Tennessee’s problem with price gouging Posted by: Bryan Pick
on Saturday, September 20, 2008
Yesterday, as I was in my third and final day driving across the country, I drove through most of Tennessee. It’s an absolute delight of a drive, except for one thing: I had foolishly neglected to fill up in Jackson, so as I drove into the Nashville area, I was running fairly low.
To determine the best stopping point, I was using a website on which locals update gas prices. There were two low-priced stations just outside Nashville, so I got off the freeway and pulled in. The BP station’s price board was empty, which I thought was strange, and as I pulled in, I saw they had little bags over every nozzle. A little sheet of paper on the pump explained that “due to supply disruptions” as a result of the recent Gulf hurricanes, they were out of gas.
Out of gas. Fresh out of a commodity.
Supply disruptions, my foot. Commodities don’t “run out” as a result of supply disruptions, short of a blockade of all remaining stocks of it. If it’s a matter of supply, distributors can get more if they are willing to pay somebody to get it for them, and simply mark up the end price to reflect the increased difficulty. It doesn’t take long for a truck to run halfway across the country: it can be done in less than 24 hours. And for a commodity like gasoline, there are plenty of suppliers. So there has to be an additional factor: somebody has to hold down the price while everyone buys up the remaining stock.
Let me explain something: I didn’t have a lot of money for this road trip when I hit the road, but I gave myself some reasonable padding. And at that moment, I was begging to be “gouged.” Because if nobody in Nashville was rationing gasoline, I was going to be parked in my Civic instead of making it to my final destination. I might even have to pony up $60+ a night for a hotel room. I wondered how Nashville, the whole city, could keep running if all the gas had gone first-come-first-served. I figured, give the city a week and a half, and if things don’t turn around, a lot of people will be in serious trouble. People will stop showing up to work; they’ll stop shopping; they’ll stop doing things they want to do, and some people will even stop doing things they need to do. Not just poor people, people.
Lucky me, after I'd passed almost all the way through town and run into several more empty stations, I happened upon a Shell station that still had gas. It also had a line going around the corner; I asked my family on the phone, “What decade is this?” The price was noticeably higher than was reported in recent days, and they were rationing by quantity—nobody could buy more than $25 of gas—but they were my saviors: I was just barely over the “E” symbol on my gas gauge when I pulled in. I asked the operator of the station what was going on, and he said all he knew was that he was lucky to get the little bit of gas that he did. I happily paid my $4.09/gallon and left.
Strangely enough, by the time I reached Baxter (roughly 70 miles east), a Love’s station was selling gas at $3.49 a gallon—with a 100 gallon limit. And this shortage was caused by a supply disruption? What, did the hurricanes knock out all the trucks headed for Nashville, but not the ones headed for Baxter? Or, for that matter, all the gas stations in New Mexico and Texas and Oklahoma and Arkansas and Virginia where I bought gas quite readily, albeit at a higher price than recently listed?
No, I had a pretty good idea right away about who the culprits were and, as far as I know, none of them are named Gustav or Ike. It’s the Tennessee state government, which is trying to sniff out nefarious “price gougers.” I can’t tell you whether they’re aware of the effects of price ceilings, so I don’t know whether the reasons that they nearly screwed me were out of good intentions or cynical ones. But anyone acquainted with economic thinking should have warned them of the consequences of this:
"We are concerned with the spike in gasoline prices in the state and Knoxville, in particular, where gasoline prices are reported to be among the highest in the nation," Attorney General Bob Cooper said in a statement. "There is a difference between profits and profiteering."
Under Tennessee law, unreasonably raising the price of essential goods, commodities or services in direct response to a natural disaster here or in another state is price gouging. Under state law, price gougers can be subject to a $1,000 civil penalty for each violation. Price gouging is also a criminal offense in Tennessee.
What is reasonable? I had almost all of my possessions packed in that car, and I could not afford to get stuck in Nashville while they waited for supply prices to drop, not even for a couple of days, or I was going to have to find some quick means to borrow money to make it the rest of the way. I happen to think that nearly getting stuck in Nashville because of the Tennessee legislature is unreasonable.
And what is the difference between profits and profiteering, exactly? Simply being greedier than your competitors doesn’t make you richer; if you raise your price higher than the demand will support, you start losing as soon as the guy down the street decides to sell for less to siphon customers away from you. Does the difference between profits and “profiteering” have anything to do with the kind of supply and demand calculation that a high school senior can make? And does it have anything to do with all the gas stations in Nashville that are suddenly unable to serve the customers who urgently need gasoline?
