Commentary

Panic at the Pump

By Jerry Taylor and Peter Van Doren
This article appeared on National Review Online on September 14, 2001.

Amidst the outpouring of human kindness and generosity that characterized America’s response to the terrorist bombings last Tuesday, an ugly note was struck by the gasoline-price spikes that ripped through a number of cities immediately after the disaster struck. The ugliness, however, is not to be found in the alleged price gouging but in the primitive reaction to what, by all accounts, was a simple lesson in supply and demand.

What happened in gasoline markets after the disaster is not hard to understand. A lot of Americans, shocked by the devastation that wracked New York and Washington, feared that the worst was yet to come and immediately went out to stock-up on groceries and gasoline. Press reports bear this out. Long lines began to form at some stations across the nation.

Now, there’s only so much fuel at a service station. Whether you like it or not, there’s only two ways to ration gasoline under such circumstances: by price or by, well, queuing up. After hearing from their distributors that oil companies couldn’t guarantee when the next shipment of gasoline might arrive, some service stations likewise panicked and chose the former option. Others chose the latter.

The mob and the politicians and reporters that earn a living by feeding it would have us believe that the gas stations that stuck to the old prices and pumped until they dropped were “the good guys” while the stations that jacked prices were the blood-sucking profiteers.

But let’s examine for a moment the consequences of sparing motorists the price hike. With demand skyrocketing, you get gasoline if you’re lucky enough to be first or second in line and risk not getting any if you find yourself a few blocks back in the queue. People who don’t really need the gasoline on Tuesday are given no reason to step aside for the motorist whose tank is running on empty. The result: a mini-replay of the wonderfully humane policies of the 1970s.

Now let’s examine what happens when service-station owners try to maximize their profits. Aunt Edna, whose tank is half-full, sees $5.00 a gallon prices and thinks twice about filling up today. Uncle Fred, who’s running on fumes, has a better chance of getting to the pump before he runs out of gasoline because the Aunt Ednas of the world aren’t there to clog up the service station with panic buying.

This, dear readers, is a perfect example of what Adam Smith termed “the invisible hand” of the market, which permits individuals to pursue their self-interest in such a way as to advance the interests of society as a whole. And the reason, by the way, that there are soaring skyscrapers and concentrated wealth in Manhattan for terrorists to target in the first place is that we allow the invisible hand of the market — and not the all-too-visible political boot of government — to order our economic affairs.

Of course, politicians found time out of their busy schedules last week to scream bloody murder about the alleged profiteering that was going on and — what do you know? — prices quickly came back to earth. Many concluded, of course, that the hot spotlight of righteous indignation focused on those unconscionable prices was what stopped the gouging in its tracks. The reality is that the gas-buying panic in the heartland subsided about as quickly as it arose, causing demand to crash and prices along with it.

Sen. Jeff Bingaman (D., NM), chairman of the Senate Energy Committee, promised the usual political witch-hunt to punish the “profiteers.” But the ugly political ploy of whooping up the mob has got to stop. Panic, not price-gouging, was to blame.

Jerry Taylor is Director of Natural Resources Studies at Cato Institute Peter VanDoren is Editor of Regulation Magazine