Are We Getting "Gouged" at the Pump?
Retail gasoline prices across the U.S. are now climbing near their highest level in two years. In fact, gas prices are above their post-September 11, 2001 levels. As a result, federal and state politicians are beginning to fret over the potential for “price gouging” behavior by gasoline retailers.
In Washington, many Senators including Ohio’s Mike DeWine, have approached the Energy Department and the Federal Trade Commission about potential investigations into gasoline price gouging.
In Michigan, newly elected Governor Granholm (who prosecuted 48 service stations for price gouging as Attorney General in 2001) has just issued an executive order that requires the Department of Agriculture to administer periodic surveys of gasoline prices around the state in an effort to curb “unfair” gasoline pricing. In Virginia, the Attorney General last week began an investigation into gasoline prices “to make sure there is no price gouging," according to a spokesman.
All of this talk about “price gouging” can be confusing to an economist. In particular, the term "gouging" implies that there is a clear victim who is being seriously harmed or “gouged,” and an equally clear assailant who is doing the “gouging.” The implication is that gasoline sellers are inflicting some harm on innocent consumer victims.
The claim of gasoline price “gouging” is particularly puzzling simply because consumers buy fuel voluntarily. Voluntary transactions between a buyer and a seller can only occur if both parties are at least as well off after the exchange as they were before. No buyer (or seller) would ever voluntarily agree to an exchange that they knew would hurt them (or “gouge” them).
Clearly what concerns some consumers and some elected officials is the fact that they are paying more for gasoline today than they would like to pay. However, the alternative to gasoline at a high price is not necessarily gasoline at a low price. The alternative may in fact be no gasoline at all, or gasoline only after waiting in long lines.
Why are gasoline prices rising? The reason is clear: crude oil prices have now risen to over $37.00 a barrel, up from less than $20.00 per barrel last year, due to a two-month strike in Venezuela, and the uncertainty about a major disruption in the supply of Middle East oil during a conflict with Iraq. How could gas prices NOT rise significantly?
If retail prices for gasoline are not allowed to rise to reflect this increase in costs, filling stations may need to shut down. Remember, these retailers will only stay in business if they can cover their costs through voluntary transactions.
Competition (or even potential competition) insures that there is a limit to how high firms can raise prices before they lose all of their customers. Even in my tiny town of Hillsdale, Michigan, we have at least ten gasoline retailers. These stations are extremely conscious of their competitor’s price and this forces them to keep prices at reasonable levels that continue to attract customers.
In spite of this, gasoline retailers are often depicted as evil, and that through cruel pricing practices, they essentially assault consumers by price “gouging.” But these retailers are merely offering consumers an opportunity to buy gasoline at the market rate.
Why are consumers and politicians not even more upset with individuals who have not yet opened gas stations? These individuals (like me and probably you too) are not willing to sell gas at ANY price.
If gasoline prices across the country rise above $2.00 per gallon as they have in San Francisco, we won’t be happy about it. However, we should not disparage gasoline retailers, and we certainly should not pass laws that require them to keep prices artificially low (like the legislation passed in Hawaii last year). After all, unlike politicians, they are making you an offer you can refuse.
Lee Coppock is an Assistant Professor of Economics at The University of Virginia and an adjunct scholar with The Buckeye Institute.