Explain this in simple terms to anyone you can: emergencies themselves almost never cause all supplies of a commodity to dry up. When emergencies happen, supply may drop and demand may rise, but this alone will not cause availability to drop to zero. No: with a few very rare exceptions (again, like a highly successful blockade), shortages only happen when businesses fail to raise the price to reflect the new reality.
The most common reaction is, “But if they raise the prices too much, only the rich will be able to afford it.” But capping the price doesn’t just mean that the poor will have an easier time relative to the affluent. “First come, first served,” the default rationing method when prices are capped, also means that some of those who desperately need the commodity—as often happens around the time of an emergency—will be unable to get it even if they’re willing to sacrifice a lot. If you raise the price so that your supplies will only be exhausted by those who are most willing (and, yes, able) to make those sacrifices, the first things to go are the most trivial or wasteful uses of the commodity. It might feel like highway robbery to have to pay twice as much for a needed commodity (whatever end is implied by “need”), but it’s the most direct method of allocating things to those who need it. If you want to help the poor and needy in that situation, feel free to donate to them, but don’t go down the path of price controls.
With that in mind, here's your optional homework assignment: spot all the errors in this "reasoning".
Thanks Bryan - I just read the link you gave at the end of your post, and then read the comments. DOH!!! I want to push sharp objects in my eyes! That’s a sad and pathetic group of people. And they haven’t a clue about supply and demand.
I think there is rather more to it than Tennessee’s law. I live in an area (South Florida, where we know a thing or two about gas shortages after hurricanes), where prices have risen somewhat in the last week, but remain in general at or just under four dollars/gallon for unleaded, and where we operate with a "anti-price gouging" law, and there is no sign of a gas shortage. (Question—did you happen to notice any signs of a shortage in other parts of Tennessee further away from Nashville?).
When we did have gas shortages post hurricane, they were very obviously related to supply disruptions—that is, the distributors were unable to get gas to the gas stations once the latter were able to open for business with generators or normal electric power, and dissipated almost as quickly as the power went on. I am therefore inclined to think the reason for the shortage, whatever it is, lies with the distributors. Perhaps they diverted fuel to Texas with the plan to profit more than Tennessee’s price gouging law would allow them to profit from gas sold in Tennessee.
But if that’s the case, why are there no problems in Florida, where the same constraint, the price gouging law, also exists? One would think that other distributors would also be diverting fuel deliveries to Texas, but if they are, it doesn’t seem to be affecting our supply here.
kishnevi - I didn’t stop in other parts of Tennessee for gas. I stopped in Jackson for the night and in Nashville and Baxter for gas — my Civic made such great mileage (37.7 mpg by the end of the trip, loaded with all my stuff) that think I only really needed one stop in the state (Baxter was just to top up at that great price). I didn’t notice a shortage in Jackson, and I think many stops out in the rural areas were fine. But they’ve been complaining about shortages in the cities, which is where I would assume (a) demand has risen the most and (b) there are bound to be more complaints of "gouging". Those assumptions, if true, support my hypothesis.
I am therefore inclined to think the reason for the shortage, whatever it is, lies with the distributors. Perhaps they diverted fuel to Texas with the plan to profit more than Tennessee’s price gouging law would allow them to profit from gas sold in Tennessee.
If there’s any profit to be made from selling gas, my educated guess is that they’ll get gas in the pumps. Being the only operating gas station in town has to be profitable if you have a decent control over your price.
I admit that I don’t know the whole story here. I do have some grasp of economics, though, and when I see shortages — not a functional failure at the station or a transportation blockage, but an actual lack of product — my mind turns to plausible explanations, and "supply disruption" isn’t one of them. If I were running a gas station in Nashville and didn’t have to fear state authorities, you can bet I’d be buying it wherever I could and staying open. Heck, knowing what I know now, I would have sent out all my local buddies to Baxter to each fill up 100 gallons of gas cans and cart it back to Nashville to sell at a slight markup. It’s hard to believe that the only state I drove through that’s having trouble getting gasoline as a result of a supply disruption is Tennessee. Texas was actually hit by a hurricane, and I got gas there without any problems (could have had it cheaper, too, if I had read the website beforehand). Why was getting gas not a problem in Oklahoma? Arkansas? Virginia?
As to your query, I can hazard a guess that Florida’s gas stations are more successful at arguing to state authorities that their price increases are "justified". Prices did rise a good deal in some parts of the state, and some Florida stations reportedly started rationing by quantity, as the open Shell in Nashville did. Perhaps the distributors simply did plan better by stocking up their inventories before the disaster.
Unfortunately, Florida is not immune. Tallahassee has been experiencing gas shortages similar to what you describe in Nashville for the past week or so. And for some reason, the gas stations that have had gas (when they have it) tend to only have the lowest grade. That might be related to your guess that they’re trying to avoid being accused of "gouging"—price increases might be less noticeable on the cheapest grade.
