $5/gallon, I guarantee that every gallon of gas headed for Saint Louis would be immediately directed toward the gulf coast.

What should we make of the “impact” on consumers’ wallets? My first guess is that the impact should be relatively small in many situations because, at the margin, there are a lot of changes we can make that don’t alter our lives very dramatically and the human mind is capable of incredible ingenuity. Years ago NOLA.com ran a picture of a New Orleans resident who had made makeshift shoes out of rubber bands and cardboard. People can save energy by taking shorter showers. Cold meals rather than cooked meals might save energy and time. People can conserve by turning off the air conditioner and by making sure their tires are properly inflated.

I don’t like paying a lot for gas any more than anyone else, and high gas prices have an impact on consumption that is similar to an increased tax; however, there is an important exception: high gas profits attract capital to gas production. The fact of the matter is that disasters change market conditions dramatically, and no amount of wishing will make gas worth “less” than what the market dictates. Unfortunately, our “friends” in Washington, Montgomery, Jackson, and Baton Rouge believe otherwise.  With friends like that, though, the storm-ravaged people of the gulf coast certainly don’t need enemies.

About the Author: artcarden

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