I just read a little news item that showed a BP taped up in West Palm Beach on Wednesday (but the nearby Texaco station was still open), so at least some "shortage" appears to have happened there, too.
George—I remember that after Wilma several stations had the mid and premium fuels available but had the regular grade taped over. My thought at the time was that they were trying to make people buy the more expensive grades. From what I saw, I don’t think it was because people bought out the supply of regular gas before they bought the more expensive grades. (Also, I think that people tend to focus on the price of regular grade, because that’s how the media reports it, so price increases would probably be less visible on the higher grades, not the lowest grade. But that’s theory on my part.)
The main problem for us after Wilma (and I assume for Texas now) was simply having not enough stations that had power to allow them to fill their tanks from the distributors and let the pumps run for customers. As more stations opened, the gas shortages went away. Since Tennessee didn’t sustain any hurricane damage, that obviously doesn’t apply here.
I hadn’t heard about the local shortages you and Bryan mentioned. I may be talking differently tomorrow; that’s when I need to fill my gas tank for the week :)
Brian, I’m amazed that you didn’t know of the fuel shortages in Knoxville/Nashville area. I live in PA and I did.
And greed does seem to be a factor, just not on the part of Big Oil.
Nope. If you’ve been out in Knoxville at all today, you’ve seen long lines of cars at gas stations. You’ve seen people filling up cars, trucks, motorcycles, lawnmowers and gas cans. They are in a panic mode, and they’re buying more gas than usual. Even though Pilot has enough to get through the crisis at normal levels of sales, there’s no way they can sustain sales at the rate they are going.
bobby - It’s not price gouging. Prices aren’t based on the price they paid for the gas currently in their underground tanks, they’re based on the price the station has to pay to get the next shipment of gas. If they suddenly find that the next tanker truck is going to cost 40% more than the last one, prices will go up roughly 40%. Immediately. Bet on it. -=-=-=-=-=-=-=-=-=-=- Jay - I was very busy in the week before my drive, getting everything ready for the road, so I had almost no time for my usual reading. I had only heard (through my family) some vague things about shortages in the general region around Texas (which even then I ascribed to price ceilings), that some stations were out and that other stations’ prices had gone way up. When they told me the prices, though, my first thought was, "That’s not so bad for me; do they know what we’re paying around here?" ("Here" was the western edge of Los Angeles County.) I hadn’t heard anything specifically about Knoxville or Nashville. And when I got through Arkansas without any problems, I guessed that the shortage problem had simply passed and everyone was back to simply paying high prices.
jpm100 - Well, yeah, there’s also perceived demand. If they raise prices by a dollar, and their competitors don’t, then their competitors are winning the price competition handily. The only reason I would raise my prices 25% like that is if I feared I would run out otherwise, because if my volume drops even a little over 20%, I begin to lose money just on the gas transactions, never mind the (more important) drop in sales of concession items.
It could be that those stations experienced some panic buying early on, extrapolated that out a few days and raised their prices. But then, perhaps, the initial panic of a possible shortage subsided, and they dropped their prices again. Perhaps some gas station owners do think they can "gouge" their customers. But business competition will punish them if they misjudge demand.
So yes, prices change in response to both supply and demand.
Where do service stations get their gas? Commodities may not run out, as you claim, but they are not always distributed in the most efficient way. Hurricanes and other events do disrupt the distribution chain. It is not always a conspiracy.
I imagine the service stations in Nashville get their gas from roughly the same places as those in Baxter. If you see that your next re-up isn’t coming on time, and demand is up locally, you can keep from running out simply by raising the price. So even if supply is cut off fairly suddenly, you don’t run out. It isn’t so much a matter of distribution.
I don’t think there was a conspiracy here, just a lot of stupidity. As supply dropped, local government and media outlets stoked the panic (raising demand) and the Tennessee state government issued fresh threats against anyone who raised prices to compensate. Voila, instant shortage.
"you can keep from running out simply by raising the price."
What is the point of that? The idea is to sell gasoline, not keep it in stock. If I am running a gas station, I would rather sell out and take the rest of the day off rather than watch people shoot me the bird as they drove past on their way to Baxter.
If you’re running a gas station, feel free to do things your way. But when you run out of product and make it easier on your competitors to make a real profit, try not to look surprised. And try not to be disappointed when you go out of business, which will happen if you take that attitude in pretty much any retail market.
The idea for most businesses is to maximize profit. That’s what I believe those gas stations would have done if they had not been prevented from doing so by stupid politics.